Investment Strategies and Portfolio Diversification
This report has been analyzed to understand the concept of portfolio and many other elements related to portfolio such as risk, return, stock prices, average return, beta, correlation etc. In this report Tesco, British American tobacco and Sainsbury has been taken consideration for. This report depict about the investment strategies an investor could adopt to enhance the return and reduce the risk of the portfolio. It depict about the portfolio, its diversification and the profits from the diversification.
In this report, stock prices, return volatility, correlation among the three securities have been analyzed to manage a perfect portfolio for the purpose of investment. This report analyze all the concept related to a perfect portfolio and explain that which points must be considered by an investor while preparing the portfolio for the purpose of investment.
Diversification is a technique to hedging the risk. Portfolio diversification is a fundamental concept of investing. It is basically a risk management strategy to combine various assets together to hedge the risk of a portfolio. It avoids the damages and risk of a portfolio by combining many assets and securities together.
Portfolio diversification is used to reduce the risk and decrease the damages which could occur in the investment due to one asset. Diversification is a strategy to reduce the risk so portfolio diversifications help an investor to reduce the risk and get a return. Through the diversification, the damages get less and investor could earn a minimum rate of return annually or monthly. Diversification analyzes the industry condition, market condition, economical condition, political and legal factor and geographical area and according to that combines the assets which could offer at least minimum rate of return each year.
For example:
During the time of increased share market volatility, a share portfolio might suffer some losses. If individual also hold some securities or fixed assets or in other asset classes then the performance of a portfolio could be better in some time. The returns from these different securities would enhance the return of overall portfolio of the investment.
Diversification within a particular asset class such as investment across different sector in Australian securities could also reduce the overall losses, risk and damages for a particular period. As if one sector would not perform well then the other sector could outperform in the same period.
If an example of Tesco, British American tobacco and TED baker weights is taken, then it has been found that from the above 3 companies, if a company’s return got down than at the same time the other security provided more return from usual (Appendix). Such as in the month of March, 2017, the return of Tesco was -0.71%, British American tobacco was 0.51% and TED Baker’s was -0.11% whereas the FTSE 100 return was 0.15% which depict that the portfolio’s return is quite better than the market return.
The Importance of Diversification in Risk Management
It depict that the portfolio diversification helps an investor in managing the risk. Diversification is a vital strategy for all the investors. The performance of a portfolio depends upon the following factors:
- Current market condition
- Interest rates
- Currency markets
It has been found through a study that is better for an investor to invest in different assets classes so that the market volatility could not make an impact over the return of the portfolio. There are many companies in the country which offers different portfolios to thee investors to invest their amount in minimum risk. This is beneficial for the person to get a return always.
For the purpose of investment, it is a strategy of behaviors, rules and procedure which are designed to guide an individual to select the securities for an investment portfolio. Individuals have different goals and different tactics to invest in a portfolio.
Normally, while selecting the asset class for investment an individual analyze the historical return of the securities, beta of the securities, correlation among the securities and historical risk of the securities and compare it with market return, market beta, market correlation and market risk to analyze the portfolio and make an investment.
Here, if an example of Tesco, British American tobacco and TED baker weights is taken, then it has been found that from the above 3 companies, the historical return of Tesco, British American tobacco and TED baker weights is -13.15%, 11.79% and 28.74% respectively whereas the market return is 2.20%. It depicts that British American tobacco and TED baker weights are performing in the market better than the other securities (Appendix).
Historical risk of Tesco, British American tobacco and TED baker weights is 25.11%, 17.49% and 30.12% whereas the market risk is 15.97%. It depict that all the securities are offering more risk than the market risk (Appendix).
Beta of Tesco, British American tobacco and TED baker weights is 0.79, 0.71 and 0.36 which depict that the stock price of TED baker weights is less volatile than the share price of Tesco and British American tobacco (Appendix).
Correlation matrix of Tesco, British American tobacco and TED baker weights depict that the lowest correlation is between TED Baker and TESCO and highest correlation is between FTSE and TED baker (appendix). It depict that if investor want to choose any 2 companies for the purpose of investment then it must choose TESCO and TED Baker because the risk would be less and the return would never be negative in this case.
Portfolio Analysis and Optimization
According to the above analysis it is suggested to the investor to invest in the TED Baker as the stock price volatility and correlation of this stock with Tesco is better and the return and risk of the company is also according to the investor.
There are always two prices of a security which is critically analyzed by an investor to understand the current price and future price of a security which he or she owns. For it, investors analyze the historical price of the security to make a decision about the future. The changes in the historical prices are evaluated by the investors to analyze it (Appendix).
The trend of Tesco, British American tobacco and TED baker weights depict that the highest stock price of Tesco was 454.4 on 26-04-2010 and the lowest stock price was 139.2 on 07-01-2016. Highest stock price of British American tobacco was 5161 on 01-03-2017 and the lowest stock price was 1959 on 25-05-2010. Highest stock price of FTSE 100 was 7382 and the lowest stock price was 4805.75 (Appendix).
According to the analysis of volatility of stock price, it has been found that the investors should invest in the TESCO as the price volatility of Stock price of Tesco is better.
The trend of Tesco, British American tobacco and TED baker weights depict that the highest return of Tesco was 0.140 and the lowest return was (0.174). Highest return of British American tobacco was 0.039 and the lowest return was (0.051). Highest return of TED Baker was 0.145 and the lowest return was (0.202). Highest return of FTSE 100 was 0.202 and the lowest return was (0.048) (Appendix).
According to the analysis of volatility of returns, it has been found that the investors should invest in the TESCO as the return and risk of Tesco is better than other returns.
