Portfolio Theory and Investment Analysis

Portfolio Theory and Investment Analysis Term Paper example
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Finance & Accounting
Pages 8 (2008 words)
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The market capitalization was 30 million pounds As given, the return on the three-asset portfolio that consists of equities, bonds and cash are given below as follows; Instrument Upto 2007 2007-now Equities 60% 40% Bonds 30% 40% Cash (treasuries) 10% 20% Where: a=equity b=bonds c = cash (treasuries) I.


wa + wb + wc = 1. E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.6(-0.2) + 0.3(0.1) + 0.1(0.04) = -0.086 Hence the strategy before the 2007 economic crisis would have realised an expected return of -8.6% on investment. The strategy adopted from 2007 onwards in the light of the crisis would realise: E(rp) = waE(ra) + wbE(rb) + wcE(rc ) 0.4(-0.2) + 0.4(0.1) + 0.2 (0.04) = -0.032 The strategy adopted after 2007 would realise an expected return of -3.2% on investment. As a result, the benefit of the strategy adopted from 2007 would be a reduced lose of 5.4% II. Advisability of investing more funds in UK equities. With the managers of the funds thinking of investing more funds into equity in the market, it is important for the managers to analyse the UK equities in a risk-return relationship. Hence when analysing the risk premium of the equity with the rest of the asset class, the return differential will be attributed to the difference in the risk associated with equity as opposed to bonds. The equity line will be normally "shakier" than the bond line. As evident from the data provided, Wealth invested in equity for the past 20 years has been more volatile than wealth invested in bonds (the UK equity having a risk of 16% as compared to 5% for bonds and cash for 0.3% in derivatives). Despite the higher return, the risks were higher as well. ...
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