Portfolio Management and Trading Simulation - Essay Example

? Table of Contents (A 2 (B)Main body 3 Portfolio Management 3 Johnson & Johnson 3 Pfizer 4 Exxon Mobil 4 Walmart 4 Recent Performance 5 Portfolios Optimisation 7 Portfolio improvement 7 Efficient portfolios 7 Portfolio optimization 7 Optimization constraints 8 Regulative constraints 8 Transaction prices 8 Mathematical tools used in portfolio optimization 9 Problems with portfolio optimization 9 Analysis and Evaluation 9 (C)Conclusion 14 References 15 (A) Abstract. The report contains information about an investment portfolio along with its recent performance. Both optimized and un optimised portfolios have been analysed and returns worked out accordingly. (B) Main body Portfolio Management Building a portfolio is a core aspect of an investment plan. A portfolio once built and left alone is of no use. Hence, I have decided to carry out a trading simulation and an in depth analysis of the four companies that have been chosen by me. As all four of these companies provide different products and services, it is almost obvious that different returns are expected from each of these companies. Although the portfolio had been developed keeping in mind mainly the long term aspects but analysing it a short term may give us an insight about the future. The four companies that had been considered, along with an introduction and a summary of their latest performance, are: Johnson & Johnson Pfizer Exxon Mobil Walmart Johnson & Johnson Johnson & Johnson is a multinational U.S based company. It was founded in 1886. It deals in pharmaceutics, medical devices along with the manufacturing of consumer packaged goods. Johnson & Johnson comprises of One of the world’s biggest and diversified medical devices company The 6th biggest company with respect to biologics and also with respect to consumer health. Ranked 8th with respect to the world’s biggest pharmaceutics company The headquarters of Johnson & Johnson is situated in New Brunswick, which is in New Jersey USA. The Johnson & Johnson family includes around about 275 operating companies around the globe. Johnson & Johnson employees around about one hundred and twenty eight thousand people in more than sixty countries. Pfizer Pfizer was founded in 1849. Its founding members included two cousins, namely, Charles Pfizer and Charles Erhart. Pfizer is the biggest pharmaceutical company with respect to the revenue it generates. Its headquarters in based in New York, USA while the headquarters of its research program is in Connecticut, USA. Although it has many research facilities around. Pfizer has acquired many renown and established pharmaceuticals on its way to success. The companies acquired include Pharmacia and Wyeth. The latter at its time, 2009, was considered as the biggest merger since the Bellsouth and AT& T in 2006. Exxon Mobil Exxon Mobil is a Multinational oil and gas company based in USA. Its headquarters is in Irving, Texas. Exxon Mobil was actually formed through merger of Exxon and Mobil in1999. Exxon Mobil is believed to the world’s biggest traded company publicly in the field of Oil and Gas. Walmart The home office of Walmart is situated at 702 SW 8th Street Bentonville. Walmart is a multinational retail company. It basically operates through warehouses and departmental stores. It has around about 10,800 stores across 27 countries. It also operates through websites in 10 countries. It employees above two million people worldwide and is considered as the largest employees recruiting worldwide. It is also estimated that around about 245 million people visit its outlets worldwide on a weekly base. The company was founded in 1962 and is now the largest retailer of USA. Recent Performance According to the first quarter reports 2013 of Pfizer Profit of Pfizer has seen an increase of about 53%, that is, an increase from 1.78 billion dollars to 2.75 billion dollars a year before. Earnings per share experienced an increase of 14 cent from a year ago, that is, from 24 cents to 38 cents Adjusted earnings saw a decrease of 3 cents as compared to a year ago, that is, 57 cents to 54 cents per share Revenue decreases $13.5 billion, that is, a decrease of 9%. Pfizer has also revised its yearly outlook. This was to reflect the IPO of its animal health unit, namely Zoetis. According to the first quarter report 2013 of Exxon Mobil Exxon Mobil shown an increase of earning of about 1% as compared to a year ago. The EPS saw an increase of around about 6% and is now placed at 2.12 dollars. Exxon saw a decrease in Oil-equivalent production. Oil equivalent production fell 3.5% as compared to a year ago. They were an increase