The Portfolio and Investment
Discuss about the Development and Financial Markets Society.
Wolfson (2017) stated that the choice of stock is based on behavioural conditions and perspective of the investors, which helps in formulating the portfolio for investment.
The portfolio is mainly created for retirement purpose and the stocks with the least risk are chosen for investment purpose as main aim of the investment is to minimise the chance of losses which incurs due to the volatility in the market. As such, framing into stocks with lower risk (Appendix show screenshot excel Sharpe Ratio) like Wilmar International Limited, Singapore Telecommunications Limited, Raffles Medical Group Ltd and CapitaLand Mall Trust are chosen for the portfolio to maintain the level of return by reducing risk from investment which were overconfident invested with higher weights (Haw Par Corporation Limited, China Aviation Oil, Sheng Siong Group Ltd, VICOM Ltd, Thai Beverage Public Company Limited) in Gambler’s fallacy for higher return. (Appendix show screenshot excel tracker higher weights)
With assistance of the portfolio theory, the asset allocation is conducted to determine mean variance analysis. This relevantly helps in conducting the asset allocation, which helps in maximising the expected return of portfolio for a given level of risk. In this context, Bai, J., Philippon & Savov (2016) stated that with the help of portfolio theory investors can detect the actual financial position of the company over the period. Additionally, the aim of portfolio theory is to detect the actual level of return, which could be provided by the portfolio on defined risk level. Also, the portfolio theory indicates that selection of stock and asset allocation is solely based on investment scope of the investor, where it might hamper the actual financial position of the investor.
Relation to the chart on the right Armstrong III, F (2008), a diversified portfolio can be considered in which the securities chosen are diversified across asset classes (Eg: Equities, bonds foreign exchange, treasury instruments and etc.) diversify within asset class (Eg: Different industries/ sectors for equities) and diversification through both local market and international. Having said that, Singapore market has been narrowed down in this portfolio.
However, Busch, Bauer & Orlitzky (2016) argued that diversified portfolio mainly loses its friction during an economic crisis, which increases risk and losses for each investor.
The portfolio comprises of different sectors of stocks (Commercial Services and Supplies, Food and Staples Retailing, Diversified Telecommunication Services, Oil, Gas and Consumable Fuels, Healthcare Providers and Services, Pharmaceuticals, Equity Real Estate Investment Trusts (REITs), Food Products and Beverages), which increases the diversification condition of the 9-asset portfolio. The portfolio is well diversified, which could help in increasing the level of return from investment, which reduces the actual risk from investment. Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016) stated that diversification process allows investors to hedge their exposure in the capital market by reducing the risk level and return from investment. Moreover, the diversification process that is used in the formulation of 9-asset portfolio mainly helps in reducing the level of risk involved in investment. The segregated investment is conducted in the 9-asset portfolio, which can be identified from different level of industry stock, which is used in the portfolio.
Asset Allocation and Mean Variance Analysis
From the overall evaluation the performance of the portfolio has relevantly improved over the period. In addition, the investment scope of the portfolio could eventually help in generating high level of returns, while reducing the risk from investment. The portfolio expected porforlio a return of 0.8654%. Furthermore, the return that is provided from investment in the 9-stock portfolio is adequate, which has helped in generating stable returns over the period. The portfolio created for investment is relevantly high, which could help in improving the level of returns from investment. On the other hand, DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E. (2015). argued that diversified portfolio created by the investor could only provide stable return, as it does not aim in generating high level of returns from investment. Nevertheless, the returns provided by portfolio is relevantly low over the investment period, which indicates the investment scope of the investor. us vs china trade war support the current state loss to covering the current state of loss include news.
Dow, Goldstein & Guembel (2017) mentioned that the correlation equation mainly allows the investor in detecting the actual relationship between each stock, which could adequately diversify the portfolio.
The overall valuation of correlation (Appendix) between 9-stocks are relatively high where some of the stocks (Haw Par Corporation Limited & Thai Beverage Public Company Limited) has inverse correlation.
Marc D. Stern (2003) stated the bear market that commenced in March 2000 tried the principle of balancing portfolios with low-correlated assets. Investors held a portfolio diversified with low-correlating assets had prospect to benefit from returns with lesser risk.
The 5 ‘best’ assets mainly comprises of (Appendxix). It is mainly chosen based on the expected returns that are provided over the 5 years history of returns. These stocks are used for increasing the relevant returns from investment, while maintaining low level or risk. The 5-asset stock correlation is used for detecting stocks, which could be used in formulating the portfolio.
