Investment Portfolio Analysis: Five Asset Classes, Efficient Portfolio, And Portfolio Performance

Asset class analysis and evaluation

Gold (USD) Troy ounce % return: The overall return provided from gold troy ounce is relatively high with medium risk. Hence, the investment options could effectively help in improving the overall portfolio returns and reduce the risk from investment. Thus, investors could use gold troy ounce in their portfolio.

Australian Bonds % return: The Australian bonds mainly have no risk associated with investment, which could allow investors to improve their return from portfolio. The no risk associated with investment could mainly help investors in forming a minimum risk portfolio, which could effectively perform during volatile capital market.

International Shares % return: The overall returns provided from international shares have the least return with high risk, which could increase risk from investment. This rising investment risk could eventually hamper the investment capital and increase the chance of occurring losses from investment.

Australian Shares % return (ex dividends): The overall returns that is provided from Australian share are relatively medium, while the risk from investment is high. However, the risk from investment is relatively higher, whereas the return from investment is medium. Thus, use of Australian shares could eventually help the investors in effectively improving the overall financial improvements, which might reduce performance of the portfolio.

Brent oil (USD) per barrel % return: Brent Oil is one of the most risky investment stocks with relatively has high return, which might increase profits as well as raise the chance of losses from investment. The investment in Brent oil could eventually help in improving the returns from investment of portfolio, if adequate stocks are used for hedging.

Table 1: Mentioning the GM, AM, and SD

(Source: As created by the author)

The table 1 mainly helps in identifying the GM, AM, and SD of the five-asset class, which could help investors to draft an adequate portfolio. The table portrays risk from each stock on ascending measures, where least risk to highest risk stock is depicted. Investors in drafting an adequate portfolio could use the overall calculations depicted in above table, which provides the highest return with investment by reducing the risk. Adrian, Etula and Muir (2014) mentioned that use of adequate risk and return valuation mainly allows investor to device the portfolio according to their risk attribute. On the contrary, Aouni, Colapinto and Torre (2014) criticises that devising the portfolio only based in risk and return valuation could increase the risk from external forces, which might raise the chances of losses from investment.

Constructing efficient portfolio

Gold (USD) Troy ounce % return:  Gold Troy ounce provides an overall arithmetic return of 7.17% while its geometric return is 6.81% with the overall risk 0.1469. The evaluation mainly indicates Investments in gold troy ounce could eventually help in increasing the overall return and reduced risk from the portfolio.

Australian Bonds % return: The Australian bonds have no risk associated with investment as its overall SD is at 0.0 198, while its geometric returns are at 6.70% and arithmetic returns are at 6.71%. This only indicates that use of Australian born could allow investors to increase the return from investment, while reducing the overall risk that might incur from investment. Therefore, the investors could include Australian Bond in their portfolio to increase their profitability and reducing risk from investment.

International Shares % return: Investments conducted International share could eventually have an arithmetic return of 5.85% and geometric return of 3.65% with the overall SD or risk at 0.1901. Therefore, from the overall evaluation the return provided from International shares is relatively lower than all the other stocks, while risk is relatively higher. This only indicates that investors could avoid the stock to increase the overall return from the portfolio and reduce the impact of volatile price action.

Australian Shares % return (ex dividends): Geometric returns are mainly at 7.15% while arithmetic returns at 5.19%, with a overall SD of 0.1875, which is rejected by the Australian shares. The returns provided from Australian shares are adequate while the risk is relatively higher, which could increase the portfolio risk of the investor. Therefore, the investor to utilise low risk investments in the portfolio to generate a higher return while reducing the risk from Australian shares.

Brent oil (USD) per barrel % return: Brent oil per barrel has the highest risk with an SD of 0.4486, whereas its overall arithmetic returns 16.81% and geometric return is 7.35%. This only indicates that investors could use the Brent oil investment to increase their return and risk of the overall portfolio. Brent oil per barrel return has the highest risk involved in investment, which mainly increases the chance of attaining higher loss than income from investment.

Figure 1: Mentioning the CAL line and efficient frontier

(Source: as created by the author)

With the help of above efficient Frontier adequate risk and return weights could be identified, which could help investors in making adequate investment decisions according to their risk appetite. From the efficient Frontier minimum risk portfolio would be identified, which allows investors to reduce the possible risk from investment while generating adequate returns.  The CAL line is also depicted in the above figure, which is relatively aligned with the efficient Frontier and depicts its efficiency. In this context, Avramov et al. (2013) stated that efficient Frontier allows investors to identify adequate weights, which could provide the desired amount of returns from investment. On the other hand, Bali and Murray (2013) argued that during in economic crisis that is attribute of investments drastically increases, which reduces the overall viability of the efficient Frontier.

Evaluation of portfolio performance

Table 2: Mentioning the weights with lowest and highest SD of Efficient frontier

(Source: As created by the author)

From the overall evaluation the minimum risk variance portfolio is identified, which has the overall return of 6.71% while the risk of 1.71%. Moreover, the above table mainly depicts the relevant weights, which could be used by the investors in reducing the risk from investment in the five asset classes. Therefore, investors using the above mentioned we could eventually reduce the risk from investment while generating a return of 6.71%. The table also depicts the weights for highest return portfolio, which could provide a return of 47.69%, while its overall risk will increase to 16.81%.  Thus, Investors can effectively utilise the weight according to the risk attribute and generate the required rate of return from investment (Bodie 2013).

