NUST Business School

Investment Portfolio Management

Final Project

Submitted to:
Sir Owais Qarni

Submitted by:
Syed Amir Hamza
Neha Afzaal
Ismail Khan
Haider Ali

BSAF 2K16 B
nd
Date: 2 May, 2019
Contents
Markowitz Theory: ........................................................................................................................................ 3
Diversification............................................................................................................................................... 5
The Following has been Termed as Optimum .............................................................................................. 6
Correlation Results:....................................................................................................................................... 6
Year 2014 .................................................................................................................................................. 7
Year 2015 .................................................................................................................................................. 9
Year 2016 ................................................................................................................................................ 11
Year 2017 ................................................................................................................................................ 13
Diversifying Our Portfolio: .......................................................................................................................... 15
2014: ........................................................................................................................................................... 15
2015 ............................................................................................................................................................ 16
2016 ............................................................................................................................................................ 17
2017 ............................................................................................................................................................ 18
Diversification (With Negative Correlation)................................................................................................ 19
2017 ............................................................................................................................................................ 19
2016 ............................................................................................................................................................ 20
.................................................................................................................................................................... 20
2015 ............................................................................................................................................................ 21
2014 ............................................................................................................................................................ 22
Literature .................................................................................................................................................... 23
Combined Portfolio ..................................................................................................................................... 33
References .................................................................................................................................................. 34
Markowitz Theory:
Harry M. Markowitz is credited with introducing new concepts of risk mea-

surement and their application to the selection of portfolios. He started with the

idea of risk aversion of average investors and their desire to maximise the expected

return with the least risk.

Markowitz model is thus a theoretical framework for analysis of risk and return

and their inter-relationships. He used the statistical analysis for measurement of

risk and mathematical programming for selection of assets in a portfolio in an

efficient manner. His framework led to the concept of efficient portfolios. An

efficient portfolio is expected to yield the highest return for a given level of risk or

lowest risk for a given level of return.

Markowitz generated a number of portfolios within a given amount of money or

wealth and given preferences of investors for risk and return. Individuals vary

widely in their risk tolerance and asset preferences. Their means, expenditures and

investment requirements vary from individual to individual. Given the preferences,

the portfolio selection is not a simple choice of any one security or securities, but a

right combination of securities.

Markowitz emphasized that quality of a portfolio will be different from the quality

of individual assets within it. Thus, the combined risk of two assets taken
separately is not the same risk of two assets together. Thus, two securities of

TISCO do not have the same risk as one security of TISCO and one of Reliance.

Risk and Reward are two aspects of investment considered by investors. The

expected return may vary depending on the assumptions. Risk index is measured

by the variance of the distribution around the mean, its range etc., which are in

statistical terms called variance and covariance. The qualification of risk and the

need for optimization of return with lowest risk are the contributions of Markowitz.

This led to what is called the Modern Portfolio Theory, which emphasizes the

tradeoff between risk and return. If the investor wants a higher return, he must take

higher risk. But he prefers a high return but a low risk and hence the problem of a

tradeoff.

A portfolio of assets involves the selection of securities. A combination of assets or

securities is called a portfolio. Each individual investor puts his wealth in a

combination of assets depending on his wealth, income and his preferences. The

traditional theory of portfolio postulates that selection of assets should be based on

lowest risk, as measured by its standard deviation from the mean of expected

returns. The greater the variability of returns, the greater is the risk.
Diversification

Markowitz postulated that diversification should not only aim at reducing the risk

of a security by reducing its variability or standard deviation, but by reducing the

covariance or interactive risk of two or more securities in a portfolio. As by

combination of different securities, it is theoretically possible to have a range of

risk varying from zero to infinity.

Markowitz theory of portfolio diversification attaches importance to standard

deviation, to reduce it to zero, if possible, covariance to have as much as possible

negative interactive effect among the securities within the portfolio and coefficient

of correlation to have – 1 (negative) so that the overall risk of the portfolio as a

whole is nil or negligible. (Witt & Dobbins, 1979)

The Following has been Termed as Optimum

Correlation Results:
Year 2014
Q1
1
CORRELATION

0.5

0
Chems - Bld Mt - Fin - Other Steel - Chems - Clths - Gold - Coal - Gold - Lab Beer -
-0.5 Mach Trans Mach Bus Sv Gold Insur Softw Eq Gold
INUDSTRIES

Highest Lowest

Q2
1
CORRELATION

0.5

0
Mach - Fin Fin - Other Trans - Fin Bld Mt - Mach - Clths - Txtls - Gold - Gold - Toys - Gold
Fin Trans Gold Gold Hardw RlEst
-0.5
INUDSTRIES

