Portfolio Management: Financial and Managerial Accounting - Assignment Example

?Table of Contents 0 Introduction…………………………………………………………………………….2 2.0 Discrete Rate of Return………………………………………………………………..2 3.0 Geometric Mean Return……………………………………………………………....3 4.0 Variance………………………………………………………………………………...3 5.0 Standard Deviation……………………………………………………………………..4 6.0 Charts……………………………………………………………………………….…..4 6.1 Standard Deviation……………………………………………………..………5 6.2 Mean……………………………………………………………………..………5 6.3 Geometric Mean…………………………………………………………………6 7.0 Risk Free Rate……………………………………………………………………………7 8.0 Discussion…………………………………………………………………………………7 9.0 Conclusion………………………………………………………………………………...8 10.0 References……………………………………………………………………….….....8 11.0 Appendix………………………………………………………………………………9 Introduction Discrete rate of return can be said to be the amount of income produced through an investment in a specified period of time in addition to change in its price in the same period divided by its initial price. 1. Travel and Leisure 2.Consumer Goods Sum-55719.86 Sum- 1221756 Average-1137.14 Average-24933 Count-50 Count-50 Initial-1344 Initial-26381 Final-1074.13 Final-24354.82 3. Media 4. Total Market Sum-1268004.05 Sum- 352868.1 Average-25877.63 Average-7201.39 Count-50 Count-50 Initial-30949.59 Initial-7724.03 Final-24441.49 Final-7050.27 Discrete Rate of Return rt, t+1 = ln(St + 1/St) = ln(1 + Rt, t + 1) 1. R=[1074.13/1344.77]-1= -0.20 2. R=[24354.82/26381.82]-1= -0.91 3. R=[24441.49/30949.59]-1= -0.21 4. R=[7050.27/7724.03]-1= -0.09 When computing discrete rate of return, as time progresses the increments also progress. In each increment there is an ending price and a beginning price. Each increment has a rate of return equal to one. It should be noted that the higher the frequency of compounding, the greater the rate of return. Arithmetic Mean 1. 1137.14 2. 24933.81 3. 25877.63 4. 7201.39 Arithmetic mean is achieved by adding all the values in each row and dividing the arrived at figure by the number of data points present. Though it is an essential calculation, arithmetic mean can overly be affected by one or two figures that may be way of the average return. This may stretch the mean to a larger or smaller figure that may not represent a majority of the occurrences. Geometric Mean Return 1. 27.64% 2. 20.26% 3. 28.51% 4. 6.73% The above computations involve the rate of return in comparison to the number of periods. This formula is used to calculate average rate of return in a given period. The investment being calculated must be compounded over a multiple record. The above calculation breaks down the figures to an effective rate in a given period known as the holding period return. This marks the total income over multiple periods. Variance This calculation tries to show how the weekly results have been spread out through the counting period. It shows how the achieved weekly results lie far away or closer to the mean. This is further enhanced by a graph showing the comparison of the two, i.e. mean and variance. Variance results Travel and Leisure 17569.09 Consumer Goods 989006 Media 7807467.79 Total Market 153985.57 Gragh Showing mean in comparison to variance Standard Deviation This calculation helps to instill a measure of confidence in the final conclusion to be discussed. It should be noted that he closer the figure achieved to the mean the better it is for the specific industry. The following figures were achieved for the standard deviation calculation. Travel and Leisure 1344.77 Consumer Goods 994.49 Media 994.49 Total Market 392.41 A pie chart showing all the markets figures This chart shows the distribution of the various standard deviation figures got among the industries. Travel and leisure had the highest deviation as it can be seen. This shows that it had the highest difference with its mean. On the other hand, the total market had the lowest deviation hence the figure achieved was closer to