 
Table 3: Mentioning the covariance of 5-assets

(Source: As created by the author)

Table 4: Mentioning the correlation of 5-assets

(Source: As created by the author)

Government with the help of fiscal and monetary policies are mainly able to control the overall economic development of a country. The use of fiscal policy allows Governments to increase or decrease the overall capital expenditure, which in turn helps in controlling the supply of a product or commodity. Furthermore, use of monetary policy allows the government to control overall supply of money, where it could control the industrial growth of the country. This control over the growth of the country mainly allows government to make adequate policies, which could help in supporting and increasing GDP of the country. The related GDP growth is mainly helpful in improving the overall capita income of the citizen, which could help in increasing collection of the government (Chapple and Humphrey 2014).

The sensitivity of the overall earnings of a company is relatively affected from three factors, which are financial leverage, operating leverage and sales. The relative decline in sales could reduce the overall earnings of the company, as it needs to incur all the related fixed production cost expenses. Moreover, the use of financial leverage mainly depicts the overall interest cost which is incurred by companies who take loans for conducting their operation. The relevant increase in the interest rate would reduce the overall earnings of the company. Lastly, we all operations the company is headed by the operating leverage, which consist of fixed and variable cost incurred in the production. The rise in fixed and variable costs of the organisation mainly decreases the overall earnings of the company, which in turn might hamper their growth perspectives (Corsi, Marmi and Lillo 2016).

Implications of different asset classes on efficient frontier and CAL

Table 5: Mentioning the formula prices of call and put value from Black-Scholes model

(Source: As created by the author)

Table 6: Portraying the daily mark-to-market settlements

(Source: As created by the author)

The daily mark to market settlement is mainly depicted in the above table, which could be used by investors in identifying the overall return from investment over a stipulated period. There is no hedging process involved in the above investment, which in turn increases the risk from investment. Thus, the use of adequate hedging process would reduce the overall risk from investment and weaken the impact of volatile capital market (DeMiguel, Nogales and Uppal 2014).

Take 7: Mentioning the overall performance of the portfolio

(Source: As created by the author)

From the valuation of the above table the portfolio mainly has a Jensen alpha of 2.73%, with a Treynor ratio of 5.18%. In addition, it also has a shop ratio of 18.39% with their information ratio of 21%. All the above values mainly depict the relevancy and viability of the portfolio in generating higher returns while reducing the risk from investment. Hence, the use of the portfolio could eventually help the investor to comply with the impact of volatile capital market and maintain adequate growth of its portfolio (Flannery 2016).

Figure 2: Mentioning the Morningstar risk-adjusted return model

(Source: Corporate.morningstar.com 2017)

The formula depicted in the above figure represents the Morningstar risk adjusted return model, which are used by investor to relatively decrease the risk from investment and attain higher income. The risk adjusted return model mainly allows the investors to identify stocks, which have least risk with higher returns that could be added in the portfolio to generate a higher return from investment. Hackbarth, Haselmann and Schoenherr (2015) criticises that morning star is adjusted return model does not help investors identify the negative impact of economic crisis on volatility of the shares, which might increase risk and capital loss of the investors.

References

Adrian, T., Etula, E. and Muir, T., 2014. Financial Intermediaries and the Cross?Section of Asset Returns. The Journal of Finance, 69(6), pp.2557-2596.

Aouni, B., Colapinto, C. and La Torre, D., 2014. Financial portfolio management through the goal programming model: Current state-of-the-art. European Journal of Operational Research, 234(2), pp.536-545.

Avramov, D., Chordia, T., Jostova, G. and Philipov, A., 2013. Anomalies and financial distress. Journal of Financial Economics, 108(1), pp.139-159.

Bali, T.G. and Murray, S., 2013. Does risk-neutral skewness predict the cross-section of equity option portfolio returns?. Journal of Financial and Quantitative Analysis, 48(04), pp.1145-1171.

Beshears, J., Choi, J.J., Laibson, D. and Madrian, B.C., 2016. Does Aggregated Returns Disclosure Increase Portfolio Risk Taking?. Review of Financial Studies, p.hhw086.

Bodie, Z., 2013. Investments. McGraw-Hill.

Chapple, L. and Humphrey, J.E., 2014. Does board gender diversity have a financial impact? Evidence using stock portfolio performance. Journal of Business Ethics, 122(4), pp.709-723.

Corporate.morningstar.com. (2017). [online] Available at: https://corporate.morningstar.com/au/documents/MethodologyDocuments/FactSheets/MRARIllustrated_Factsheet.pdf [Accessed 11 Jun. 2017].

Corsi, F., Marmi, S. and Lillo, F., 2016. When micro prudence increases macro risk: The destabilizing effects of financial innovation, leverage, and diversification. Operations Research, 64(5), pp.1073-1088.

DeMiguel, V., Nogales, F.J. and Uppal, R., 2014. Stock return serial dependence and out-of-sample portfolio performance. Review of Financial Studies, 27(4), pp.1031-1073.

Flannery, M.J., 2016. Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.

GAUDECKER, H. and VON, M., 2015. How does household portfolio diversification vary with financial literacy and financial advice?. The Journal of Finance, 70(2), pp.489-507.

Hackbarth, D., Haselmann, R. and Schoenherr, D., 2015. Financial distress, stock returns, and the 1978 Bankruptcy Reform Act. Review of Financial Studies, p.hhv009.

Hoffmann, A.O., Post, T. and Pennings, J.M., 2013. Individual investor perceptions and behavior during the financial crisis. Journal of Banking & Finance, 37(1), pp.60-74.

Lins, K.V., Servaes, H. and Tamayo, A., 2015. Social capital, trust, and firm performance during the financial crisis.

McLean, R.D. and Pontiff, J., 2016. Does academic research destroy stock return predictability?. The Journal of Finance, 71(1), pp.5-32.

Pfaff, B., 2016. Financial risk modelling and portfolio optimization with R. John Wiley & Sons.

Qin, Z., 2015. Mean-variance model for portfolio optimization problem in the simultaneous presence of random and uncertain returns. European Journal of Operational Research, 245(2), pp.480-488.

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