The Markowitz diversification process mainly aims in seeking a combination of portfolio assets, which have less than perfectly correlation. This is conducted to help reducing the risk from investment without hampering the actual returns that could be generated from the portfolio. An efficient frontier constructed using the 5 ‘best’ assets and the position when it’s at different required weights as below:
The Markowitz diversification process allows the investor to reduce the risk from investment, which declines the risk of the portfolio to reduce the negative impact from volatile capital market. Therefore, by using Markowitz diversification the overall risk hampering the returns of the portfolio could be reduced, which help in generating higher level of returns from investment (Hudson, 2017).
The evaluation of the 5-stocks portfolio, its beta at required weights is calculated as above. This represents the volatility of the stock also depicts overall movement of the stock in terms of capital market. Despite the low beta compared to capital market, in Tzee-man chow, Jason C. Hsu, Li-Lan Kuo, and Feifei Li (2014) mentioned that low-volatility investment has attracted considerable interest and substantial assets since the global financial crisis but the concept is not new. Low-volatility strategies, has been known since Markowitz’s 1952 paper on mean-variance analysis.
Diversification and Risk Management
From the evaluation it is understood that the portfolio with equal weight has higher Sharpe ratio, which represents its capability to generate higher returns. According to Gilchrist, Sim & Zakrajsek (2014), with the help of Sharpe ratio investors can detect the return that will be generated excess of risk free return in comparison to the total risk. Therefore, the use of 5-Stock Portfolio with equal weights could eventually help in generating higher level of return from investment more than the risk-free rate of return.
The overall evaluation of portfolio mainly depicts its viability in meeting the requirements of retirement goal, as it has high return from investment. In addition, the stocks has adequately providing return with low risk involved in investment. This could eventually help in maintaining the relevant returns that is required to fulfil the retirement goal. The portfolio performance mainly increases the overall return from investment, which could generate over time. In addition, the portfolio provides a return of 1.07%, which depicts the stable return that could be provided from investment.
With the use of passive investment, the portfolio created for retirement could help in maintain the level of return, while reducing the risk from investment. Also it could help in reducing the overall amount of buying and selling to a minimum. The portfolio could have increase in lower beta stocks, which might help in reducing the level expenses from fees and transaction cost. The weights of the portfolio could be changed further for reducing overall beta of the stock which might help in improving the level of return from investment.
Wolfson, M. H. (2017). Financial crises: Understanding the postwar US experience. Routledge. (Assessed: 1-April-2018)
Bai, J., Philippon, T., & Savov, A. (2016). Have financial markets become more informative?. Journal of Financial Economics, 122(3), 625-654. [Online] (Assessed: 3-April-2018)
Armstrong III, F (2008), ‘How Much Diversification Is Enough?’, CPA Journal, 78, 1, pp. 51-52, Business Source Premier, EBSCOhost, (Assessed: 4-April-2018)
Busch, T., Bauer, R., & Orlitzky, M. (2016). Sustainable development and financial markets: Old paths and new avenues. Business & Society, 55(3), 303-329. (Assessed: 31-March-2018)
Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016). The impact of Brexit on foreign investment in the UK. BREXIT 2016, 24. (Assessed: 29-March-2018)
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E. (2015). Quantitative investment analysis. John Wiley & Sons. (Assessed: 30-March-2018)
Dow, J., Goldstein, I., & Guembel, A. (2017). Incentives for information production in markets where prices affect real investment. Journal of the European Economic Association, 15(4), 877-909. (Assessed: 1-April-2018)
Marc D. Stern (2006), ‘The Long View’. The Power of Low-Correlation Investing. CPA Journal, [Online] Available at: https://archives.cpajournal.com/2003/1103/features/f114203.htm (Assessed: 5-April-2018)
Hudson, A. (2017). The law on financial derivatives. Sweet and Maxwell Ltd. (Assessed: 1-April-2018)
Tzee-man chow, Jason C. Hsu, Li-Lan Kuo, and Feifei Li (2014), A Study of Low-Volatility Portfolio Construction Method. IIJ, 440, 4 [Online] Available at: https://www.anderson.ucla.edu/Documents/areas/prg/mfe/Tzee%20Mann%20Chow%20JPM_Summer_2014_RA.pdf (Assessed: 5-April-2018)
Gilchrist, S., Sim, J. W., & Zakrajšek, E. (2014). Uncertainty, financial frictions, and investment dynamics (No. w20038). National Bureau of Economic Research. (Assessed: 2-April-2018)
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