Highest Lowest

Q3
1
0.8
CORRELATION

0.6
0.4
0.2
0
-0.2 Hshld - Drugs- Fin Hardw - Hshld - Fin Hshld - Guns - Rubbr - Gold - Coal - Mach -
Hardw Chips Chips Softw Guns Softw Softw Softw
INUDSTRIES

Highest Lowest
 Q4
1
0.8
0.6
CORRELATION

0.4
0.2
0
-0.2 Trans - Fin Insur - Fin Mach - Fin Bld Mt - Mach - Oil Beer - Gold - Med Eq - Gold - Gold - Oil
Rtail Gold Other Gold Insur
-0.4
INUDSTRIES

Highest Lowest

2014
1
0.8
CORRELATION

0.6
0.4
0.2
0
Fin - Other Bld Mt - Trans - Fin Mach - Mach - Fin Beer - Gold - Oil Gold - Gold - Med Eq -
-0.2
Fin Trans Gold Insur RlEst Gold
INUDSTRIES

Highest Lowest
Year 2015

Q1
1.5
CORRELATION

0.5

0
Banks - Fin Mach - Elc Bus Sv - Bus Sv - Insur - Fin Txtls - Gold - Cnstr - Gold - Books -
-0.5 Eq Whlsl Lab Eq Gold Chips Gold Banks Gold
INUDSTRIES

Highest Lowest

Q2
1
CORRELATION

0.5

0
Bus Sv - Banks - Fin Rubbr - Aero - Lab Eq - Txtls - Gold - Hlth - Coal Hlth - Med Eq -
Whlsl Bus Sv Paper Whlsl Gold Banks Mines Gold
-0.5
INUDSTRIES

Highest Lowest

Q3
1.2
1
CORRELATION

0.8
0.6
0.4
0.2
0
Banks - Fin Bus Sv - Bus Sv - Bus Sv - Insur - Fin Soda - Coal Guns - Soda - Beer - Coal Gold -
Whlsl Insur Rtail Gold Gold Banks
INUDSTRIES

Highest Lowest
 Q4
1
0.8
CORRELATION

0.6
0.4
0.2
0
Banks - Fin Mach - Elc Bus Sv - Bus Sv - Bus Sv - Clths - Soda - Hlth Hlth - Gold Beer - Hlth Gold - Rtail
-0.2
Eq Fin Whlsl Lab Eq Gold
INUDSTRIES

Highest Lowest

2015
1
CORRELATION

0.8
0.6
0.4
0.2
0
Banks - Fin Bus Sv - Bus Sv - Lab Eq - Bus Sv - Clths - Guns - Hlth - Gold Txtls - Gold Gold -
Whlsl Lab Eq Whlsl Fin Gold Gold Banks
INUDSTRIES

Highest Lowest
Year 2016
Q1
1.2
1
0.8
CORRELATION

0.6
0.4
0.2
0
-0.2 Banks - Fin Bus Sv - Insur - Fin Banks - Rubbr - Bld Gold - Gold - Rtail Smoke - Gold - Bear -
-0.4 Lab Eq Insur Mt Meals Gold Softw Gold
INUDSTRIES

Highest Lowest

Q2
1.5

1
CORRELATION

0.5

0
Banks - Fin Mach - Elc Bld Mt - Insur - Fin Bld Mt - Gold - Drugs - Fun - Gold Med Eq - Gold - Fin
-0.5 Eq Bus Sv Elc Eq Insur Gold Gold
INUDSTRIES

Highest Lowest

Q3
1
0.8
CORRELATION

0.6
0.4
0.2
0
-0.2 Banks - Fin Bld Mt - Bus Sv - Bld Mt - Mach - Elc Agric - Clths - Gold - Agric - Agric - Util
Elc Eq Hardw Whlsl Eq Guns Gold Banks Soda
INUDSTRIES

Highest Lowest
 Q4
1.5

1
CORRELATION

0.5

0
Banks - Fin Mach - Elc Fab Pr - Soda - Steel - Smoke - Smoke - Beer - Smoke - Beer - Fin
-0.5 Eq Ships Beer Mach Banks Mines Banks Fin
INUDSTRIES

Highest Lowest

2016
1.2
1
0.8
CORRELATION

0.6
0.4
0.2
0
-0.2 Banks - Fin Mach - Elc Insur - Fin Bld Mt - Bus Sv - Gold - Gold - Fin Gold - Gold - Gold - Rtail
-0.4 Eq Elc Eq Lab Eq Banks Insur Meals
-0.6
INUDSTRIES

Highest Lowest
Year 2017
Q1
1
0.8
0.6
CORRELATION

0.4
0.2
0
Banks - Fin Bld Mt - Bld Mt - Bld Mt - Mach - Elc Util - Chips Gold - Gold - Fin Smoke - Util -
-0.2
Mach Cnstr Elc Eq Eq Banks Autos Banks
-0.4
INUDSTRIES