in dividends per share by 21% as compared to a year ago. The dividends per share were 57 cents. For the first quarter the Financing and corporate expenses were $219 million, that is, down $420 million from a year ago. This reflects favourable impacts of taxation. According to the first quarter report 2013 of Johnson & Johnson Sales of the first quarter were $17.5 billion. This shows an increase of around of 8.5% as compared as a year ago. Local sales witnessed an increase of 11.2% while international sales witnessed an increase of 6.3% With the exclusion of special items the net earnings showed an increase of 8% and diluted earnings per shares showed an increase 5.1% as compared to a year ago, that is, the net earnings for the quarter was $4.1 billion and dil. EPS was $1.44. Johnson & Johnson also confirmed that its earnings guidance for 2013(full-year). This was confirmed per share of $5.35 - $5.45. According to the first quarter report 2013 of Walmart Earnings per share have showed an increase of 4.6% as compared to a year ago. The EPS stood at 1.14 dollars in the first quarter of 2013 as compared to 1.09 dollars in the first quarter of 2012. During the first quarter of 2013 Walmart returned about $3.8 billion to its shareholders through share purchases and dividends. The net consolidated earnings of Walmart saw an increase of $1.2 billion. Walmart also expects to deliver increased earnings per share for the second quarter. The EPS of the second quarter is expected to range from 1.22-1.27 dollars. The EPS for the second quarter a year ago was $1.18. Portfolios Optimisation Portfolio improvement It is the strategy of selecting the proportions that to be control during a portfolio, of assorted assets that area unit organized in such how on build the portfolio higher than the other in keeping with some criterion. Efficient portfolios The trendy portfolio theory assumes that if capitalist desires to maximise its portfolio's expected return at any value of risk then the risk is measured by the quality deviation of its portfolio's rate of return. The portfolios that meet their criterion are known as economical portfolios. These economical portfolio achieve the next expected return that needs taking up a lot of risk, therefore investors have to face with a trade-off between expected risk & return. The connection of this risk-expected return of economical portfolios is diagrammatically reflected by a curve that is known as the economical frontier. All economical portfolios are well-diversified and are reflected diagrammatically on the economical frontier. Portfolio optimization Different methods to portfolio optimization measure risk differently. Lists of measures include Standard deviation, covariance, Sotino ratio and condition value at risk, also known as, CVaR. Usually portfolio optimisation follows two stops Step 1 Weight optimisation of assets to invest in Example: Equities versus bonds Step 2 Weight optimisation of assets among the same class of assets. Example: proportions of stocks of different companies among each other With the help of the above method one ensures the elimination of non-systematic risks, at the same time, among an individual asset and the asset class level. Optimization constraints Portfolio improvements are often subjected to many constraints. These constraints include Regulative constraints An example being law and tax implementations. It may happen that short selling may be prohibited while in order to improve ones’ portfolio a short selling of stocks may be required. Tax implementations may also force an investor to change his strategy and plan and not act according to his desire. Transaction prices Optimising and re-optimising according to ones’ analysis may lead to increase in transaction costs. Even though it may seem feasible to do so, transaction costs force one to reconsider a change it their strategy. Other constraints include shortage of a liquid market along with a few more. Mathematical tools used in portfolio optimization Mathematical tools have always been an integral part in assessing and building a portfolio. These tools form an integral part in optimisation. With the evolution of computers mathematical tools have now become easy to use. Tools include: • Meta-Heuristic Methods • Nonlinear programming • Mixed integer programming • Quadratic programming Problems with portfolio optimization Investment depends on future outcomes hence it is important to forecast risks and co variances. A core assumption of Portfolio optimization is that an investor may bear some risks and the prices may display substantial changes amongst their past or predictive values and what actually happens. Economic downturns and crises are categorised as by the substantial growth in co-relation of stock price movements which may cause a serious reduction to the benefits of diversification. Analysis and Evaluation The below table reflects some information about my investment portfolio Amount Transaction Symbol Price ? 