its mean. A pie chart showing the total representation of all the markets This chart shows the representation of all the industries in terms of mean. As it can be seen, media took the lion’s share of the total representation. This was followed by the consumer goods as expected. Total market came last. The mean is highest in the media industry as expected; this is due to the fact that the media acts as the source of information and guide for the choice and consumption off all the other products. Graph Showing geometric mean in comparison to standard deviation. Comments The above calculations show the performance of three markets and the total market share index. The key markets chosen are namely; Travel and Leisure, consumer goods and Media. Lastly there is the total market. As it can be seen, in all the calculations, the initial income was higher at the start but was lower at the end. This shows there was a negative trend in the income recorded. When measured against the total market index, the media market was seen to perform the best. It had the highest mean as seen in the graph which compares both the geometric mean and standard deviation. Travel and leisure had the highest standard deviation while the total market had the lowest figure. The above graphs and calculations show that all the three industries performed better as they had figures which were better than the total market index. The trend should be maintained as having figures above the total average shows more income can be realized from the investments. Risk free rate CAPM. E(r) = RFR + Beta(Rm – RFR) 1. Stock Travel and Leisure: 0.13 = RFR + 1.5(0.01756) 0.02634 = RFR 2. Stock Consumer goods: 0.103 = RFR + 0.95(0.0989006) 0.0939557 = RFR 3. Stock Media: 0.13 = RFR + 1.5(0.07807467) 0.117112 = RFR 4. Stock Total Market: 0.103 = RFR + 0.95(0.0153985) 0.014628575 = RFR The above calculations show the risk free irate calculations. The calculations are of the three industries plus the total market. From the figures obtained, it can be seen that the total market share index has the lowest risk free rate while the Media industry has the highest rate. The calculations try to identify the best industry to invest in being represented by the one with the lowest risk. Discussion The above selected industries namely the travel and leisure, consumer goods and media are a representative of the daily lives of people. Leisure forms a nearly a must do activity In the current world while consumer goods are basics which are a a day to day way of life for man. Media has also formed a crucial part of man’s life as it provides information. It is through media that we get to know what is happening, which commodities prices have increased, which is the cheapest travel and leisure source and what is the total market representation. The above calculated results are a true representation of how the market is expected to behave. As it can be seen, leisure has very standard deviation, a representation of the true society. Investors should carefully look at these figures in order for one reap the maximum benefits. It is important to know the trends in these industries so that a false impression may not be created and one falls for the wrong investment. The general market performance can be got form the total market share index hence it should also be taken seriously. The geometric mean gives an average of how the whole industry performs over a given period of time. All these figures have a set importance hence utmost care should be taken before a decision is made. The other important factor to look at is the figures at the reserve bank of Australia. They help to give a general impression of how the market is performing. This would give an investor the correct information which puts into consideration a lot of factors that affect the day to day life of the citizens. These include the change in international oil prices and inflation. There are alt