Highest Lowest

Q2
1
0.8
0.6
CORRELATION

0.4
0.2
0
-0.2 Banks - Fin Bld Mt - Bld Mt - Mach - Elc Chems - Gold - Gold - Gold - Fin Books - Gold -
Mach Elc Eq Eq Mach Banks Insur Gold Other
-0.4
INUDSTRIES

Highest Lowest

Q3
1
CORRELATION

0.5

0
Banks - Fin Mach - Elc Bld Mt - Bus Sv - Softw - Lab Ships - Gold - Gold - Gold - Gold -
Eq Elc Eq Softw Eq Gold Paper Banks Boxes Insur
-0.5
INUDSTRIES

Highest Lowest
 Q4
1
0.8
CORRELATION

0.6
0.4
0.2
0
-0.2 Banks - Fin Mach - Elc Bld Mt - Mach - Bus Bus Sv - Soda - Telcm - Telcm - Smoke - Beer -
Eq Elc Eq Sv Lab Eq Clths Softw Lab Eq Gold Clths
-0.4
INUDSTRIES

Highest Lowest

2017
1

0.8

0.6
CORRELATION

0.4

0.2

0
Banks - Fin Mach - Elc Bld Mt - Bld Mt - Chems - Gold - Gold - Fin Gold - Gold - Util -
-0.2 Eq Mach Elc Eq Mach Banks Insur Other Banks
-0.4
INUDSTRIES

Highest Lowest
 Diversifying Our Portfolio:

2014:
Q1 Q2
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Chems - Mach 0.88512524 Mach - Fin 0.906249361
Bld Mt - Trans 0.87561589 Fin - Other 0.876785292
Fin - Other 0.875061315 Trans - Fin 0.885318503
Steel - Mach 0.873020268 Bld Mt - Fin 0.885125175
Chems - Bus Sv 0.871399717 Mach - Trans 0.881417405
Clths - Gold -0.098885558 Clths - Gold -0.333197292
Gold - Insur -0.093095464 Txtls - Gold -0.320877792
Coal - Softw -0.0865687 Gold - Hardw -0.319253113
Gold - Lab Eq -0.082232974 Gold - RlEst -0.292823313
Beer - Gold -0.075508402 Toys - Gold -0.287336384

Q3 Q4
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Hshld - Hardw 0.847628108 Trans - Fin 0.865248338
Drugs- Fin 0.844476546 Insur - Fin 0.857913296
Hardw - Chips 0.83971002 Mach - Fin 0.85370745
Hshld - Fin 0.836594449 Bld Mt - Rtail 0.846630042
Hshld - Chips 0.832830326 Mach - Oil 0.845779148
Guns - Softw -0.095054958 Beer - Gold -0.204777002
Rubbr - Guns 0.030887702 Gold - Other -0.195544975
Gold - Softw 0.032351286 Med Eq - Gold -0.188745311
Coal - Softw 0.037504785 Gold - Insur -0.182669651
Mach - Softw 0.040619039 Gold - Oil -0.182137945

2014
Correlation between Industries Highest Lowest
Fin - Other 0.860705927
Bld Mt - Fin 0.844757809
Trans - Fin 0.834892407
Mach - Trans 0.832717102
Mach - Fin 0.831383239
Beer - Gold -0.060544711
Gold - Oil -0.05137721
Gold - Insur -0.051139507
Gold - RlEst -0.038829998
Med Eq - Gold -0.03334086
 2015
Q1 Q2
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.964308368 Bus Sv - Whlsl 0.920114684
Mach - Elc Eq 0.923724248 Banks - Fin 0.904365685
Bus Sv - Whlsl 0.912621836 Rubbr - Bus Sv 0.898187044
Bus Sv - Lab Eq 0.908674196 Aero - Paper 0.894873954
Insur - Fin 0.906897103 Lab Eq - Whlsl 0.882076507
Txtls - Gold -0.143696798 Txtls - Gold -0.292344799
Gold - Chips -0.131659255 Gold - Banks -0.218335861
Cnstr - Gold -0.112328499 Hlth - Coal -0.152056663
Gold - Banks -0.098247591 Hlth - Mines -0.140787555
Books - Gold -0.094506341 Med Eq - Gold -0.124133867

Q3 Q4
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.970554344 Banks - Fin 0.936263629
Bus Sv - Whlsl 0.951069458 Mach - Elc Eq 0.889014088
Bus Sv - Insur 0.941257925 Bus Sv - Fin 0.886728821
Bus Sv - Rtail 0.939423021 Bus Sv - Whlsl 0.885292776
Insur - Fin 0.939360568 Bus Sv - Lab Eq 0.883676708
Soda - Coal 0.128425707 Clths - Gold -0.070966263
Guns - Gold 0.152343154 Soda - Hlth -0.006271051
Soda - Gold 0.164343572 Hlth - Gold -0.002296094
Beer - Coal 0.167735099 Beer - Hlth 0.050311552
Gold - Banks 0.170345655 Gold - Rtail 0.055718713