41,414.00 Buy JNJ ? 57.58 ? 41,414.00 Buy PFE ? 18.93 ? 41,414.00 Buy WMT ? 50.90 ? 41,414.00 Buy XOM ? 59.87 *conversion rate 1.53 Un-Optimal Portfolio Optimal Portfolio Weight No. Amount Weight No. Amount ? 0.05 ? 1,135.07 ? 100,000.00 ? 0.45 ? 10,278.22 ? 905,511.04 ? 0.45 ? 31,066.62 ? 900,000.00 ? 0.05 ? 3,281.59 ? 95,067.66 ? 0.45 ? 11,556.24 ? 900,000.00 ? 0.47 ? 12,047.65 ? 938,270.84 ? 0.05 ? 1,091.58 ? 100,000.00 ? 0.19 ? 4,073.26 ? 373,151.31 ? 2,000,000.00 ? 2,000,000.00 Final Values Market Value Profit Optimal Portfolio   ? 2,198,639.71 ? 202,390.42 Un-optimal Portfolio   ? 1,925,768.32 -? 76,096.98 ** It is assumed that the $2 million is borrowed at the stated interest rate of LIBOR +1%. As of 20th May 2013, 6 Month LIBOR is 0.41840% Both the optimised and un-optimised results are shown above along with the assumptions made. I have analysed each stock on a day to day basic which is reflected in the excel sheet that is attached. Combined results of about three weeks period is shown in the table above. For the purposes of optimal weight I have kept in mind some aspects. The results along with the constraints are as below. Optimal Weightage **Weights have been calculated by using the Excel add-in Solver and setting a minimum variance variable, with replaceable weights, but ensuring the following constraints: 1. No weight of the security can be less than or equal to Zero 2. Total weightage cannot be higher than 1.000 3. Expected return should be higher than or equal to 6% Values AFTER solving:   Weight (W) Expected Return (Eri) Variance (?i^2) Er*W W^2*?i^2 W*?i J&j 0.45276 7.507% 0.02916 3.399% 0.598% 0.039% Pfe 0.04753 1.163% 0.04312 0.055% 0.010% 0.009% Xom 0.46914 8.152% 0.03057 3.824% 0.673% 0.044% Wmt 0.18658 3.867% 0.03644 0.721% 0.127% 0.025% 1.00000 13.9% 8.0% 1.407% 0.116% Values BEFORE solving:   Weight (W) Expected Return (Eri) Variance (?i^2) Er*W W^2*?i^2 W*?i J&j 0.05000 7.507% 0.02916 0.375% 0.007% 0.004% Pfe 0.45000 1.163% 0.04312 0.523% 0.873% 0.084% Xom 0.45000 8.152% 0.03057 3.669% 0.619% 0.042% Wmt 0.05000 3.867% 0.03644 0.193% 0.009% 0.007% 1.00000 13.9% 4.8% 1.509% 0.137% (C) Conclusion Investing in stocks is a full time job especially if you are going short. Building an investment portfolio and sticking to all assumptions and procedures will not reap you success. To become successful one is to analyse all investments closely and act accordingly to the results. If one stock is doing well we may stick to that in fact may increase our investment in that particular stock. But if one investment/stock is not doing well, we may either replace the stock with another one or may decrease its weightage accordingly. Trusting ones instinct is a lay man or gamblers job. A trader/investor should always be flexible in approach and if ones one its investment is not going good he should change his strategy or change his investment. This kind of attitude shall reap success. Before making judgments about how an investment is going, one should firstly assess on what basis was the investment made, was it short term or long and what is the major reasons of this investment not reaping fruit. If it’s a short term failures one may stick to its strategy but if the reasons seems to possibly cause further problems to the company, one is not decrease the weightage but in fact is to withdraw from the respected stock straight away to make sure that no further loss is made. Simulation enhances ones skill in the trading world and helps in a better assessment and evaluation of the stocks. This ensures minimal loss. References Top of Form BODIE, Z., KANE, A., MARCUS, A. J., & SENER, T. (2011). Investment analysis & portforlio management: [created for] SUNY New Paltz School of Business, Course number BUS 443, Professor Tulin Sener. Boston, McGraw-Hill Irwin. Top of Form CHEN, M.-H., JANG, S., & PENG, Y.-J. (2011). Discovering Optimal Tourist Market Mixes. Journal of Travel Research. 50, 602-614. Top of Form DURAN, A., & BOMMARITO, M. (2011). A profitable trading and risk management strategy despite transaction costs. Quantitative Finance. 11, 829-848. Google.com. n.d.. Simulations Plus, Inc.: NASDAQ:SLP quotes & news - Google Finance. [online] Available at: https://www.google.com/finance?cid=660897 [Accessed: 24 Jun 2013]Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More