Portfolio Analysis (Chapter 3) ee CHAPTER 3.1.1. Concept of Portfolio Portfolio can be referred to as the combination of various financial instruments like the stocks and debentures. The process of combining the securities from various asset classes with aim to obtain maximum return with minimum risk is called as portfolio construction. Portfolio helps in the diversification of risk among various assets. The diversified securities help in getting the required return from the portfolio. If an investor puts all his money in a single security and that security performs poorly, the investor will incur loss However, on the other hand if he buys various securities from his total capital and minimises the risk. In a diversified portfolio, some securities may not perform as expected, but others may exceed the expectation and making the actual return of the portfolio reasonably close to the expected one. A market portfolio is a theoretical bundle of investments that includes every type of asset available in the world financial market, with each : _ asset weighted in proportion to its total presence in the market Risk and Return of a Portfolio io is a combination/group of different securities. The decisions require the selection of group of different grouping of securities in a portfolio does not account for eeeaanalty or various types of risk.ae ae ~ MBA Fourth Semester (Pwtfotio Management) Kix | 4 The investor emphasis on the performance of the securities present ig | { the portfolio. The weighted return of these securities in the port tio iy known as portfolio returns. Portfolio risk uses the standard des iatiog | along with the covariance between securities. It is not the simple weighted average risk of various securities in the portfolio. yi 3.1.3. Portfolio Returns/Expected Return on | Portfolio | The weighted average of the expected retum of indiviclual securities in given portfolio is known as expected return on a portfolio R,= W, Ry + We Red. Wy Re Or R= SWR a Where, R, = Expected rate of return in a portfolio, W, = Proportion of total investment invested in i" asset, R, = Expected rate of return on i® security, n = Number of securities in a given portfolio. | Example 1: The stock of Singh Mills Ltd, (SML) has the expected rate | of return of 20% for a holding period while the Chopra Mills Ltd. (CML) has 16% expected rate of return. | The investors want to invest in both the securities. Calculate the | expected rate of return from the two-asset portfolio. Solution: R,= WR, | a Wevn = 0.50 Rw = 0.20 | Wem = 0.50 Rem =0.16 R p = (Wem) (R smu) + (Wem) (R cw) (0.50x0.20) + (0.50x0.16) .10 + 0.08 = 0.18 or 18% Note: Here, let the total weight of the stock be 1 which is divided into two securities for investment. Therefore, Wey. and Went will be 0.50.Portfolio Analysis (Chapter 3) SI Example 2: Continuing the above two Asset Portfolio, the Tewari Mills Ltd scrip is also included in the portfolio by partly selling the investment in Chopra Mill Ltd by 20% of total investment and the expected rate of return from Tewari Mills Ltd is 22% for the same holding period. What will be the return from the 3-asset portfolio? Solution: Wemi= 0.50 R sm = 0.20 Rem = 0.16 Rm = 0.22 R p= (Wem) (R smi) + (Went) (R emt) + (Wr) (R rt) (0.50x0.20] + [0.30x0.16] + [0.20x0,22] 10 + 0.048 + 0.044 .192 or 19.2% Note: Here, Wem = 0.50 — 0.20 = 0.30 3.1.4. Portfolio Risk The weighted average rates of return of individual assets of given portfolio is known as the portfolio rate of return. The calculation of portfolio risk is different from the weighted average of total risk of an ; individual asset. It is usually different from individual asset tisk. There 4 are chances that the individual assets may be risky with large standard deviations and if they are combined in a portfolio than there is no tisk. Measurement of Portfolio Risk The portfolio risk is measured with the help of used can be easily modified for this situation. Fo of correlation for the rates of return for two 1) The correlation is used to d i variables x and y. The degree of relationship as a The ‘r’ is used for densstment can be computed 1e expected return (R ) om the inves 02 x 005) + (008 x 0.10) + (0:12 028) Expected retum on investment i "= Outcome of ioe ae : MBA Fourth Semester (Portfolio Mang 58 Calculate the portfolio return and risk characteristic of an cay weighted portfolio of three securities. 8eMeyy N Solution: Portfolio Retum = °X,R, = (0.33 x 12) + (0.33 x18) + (0.33 = 3.96 + 5.94 + 7.26 = 17.16% x 22) Portfolio Risk (9p) = y(x,)°(0,)? +043) (6) +2X)X,(4,,63) (0.33? x15*)-+(0.33?x20?)+(0.33 X25?) +[2(0.33?x— +[2(0.33?xo, 20x 20x 25)] + [2(0.332 Op= 0.35% 15x29) X-0.60%15x25)] (0.1089 225) + (0.1089x400)+(.1080x ~¥+ex0 1089100) + (2x0.1089x-225) = 24.504 43 56+ 68.06 +( 22.87) + 21.78 +(—49) = v136. 12-22.87421,.78—49 = 86.03 =9.275 625)+(2x0. 1089 x -105) 3.2.1. Short Answer Type Questions 1) Whatis the concept of portfolio? 2) Discuss the risk and return of a Portfolio, 9) Explain the portfolio risk and return in single asset, 3.2.2. 1 2) Long Answer Type Questions Write a detailed Note on the portfolio returns with its calculation. Discuss Portfolio risk in two asset and -asset model,