...FINANCE PORTFOLIO ANALYSIS FINAL WORK DESCRIPTIVE ANALYSIS AND APPLICATION OF THE PORTFOLIO THEORY Abstract The main objective of the work is to construct, through application of the Portfolio theory, an efficient frontier which represents a set of portfolios with optimum risk-return ratio for ten companies from Mexican IPC. The sample used in this work is composed of the most representative companies in this index. A descriptive analysis of the behavior of the stocks included in this study is carried out using the binomial risk-return, which significantly contributes in selecting the most suitable stocks to be included in the portfolio. The work is concluded with finding an optimal portfolio for a risk adverse investor. The main conclusions from study are the poor performance of the construction sector, which holds the lowest returns, the highest risk and negative performance ratios, and the usefulness of the theory of portfolios to get a set of portfolios with higher returns and lower risk than the general Mexican IPC index that represents the market. The importance of diversification of assets is also noted. Keywords: Portfolio theory, Efficient Frontier, Risk-Return, Minimum Variance, Portfolio Contents 1. Introduction 6 1.1 Introduction 6 1.2 Goals 7 1.3 Methodology 7 1.4 Structure 9 2. Theoretical Framework 11 2.1 Risk and Return 11 2.1.1 Portfolio’s Expected Return 12 2.1.2 Portfolio Risk (Standard Deviation) 13 2.2 Diversification...
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...or "El" in the graph represents a portfolio with 60 percent invested in Supertech and 40 percent invested in Slowpoke. You will recall that we previously calculated both the expected return and the standard deviation for this portfolio. The choice of 60 percent in Supertech and 40 percent in Slowpoke is just one of an infinite number of portfolios that can be created. The set of portfolios is sketched by the curved line in Figure 10.3. Figure 10.2 Expected Returns a n d Standard Deviations for Supertech, Slowpoke, a n d a Portfolio Composed o f 60 Percent i n Supertech a n d 40 Percent i n Slowpoke Expected return (%) Supertech b Slowpoke I I I I 11.50 15.44 25.86 Standard deviation (%) Figure 10.3 Set of Portfolios c o m p o s e d of Holdings in Supertech and Slowpoke (correlation between the t w o securities i s -0.1639) Expected return on portfolio (%) I I Slowpoke I Standard deviation of portfolio's return (%) Portfolio 1is composed of 90 percent Slowpoke and 10 percent Supertech (p = -0.1639). Portfolio Zis composed of 50 percent Slowpoke and 50 percent Supertech (p = -0.1639). Portfolio 3is composed of 10 percent Slowpoke and 90 percent Supertech (p = -0.1639). Portfolio l ' i s composed of 90 percent Slowpoke and 10 percent Supertech (p = 1). Point MY denotes the minimum variance portfolio. This is the portfolio with the lowest possible variance. By definition, the same portfolio must also have the lowest possible...
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...The Composition Of Virgins Portfolio Marketing Essay The Virgin Group is a multi national corporation with a hugely diversified business portfolio. This essay examines how the Virgin Groups corporate strategy has allowed it to sustain competitive advantage. The first area that is covered is the composition of Virgins portfolio, namely what businesses Virgin is in and what is the logic of their portfolio. Within the composition section it puts forward two models that help to show why Virgin has chosen particular avenues for achieving growth and sustaining competitive advantage. The Core Competence Theory and Parenting Concept are then reviewed critically in regard to Virgin. Porters three tests are then related to the Virgin Group. Next the co-ordination of Virgins portfolio is addressed, how Virgin has managed its portfolio in its quest for growth and a sustained competitive advantage. Within the composition section of the essay is the issue of control versus the co-operation of Virgin and its business units. It then handles the four concepts of corporate strategy and how Virgin can and has used them to add value to its business units. The link between Virgins Corporate and Marketing strategy is then discussed before the other side of the argument is considered, looking at how Virgins corporate strategy destroyed rather than added value. Finally having synthesised the various diverse elements the essay concludes by using the knowledge gained to raise questions for Virgin about...