Correlation matrix of Tesco, British American tobacco and TED baker weights depict that the lowest correlation is between TED Baker and TESCO and highest correlation is between FTSE and TED baker (appendix). It depict that if investor want to choose any 2 companies for the purpose of investment then it must choose TESCO and TED Baker because the risk would be less and the return would never be negative in this case.
According to the analysis of statistical analysis and correlation analysis, it has been found that the investors should invest in the TED Baker as the stock price volatility and correlation of this stock with Tesco is better and the return and risk of the company is also according to the investor.
Performance Indicators for Portfolio Analysis
Portfolio is fundamental concept of investing. It is basically a risk management strategy to combine various assets together to hedge the risk of a portfolio. It avoids the damages and risk of a portfolio by combining many assets and securities together.
Here the portfolio of Tesco, British American tobacco and TED baker weights depicts that the total return get by the investor would be 1.90% through this portfolio. The weights of all the three securities are 20.28%, 62.29% and 17.43%. the portfolio statistics depict that the CAPM of the portfolio is 1.90%, the standard deviation and variance of portfolio would be 15.12% and 0.0229 respectively (Appendix).
Coefficient of variance is 7.96, which is smaller than every securities CV, it depicts that the portfolio is good in the concern of CV. The sharp ratio of the portfolio depict that portfolio must enhance the sharp ratio. Beta of the portfolio is 0.66 which is quite lesser than the Tesco’s beta and British American tobacco’s beta but higher than the bets of TED baker. It depict that the average beta of the portfolio could be considered good (Appendix).
Treynor ratio is used to measure the risk of portfolio as well as security. The treynor ratio of this portfolio is 0.0088 which depict that the associated risk of the portfolio is lesser than the individual securities (appendix).
Thus it has been analyzed that the portfolio of these 3 securities is a better investment opportunity for the investor rather than investing in individual securities.
Performance indicator of a portfolio is analyzed to identify the return and risk of the portfolio by the time. The portfolio indicator analysis of the three companies indicate that if investor would invest in this portfolio then the weight of the investment would be 20.28%, 62.29% and 17.43% in Tesco, British American tobacco and TED baker weights respectively.
The risk free return, Portfolio’s beta, Sharpe ratio and Treynor ratio of the portfolio was 0.87%, 1, 1.35 and 0.203 on 3-7-2017. The below table depict abut the actual and expected return of the portfolio on 22-06-2016 and 03-07-2017.
|
Portfolio management ( Post-brexit vote period) |
|||
|
Summary (period of 10 months) |
Portfolio |
Market-Actual |
|
|
Expected returns |
Actual returns |
||
|
22-06-2016 |
03-07-2017 |
03-07-2017 |
|
|
Return |
1.90% |
21.32% |
15.38% |
|
Stdev |
15.12% |
14.51% |
14.27% |
|
Risk-free rate |
1.31% |
0.87% |
0.87% |
|
Portfolio’s beta |
0.66 |
1.00 |
1.00 |
|
Sharpe Ratio |
0.0388 |
1.3527 |
1.0168 |
|
Treynor Ratio |
0.0088 |
0.2037 |
0.1451 |
It depict that the beta of the company depict about the volatility of share price and higher the beta depict a bad condition of the portfolio whereas the Sharpe ratio is in the favor the investor. And treynor ratio depict about the risk of the portfolio that means the portfolio is more risky.
It depict that the portfolio is quite risky but the return has also enhanced with the increment in the risk.
Performance indicator of a portfolio in the market is analyzed to identify the return and risk of the portfolio according to the market condition. The portfolio indicator analysis of the three companies portfolio with the market and indicate that if investor would invest in this portfolio then how much profitable it would be for the investor according to the market and industry condition.
The risk free return, Portfolio’s beta, Sharpe ratio and Treynor ratio of the portfolio was 0.87%, 1, 1.35 and 0.203 on 3-7-2017 while the market risk free return, Portfolio’s beta, Sharpe ratio and Treynor ratio of the portfolio was 0.87%, 1, 1.01 and 0.1451. The below table depict about the return of the portfolio and market on 22-06-2016 and 03-07-2017 (Appendix).
|
Portfolio management ( Post-brexit vote period) |
|||
|
Summary (period of 10 months) |
Portfolio |
Market-Actual |
|
|
Expected returns |
Actual returns |
||
|
22-06-2016 |
03-07-2017 |
03-07-2017 |
|
|
Return |
1.90% |
21.32% |
15.38% |
|
Stdev |
15.12% |
14.51% |
14.27% |
|
Risk-free rate |
1.31% |
0.87% |
0.87% |
|
Portfolio’s beta |
0.66 |
1.00 |
1.00 |
|
Sharpe Ratio |
0.0388 |
1.3527 |
1.0168 |
|
Treynor Ratio |
0.0088 |
0.2037 |
0.1451 |
It depict that the beta of the portfolio and market is same that means the portfolio is going good according to the market condition. The Sharpe ratio is higher of portfolio which depicts a good return in the portfolio than market. Treynor ratio depict a higher ratio than market condition that means the risk is higher in portfolio then the actual market condition.
It depict that the portfolio is quite risky but the return has also enhanced with the increment in the risk.
Conclusion:
The above study depicts about the three companies Tesco, British American tobacco and TED baker weights. This study concludes that the portfolio of these three companies is better in the market than the market condition. It has been found through this study that an investor must invest in diversified portfolio to get a positive return always.
It could be concluded through this study that an individual must analyze all the concept and element of security and portfolio and after analyzing all the elements, they must make a decision about the investment or not to invest.
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