Introduction
The need and consideration of investment is extremely important for the sake of an organization, as well as for the sake of an individual. In the end of the day only those individuals or organizations will deem effective and proactive who have an effective approach as far as investment planning is concerned.
The maneuvering related to the management of investment delivers something extraordinary for the companies as well as the investors; however it is required to plan the things in an effective manner. An investor will always look over the analytical provision, and would always like to mitigate the level of risk from the investment. The investment which has low risk provision and effectiveness would be comparatively more worthwhile for the investment purpose as compared to the investment stance which is in high risk. However, high risk means high gain, and an investor will not feel the thing if the level of return on this investment is highly effective.
The management of portfolio will always be effective and worthwhile for the companies and individuals in all over the world, and they will analyze the things in an effective and organized manner. Management of investment and portfolio starts with the allocation of funds with each of the company, and then relevant techniques will be applied on it for the main purpose accordingly. This is an assignment that usually deals with the hypothetical investment situation of a couple, namely Kim and Rich who are seeking to invest their savings as an investment. There are ten different companies which have been taken into consideration for the analysis purpose y applying appropriate amount of investment known as optimal proportion. The total invested amount which Kim and Rich want to park in the stock portfolio is $ 500,000. There are different parts of this assignment that needed to be completed accordingly in the analysis.
Discussion & Analysis
As per a common saying that management of risk is an important aspect and only those professionals which are trying to deliver their effectiveness for their portfolio are more effective and worthwhile as compared to those investors who would like to manage their earnings in a perfect and organized manner.
The Sample
The sample is the first and foremost part of this assignment that requires selecting a sample of different stocks and securities in which Kim and Rich would like to invest in. It is not necessary for the couple to allocate the funds in every stock sample in particular. There are number of stock markets found in the United States (US) wherein stocks of different companies will be trading in accordingly. The names of some of the major financial markets are National Association of Security Deals Automated Quotations (NASDAQ), New York Stock Exchange (NYSE) and others.
Kim and Rich have given a portfolio of ten different companies, covering different industries and markets. The main reasons behind giving different companies are that it can assist the investors to mitigate their expenses accordingly. The names of the selected companies are
- Apple Inc
- ABM Industries
- Autodesk
- Acuson
- Adobe Systems
- Adaptec
- Altera
- Applied Materials
- Advance Micro Devices
- Amdahl
All of the companies are financially active and strategically fit from all of their standpoints, and they will certainly give strength to the investors as far as investment in this aspect in particular. Out of these ten companies, there are three companies operating the Computer hardware industry, while couple of them related to the Semiconductor industry. Real Estate manufacturing and Medical Equipment are some other companies which have been taken into account for the same analysis.
The rationale behind choosing or recommending these companies to Kim and Rich are their immense capability of increasing the financial portfolio, and delivering the best node to the investors of the companies accordingly. Out of these ten companies, Apple Inc has the highest amount of revenue recognition in the financial year 2014, with a high amount of share price in the market. Apart from Apple Inc, Advance Micro Devices are some of the major companies associated with this particular list that have a remarkable effectiveness in the market as far as managing the effectiveness of this portfolio is concerned. The data of five years of stocks of each of the company have been taken into consideration; however there are only a few companies which are actually used for the investment application. Though, the financial aspect and structure of every company is largely effective but the values of their shares are very high and expensive which is not possible for Rich and Kim to buy the thing in the same manner. Therefore, some of the companies leave intact for the investment purpose in the core portfolio. These ten stocks are trading in three different stocks exchanges of the United States, known as NASDAQ, NYSE and American Stock Exchange (AMEX), some of the largest stock exchanges of the world in which hundreds of thousands of companies are duly operating. The data of the selected companies along with their return are as follows
Mean-Variance
Mean Variance analysis is one of the most important statistical measures used to analyze the level of riskiness from an investment. Variance is basically a square of standard deviation, which is a name of deviation from the mean. The mean standard deviation of all of these ten stocks is 0.124% while the mean variance of the stocks found in a same portfolio is 0.0155%. It is found from this analysis that making of portfolio certainly works for Kim and Rich, as the individual part of the standard deviation with individual security is little bit higher than that of the riskiness of the portfolio in particular. It is an important type of analysis that has been conducted in this part.
- The mean variance risk and return indicator can be found with the help of average return of ten stocks, variances and co-variances. The average returns of all of these ten stocks are 0.0199%, while the mean variance of the same portfolio is 0.0155%. The mean co-variance of all of these ten stocks is 0.00164 which is quite low, however still manages to keep in the positive range, which is an indemnity that the stocks are moving accordingly with each other, which is an effective sign for the investors, Kim and Rich.
- Tangent Portfolio is also known as optimal portfolio that used by the investors to invest in the stocks according to the prescribed weights and proportions particularly. The optimal weights to each of the stocks have been applied on the basis of their return, and the value of their shares. Kim and Rich has to analyze the fact first that whether they have sufficient money to buy the shares of some of the big companies which have high worth of shares like Apple Inc. The proportion with the optimal weights of analysis are as follows
In terms of result, it is important to apply the techniques of optimal allocation on the mean return and standard deviation of the companies, which have been mentioned in the first part. The mean return and riskiness as per the current optimal portfolio selection is as follows
= 500,000 * 2.87% = 14,350 $ in the first years of investment
Optimal Weight Analysis
The optimal weights have been applied on the companies on the basis of their share performance rather than on their financial performances. It is an effective way of allocating the weights to the shares accordingly. Apple Inc has the highest financial rating among all of the selected companies, but it was not awarded a single allocation, not on the basis of their financial aspects, but their recently activities due to which their mean return comes in the negative figure, while it is positive for other companies.
Portfolio theory applies on the fact that riskiness in an investment should be placed on a lower level; otherwise it will create problems and issues for the individuals. With the help of a portfolio theory, an investor can decrease the level of their riskiness in an effective and organized manner. After applying the portfolio theory on the analysis, this particular thing is found accordingly that portfolio theory certainly helps out an investor to mitigate the risk and resultantly increases the mean return of the investment.
Portfolio theory certainly helps in this particular provision, as it is an important tool to minimize the risk of an investment, which is an important factor, lies in the investment management concept. It is effective in terms of economic decisions and situation, with a perfect management of timings accordingly.