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...of how Mutual Funds can be used as a dynamic tool for diversification.. INTRODUCTION There are a lot of investment avenues available today in the financial market for an investor with an invest-able surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds A mutual fund is an investment vehicle that comprises a pool of funds collected from a large number of investors who invest in securities such as stocks, bonds, and short term money market instruments. The portfolio of a mutual fund is structured and maintained by fund managers. Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient...
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...world since the great depression of 1929. The crisis started to brew in the US in 2007 and many believed it would be largely limited to the shores of the US. However, the collapse of Lehman Brothers in 2008 was sufficient to trigger a worldwide stock market collapse, the effects of which are felt to this day. The worldwide collapse of stock market can be understood by considering the world as a single big marketplace. Analysing the co-movement of various financial markets has gained importance in the recent past both for policy makers, in terms of policy co-ordination, and portfolio managers, for portfolio diversification. For policy makers, high co-movement would facilitate transition in local currency areas resulting in potential efficiency gains from stock market merger activities. This, in turn, will result in greater financial stability across the regions. However, for portfolio managers, high correlation between international stock markets would reduce the benefits of portfolio diversification creating the need of searching other assets with lower correlation. The past few decades have seen a continuous increase economic integration between countries as a result of greater impetus towards globalization. All the worlds developed countries are also major traders (imports and exports) with other...
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...decade-long effort to divest nonstrategic business gained through its 1989 acquisition of Emhart Corporation and expected the company to enter a long-awaited period of growth as its entire management refocused its attention on its core power tools, plumbing, and security hardware business. Archibald believed that "This portfolio restructuring will allow us to focus on core operations that can deliver dependable and superior operating and financial results." However the portfolio restructuring did little to improve the market performance of the company's securities. Yet Archibald and the management continued to express confidence that the company's streamline portfolio would allow Black & Decker to achieve revenue and earnings growth that the market would find impressive. So far the 1998 divestitures have not produced steady increases in the company's stock price, but look promising for the future due to the efforts to refocus efforts on the successful power tools line. Strategic planning team evaluation Over the years, Black & Decker has branched off into many different directions in order to gain as much market share as possible. The diversification program in the 1980s produced mixed results for shareholders, and later on proved to be something that wasn’t as successful in the long run. Many things can be learned from the experiences that...
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...Topic Listing Based on Syllabus and Chapter Readings from Suggested Book Sl. No Syllabus Coverage Topics Title as given in Case Mapping Table Industry to which he case is related Considered Case Chapter Reading from Book No. of Sessions Week No. 1. Introduction to Business Strategy: Contributions of Leading Management Gurus. The nature of strategy and strategic decisions – characteristics of strategic decisions – levels of strategy – vocabulary of strategy. Strategic Management – the strategic position – strategic choices – strategy into action. 1. What is strategy? 2. Strategic Management 1. War 2.Banking Industry 1. The Great Escape 2. Yes Bank: Competitive Strategy of a Late Entrant Chapter 1 (Text Book) 4 1 & 2 2. Understanding Strategy Development: Strategy Development Process in organizations, Intended & Emergent Strategies, Strategic planning systems –logical incrementalism – the learning organization, multiple processes of strategy development., Multiple processes for strategy development, Strategic leadership, Strategic drift – strategic management in uncertain and complex conditions. 2. Context of Strategy formulation 3. Strategic Leadership 3. Diversified 4. Diversified 3. Jack Welch and Jeffrey Immelt - Continuity and Change in Strategy, Style and Culture at GE 4. Ratan Tata: Leading the Tata Group into the 21st Century Chapter 11 (Text Book) 4 3&4 3. The Strategic Position: The environment – the Macro environment – the PESTEL framework – structural...
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...Diversification Strategies Diversification strategies are used to expand firms' operations by adding markets, products, services, or stages of production to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called concentric diversification. Conglomerate diversification occurs when there is no common thread of strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated. Diversification is a market strategy, which is about expanding the business of the company in some way. It stretches from adding new products or services, which in some way are related to the corporation’s previous products or services on the market, too establish oneself with new, on a from the corporation’s point of view, completely unknown market (Grant). Although the idea of diversification as a strategy for growth and risk reduction is rather old, it was only after 1950 it became popular to let the corporation expand over different markets and product lines. This growth strategy continued to attract more and more companies, until it culminated in the 1970s when it became popular to build conglomerates, that is, companies expanding by adding more and more unrelated business to the corporation, often via acquisitions. In the following decades, the...
