Portfolio Selection: Analysis Of The Selected Stocks

Australian Government Bond Yield to Maturity

The seven stocks, which have been selected for this task, are as follows:

• Amcor Ltd. (ASX Code – AMC)
• Blackmores (ASX Code – BKL)
• Boral Ltd. (ASX Code – BLD)
• Hutchison Telecommunication (ASX Code – HTA)
• Origin energy (ASX Code – ORG)
• Qantas Airways (ASX Code – QAS)
• Telstra (ASX Code – TLS)

The shortest maturity date of any Australian government bond is 2 years, which has a yield to maturity of 2.07%.

The expected or average returns of the selected stocks and the market index are stated below:

The results that have been obtained in the part 8 of the section determine the shares that would be selected and the ones that would be rejected in the portfolio. It is seen that there are 8 products that are available for selection in the investment portfolio and the products needs to be selected on the basis of the risks and returns the products will be able to provide to the investor. The security market line refers to the line that is drawn within a chart that acts as a graphical representation of the capital asset pricing model, which looks to explain the different degrees of the market and the systematic risks of several kinds of securities that are marketable that are plotted with respect to the anticipated returns of the overall market at a certain point of time. The security market line is an optical of the capital asset pricing model, in which the x-axis of the graph is a representation of the risks with respect to the beta and on the other hand the y-axis if the graph reveals the expected returns. The risk premium of the market of a particular security is ascertained by the fact where it is plotted on the chart in accordance to the security market line.

In accordance to the results that is obtained in the graph in relation to this question, it is seen that more than two shares have been found to be ideal for the preferred portfolio. The shares that are over the security market line have been chosen for the inclusion in the portfolio because of the fact that these are the shares that have the ability to give out the optimum amount of returns and have the lowest amount of risk. It is seen that the shares that are above the security market line have the lowest level of risks thereby lowering the chances of loss for the investors and on the other hand the availability of positive returns and the returns being in accordance to the expectations of the shareholders are ideal for the inclusion in the portfolio. On the other hand the shares that are below the security market line are not ideal for the inclusion in the portfolio because of the fact that these shares have the amount of risks to be higher than the expected returns. It is always expected that those shares needs to be taken within the portfolio that would provide higher returns and would have lowest amount of risks and therefore all the shares that are below the line have been excluded from the portfolio. These are the factors that have influenced the investors from selecting the shares that are above the security line to be included in the portfolio. The shares that have been selected would give out effective amount of returns and thereby would be effective enough in providing effective returns for the investors. 

Expected Average Returns of Selected Stocks

The shares that have been selected in the portfolio have been given equal weightage and it is seen that each of the four shares 25% weightage each. It is seen that TLS provides the highest expected return followed by AMD that provides an expected return of 1.32%. ORG on the other hand provides an expected return of 0.94% and BKL has the lowest amount of return and the value is 0.88%. It is seen that the risk percentage of TLS is 0.326, which is the lowest followed by AMD that has a beta value of 0.443. ORG has their beta value placed at 0.669 and the beta value for BKL has been found to be 0.704. The aggregate portfolio weightage is seen to be 100% and the aggregate return for the portfolio is 1.16% and the beta value on an average is 0.54. It is seen that the expected returns for the portfolio are better than extent of risk and therefore the selection of these shares are justified. Out of the four shares that have been selected, it is seen that TLS is the most effective share that has been able to provide the highest expected return by giving out the lowest level of return and BKL has been most amount of risk in the portfolio by giving out the lowest amount of expected returns.

The results that have been attained have been seen to be less than certain because of the fact that there are several internal and external factors that can have an impact on the performance of the shares that have been included in the portfolio. It is seen that political factor plays a significant role in the performance of the shares and changes in the government rules and policies can have impact in the expected returns and the value of the beta and therefore the expectations that were taken from the portfolio may not be correct. The economic factors like the changes in the rate of interest, changes in the market and the alterations in the inflation rate can have an impact on the share market and accordingly can have an impact on the performance of the selected shares. It is even seen that societal and cultural factors can have an impact as well because of the fact that changes in the mindset of the investors would lead to changes in the performance of the shares and thereby can impact the level of returns and the extent of risk. In certain scenario, the development of unprecedented events like natural calamities and political unrest can affect the share market and thereby can make changes in the expected returns and the level of risk. These are several factors that create various uncertainties and doubts in the shares that have been selected in the portfolio and thereby suggest that the conclusions that have been given in part 8 of the question to be less than certain. These variations can hamper the aims and the goals of the investors and therefore the investors need to be aware of the same and take measures in order to lower their unprecedented risks.

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