of factors that contribute to the performance of each industry, the more factors one put into consideration the better and accurate decisions are made. Conclusion The above calculations form an important aspect of portfolio management and helps students gain the required knowledge and skills to analyze financial markets. The will help students get the proper base to further their financial skills and analysis concepts. The calculations have also tried to show the true representation of all the industries in figures. It will help show the proper investments to be made and how prices are affected right across all the industries. References Atkinson. H. Berry, A & J, R. 2005. Business Accounting. London: Chapman and Hall. Carl, S and James, M. 2007. Financial and Managerial Accounting. Minnesota, South-western College. Clyde P and Roman L. 2007. Financial Accounting: An Introduction to Concepts, Methods and Uses. Minnesota, South-Western College. Derembele,C .2008. Optimal Trading With Linear Costs. Atlas,Tilburg. Fukasawa, M. 2005. Efficient Discretization of scholastic integrals. Minnesota,South-Western College Harris, P and Hazzard, R. 2008. Revenue Management. Atlas, Tilburg. Lempe, J .2008. Optimal Portfolios In Commodity Future Markets. London: Chapman and Hall. Peckinpaugh, G .2005. Maximum Yield Approach: A strategic Perspective. Blackwell, Oxford. Haram,K. 2009. Principles Of Portfolio Management: An Introduction. Berlin, Schew. Stewart, S. 2007. Professional Portfolio Management: Boston, Nilgerg. Appendix Name Total Market Consumer Goods Media Travel & Leisure 3/2/2011 7724.03 26381.11 30949.59 1344.77 3/9/2011 7675.68 26593.36 30242.44 1354.98 3/16/2011 7346.76 25380.55 29101.05 1292.56 3/23/2011 7506.8 25838.95 29083.59 1287.88 3/30/2011 7786.75 26807.65 30305.93 1331.71 4/6/2011 7938.36 26813.42 31041 1347.27 4/13/2011 7936.41 26734.57 30984.95 1333.12 4/20/2011 7847.23 26830.41 30823.44 1340.12 4/27/2011 7875.96 26841.48 30579.02 1344.31 5/4/2011 7667.85 25927.02 29776.63 1338.64 5/11/2011 7726.16 24083.21 28601.46 1357.77 5/18/2011 7591.68 23661.29 28007.61 1333.17 5/25/2011 7432.93 23306.5 27641.1 1312.51 6/1/2011 7639.07 23845.2 28209.31 1342.26 6/8/2011 7345.4 23929 26906.49 1109.75 6/15/2011 7399.85 24332.94 26875.63 1107.88 6/22/2011 7338.39 25300.83 26564.12 1112.28 6/29/2011 7338.83 24955.46 26665.62 1120.21 7/6/2011 7465.6 25209.17 27386.24 1156.72 7/13/2011 7342.57 24954.98 26913.88 1134.45 7/20/2011 7397.57 24951.07 26593.36 1148.48 7/27/2011 7384.71 24940.99 25794.6 1149.45 8/3/2011 7057.43 24342.93 24681.88 1121.76 8/10/2011 6766.23 23627.61 21940.85 1038.95 8/17/2011 7030.49 24435.28 23075.3 1065.6 8/24/2011 6813.12 23946.78 23028.3 1016.61 8/31/2011 7027.54 24207.13 24876.38 1051.45 9/7/2011 6853.38 23579.94 24064.36 1021.38 9/14/2011 6570.64 23359.11 22357.61 973.06 9/21/2011 6685.9 23538.29 23135.24 1005.27 9/28/2011 6624.45 24606.86 23055.25 996.42 10/5/2011 6460.5 24446.61 22706.35 948.8 10/12/2011 6916.13 24736.75 24211.83 1024.75 10/19/2011 6938.55 25151.66 24439.51 1018.71 10/26/2011 6989.92 25345.25 24168.01 1031.55 11/2/2011 6904.61 25294.05 24173.53 1028.49 11/9/2011 7169.75 25645.28 24563.55 1063.59 11/16/2011 7019.28 25829.42 23853.07 1066.59 11/23/2011 6713.98 25210.08 22519.62 1022.23 11/30/2011 6825.75 25263.15 23428.8 1036.03 12/7/2011 7100.21 25499.34 24126.86 1060.84 12/14/2011 6940.31 25423.26 23559.82 1052.66 12/21/2011 6858.95 24322.89 23173.89 1036.97 12/28/2011 6785.24 24015.84 23201.41 1022.2 1/4/2012 6956.27 24702.68 23821.65 1046.96 1/11/2012 6963.18 24450.54 23699.36 1055.19 1/18/2012 7024.09 24604.16 24214.37 1059.31 1/25/2012 7113.34 24198.05 24438.7 1080.07 2/1/2012 7050.27 24354.82 24441.49 1074.13 Sum 352868.1 1221756.92 1268004.05 55719.86 Average 7201.389796 24933.81469 25405.72418 1137.14 Variance 153985.5669 989006.2845 7807467.789 17569.08508 Standard Deviation 392.4099475 994.4879509 2794.184638 132.5484254 Read More