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...distribution (magnitude), p = price, E = expectation (which captures and combines the probability that different outcomes can/will happen) and m = SDF and captures the relation with other factors and the reward required to bear the risk inherent in x (it indicates how much (marginal) utility the outcome has, which captures the role of when we like the payoff more, the conditions matter; it captures the premium needed for this specific risk). The SDF can be derived from the utility function, this gives: . The problem with this is determining marginal utility. In many cases, the SDF is a linear function of a factor (CAPM): That factor f captures when returns in situation A may be more pleasant than the same returns in situation B. Portfolio theory (Risk & return: theory – empirics) Uses assumption A1 and A2, and more: Investors: A3. Agents maximize utility, and do so for 1 period. (Rationality: agents are capable to find the very best solution for their problem, and are willing to do so). A4. Utility is a function of expected return and variance (and nothing else). Market conditions: A5. No distortion from costs, transaction fees, inflation or taxes. If trading has costs, the optimum shifts (another allocation becomes optimal as fees eat...
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...Title | | LVMH | | | | Author | | Rohan Narula | Course | | Strategic Management | Teacher | | Dr. Jeffrey Kerr | Location | | EGP – University of Porto Business School, Porto, Portugal | Date | | 2011/12 2nd Term | 2. Does LVMH corporate add value to the companies in its portfolio? Are the portfolio companies more effective and competitive because they are part of LVMH? Explain. LVMH is a world leader in luxury products and services with a portfolio of over 50 prestigious brands. Brands under the conglomerate operate in the areas of: Wines and spirits, perfumes and cosmetics, fashion and leather goods, watches and jewelry, etc. LVMH manages a large portfolio; but ensures that there is consistency in marketing each of these brands. Although there exists product diversification, LVMH tries to create synergies in order to integrate each of these businesses with the parent brand. LVMH has stressed on the importance of quality, and in turn creating a heritage brand, by facilitating innovation in each independent brand as the driver of its growth and profitability. LVMH has developed several distinctive resources and capabilities that allow its brands to have competitive advantages: * Central advertising service thereby reducing the cost of an advertising campaign performed by a single company by more than 20%. * Support international development using the experience of administrative and legal support; local cultural awareness; pre-established...
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...Introduction to CreditMetrics™ The benchmark for understanding credit risk New York April 2, 1997 • • • A value-at-risk (VaR) framework applicable to all institutions worldwide that carry credit risk in the course of their business. A full portfolio view addressing credit event correlations which can identify the costs of over concentration and benefits of diversification in a mark-to-market framework. Results that drive: investment decisions, risk-mitigating actions, consistent risk-based credit limits, and rational risk-based capital allocations. J.P. Morgan Co-sponsors: Bank of America Bank of Montreal BZW Deutsche Morgan Grenfell KMV Corporation Swiss Bank Corporation Union Bank of Switzerland Table of Contents 1. Introduction to CreditMetrics 2. The case for a portfolio approach to credit risk 3. The challenges of estimating portfolio credit risk 4. An overview of CreditMetrics methodology 5. Practical applications 3 9 12 14 30 Introduction to CreditMetrics Copyright © 1997 J.P. Morgan & Co. Incorporated. All rights reserved. J.P. Morgan Securities, Inc., member SIPC. J.P. Morgan is the marketing name for J.P. Morgan & Co. Incorporated and its subsidiaries worldwide. CreditMetrics™, CreditManager™, FourFifteen™, and RiskMetrics™ are trademarks of J.P. Morgan in the United States and in other countries. They are written with the symbol ™ on their first occurance in the publication, and as CreditMetrics, CreditManager, FourFifteen or RiskMetrics thereafter...
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...SMG Self-Reflection Explain three things you learned and came to understand about the stock market and how it functions. The Stock Market Game was an informative introduction to economics and the world of investing money. Starting out with $100,000, we were eventually able to make $9055.73 with a +9.06% return, placing 136th out of 852 teams. Through the simulation, I learned that stock statistics of companies do not reveal everything, successful investments require in-depth research and patience, and diversification of stocks is important to keep investments balanced. As I played the Stock Market Game, I realized that looking solely at the stock’s statistics, such as 52wk range, Earnings Per Share (EPS), and Price-Earnings Ratio (PE), did not accurately predict the current direction of the stock’s price. More often, I used the statistics to determine whether the investment would be good in the long run, as opposed to stocks which might do well...
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...________ is the process of developing and maintaining a crucial fit between the organization's goals and capabilities and its changing marketing opportunities. A) Benchmarking B) SWOT analysis C) Market segmentation D) Strategic planning E) Diversification Answer: D AACSB: Analytical thinking Skill: Concept Objective: LO 2.1: Explain company-wide strategic planning and its four steps. Difficulty: Easy 2) Which of the following is true with regard to strategic planning? A) At the corporate level, the company starts the strategic planning process by determining what portfolio of businesses and products is best for the company. B) A strategic plan deals with a company's short-term goals. C) The focus of strategic planning is to define a game plan for long-run survival and growth. D) The strategic plan is a statement of an organization's purpose. E) Strategic planning involves identifying segments of consumers with identical preferences. Answer: C AACSB: Analytical thinking Skill: Concept Objective: LO 2.1: Explain company-wide strategic planning and its four steps. Difficulty: Moderate 3) Which of the following is the first step in strategic planning? A) setting short-term goals B) developing the business portfolio C) defining the organizational mission D) formulating the key marketing strategies E) identifying the organization's weaknesses and the threats it faces Answer: C AACSB: Analytical thinking Skill: Concept Objective: LO 2.1: Explain...
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...TOPIC THREE PORTFOLIO THEORY AND CAPITAL ASSET PRICING MODEL (CAPM) Reading : BKM: Chapters 7&9 Pilbeam: Chapters 7&8 OUTLINE Section I: The concept of portfolio and diversification Calculate portfolio expected return Measuring portfolio total risk: variance and standard deviation Market portfolio Measuring systematic risk: Beta Section II: Markowitz Portfolio Theory Efficient portfolio and Efficient Frontier Capital Asset Pricing Model - CAPM CAPM lines: CML and SML PORTFOLIO A portfolio is a collection of assets Diversification - Strategy designed to reduce risk by spreading the portfolio across many investments. Diversification reduces risk because prices of different securities do not move exactly together. - The amount of possible risk reduction through diversification depends on the correlation (see later) An asset’s risk and return are important in how they affect the risk and return of the portfolio The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets PORTFOLIO EXPECTED RETURN The expected return of a portfolio is the weighted average of the expected returns of the respective assets in the portfolio Portfolio rate of return = fraction of portfolio rate of return + x in second asset on second asset ( ( fraction of portfolio in first asset )( )( x s i 1 rate of return on first asset ) ) ...
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...CPPIB is not a sovereign wealth fund, does not serve a government budget and its funds (at a contribution rate of 9.9%) come from employers and employees in Canada. Therefore, the CPPIB has future liabilities in the form of pension payments. • The CPPIB employs a total portfolio approach in which investment decisions are made by allocation of underlying risk characteristics across various investments. In doing so, it does not restrict its allocation to any asset class, as long as the risk/return benefit from an investment justifies its deviation from the Reference Portfolio. The GPFB however functions as a typical pension fund, where allocations of funds are across asset classes and regions. The portfolio would be rebalanced when specific asset classes deviated from a benchmark, hence restricting the percentage asset allocation of the portfolio. • The GPFB has only recently started an allocation of funds to real estate with the rest of the portfolio invested in fixed income and equity. The CPPIB, on the other hand, is more aggressive in its investments in illiquid assets, having gradually increased its allocation to infrastructure, private equities and real estate, which formed approximately 30% of the portfolio as of 2011. 2. Do you agree that the Norway Fund provides a good blueprint for other countries to establish a SWF? State your reasons. I agree: • The fund is well integrated with the Government budget. By financing the non-oil budget deficit of the government and...
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