2015
Correlation between Industries Highest Lowest
Banks - Fin 0.95092687
Bus Sv - Whlsl 0.923323011
Bus Sv - Lab Eq 0.907634915
Lab Eq - Whlsl 0.900629208
Bus Sv - Fin 0.898533837
Clths - Gold 0.036795429
Guns - Gold 0.037767549
Hlth - Gold 0.057811737
Txtls - Gold 0.10263642
Gold - Banks 0.106479113
 2016

Q1 Q2
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.940466097 Banks - Fin 0.96892926
Bus Sv - Lab Eq 0.933738849 Mach - Elc Eq 0.947195048
Insur - Fin 0.929985357 Bld Mt - Bus Sv 0.930666905
Banks - Insur 0.922615178 Insur - Fin 0.925640231
Rubbr - Bld Mt 0.922383037 Bld Mt - Elc Eq 0.924890955
Gold - Meals -0.263601231 Gold - Insur -0.305027858
Gold - Rtail -0.240695924 Drugs - Gold -0.301968719
Smoke -Gold -0.217373112 Fun - Gold -0.288398897
Gold - Softw -0.190467332 Med Eq - Gold -0.288031976
Bear - Gold -0.176998278 Gold - Fin -0.285022266

Q3 Q4
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.928779256 Banks - Fin 0.937997135
Bld Mt - Elc Eq 0.891899735 Mach - Elc Eq 0.877507858
Bus Sv - Hardw 0.880639424 Fab Pr - Ships 0.831590629
Bld Mt - Whlsl 0.872810352 Soda - Beer 0.829314296
Mach - Elc Eq 0.866269869 Steel - Mach 0.827167868
Agric - Guns -0.023127057 Smoke - Banks -0.406538323
Clths - Gold 0.035887682 Smoke - Mines -0.394601168
Gold - Banks 0.042777903 Beer - Banks -0.393896263
Agric - Soda 0.060279276 Smoke - Fin -0.383975694
Agric - Util 0.083157857 Beer - Fin -0.383669594

2016
Correlation between Industries Highest Lowest
Banks - Fin 0.948271244
Mach - Elc Eq 0.907853793
Insur - Fin 0.890519506
Bld Mt - Elc Eq 0.887367207
Bus Sv - Lab Eq 0.887159215
Gold - Banks -0.161951058
Gold - Fin -0.127404748
Gold - Insur -0.117692358
Gold - Meals -0.108084014
Gold - Rtail -0.065221584
 2017
Q1 Q2
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.934003334 Banks - Fin 0.920614019
Bld Mt - Mach 0.889733437 Bld Mt - Mach 0.903029078
Bld Mt - Cnstr 0.867105478 Bld Mt - Elc Eq 0.866773727
Bld Mt - Elc Eq 0.863877989 Mach - Elc Eq 0.865063072
Mach - Elc Eq 0.849024699 Chems - Mach 0.848578196
Util - Chips -0.250825913 Gold - Banks -0.305691904
Gold - Banks -0.241295312 Gold - Insur -0.292578674
Gold - Fin -0.221641152 Gold - Fin -0.243105654
Smoke - Autos -0.213439122 Books - Gold -0.227256268
Util - Banks -0.202426106 Gold - Other -0.182883814

Q3 Q4
Correlation between Industries Highest Lowest Correlation between Industries Highest Lowest
Banks - Fin 0.919248907 Banks - Fin 0.85193708
Mach - Elc Eq 0.842722912 Mach - Elc Eq 0.811012139
Bld Mt - Elc Eq 0.777155697 Bld Mt - Elc Eq 0.767278988
Bus Sv - Softw 0.769401046 Mach - Bus Sv 0.748914522
Softw - Lab Eq 0.763570908 Bus Sv - Lab Eq 0.743099143
Ships - Gold -0.421074139 Soda - Clths -0.29685131
Gold - Paper -0.340928554 Telcm - Softw -0.272328737
Gold - Banks -0.295475264 Telcm - Lab Eq -0.266511964
Gold - Boxes -0.273537005 Smoke - Gold -0.252048479
Gold - Insur -0.258416409 Beer - Clths -0.244608941

2017
Correlation between Industries Highest Lowest
Banks - Fin 0.913109005
Mach - Elc Eq 0.842740442
Bld Mt - Mach 0.832685122
Bld Mt - Elc Eq 0.826372676
Chems - Mach 0.74916574
Gold - Banks -0.255023473
Gold - Fin -0.189989785
Gold - Insur -0.183374675
Gold - Other -0.137491557
Util - Banks -0.11121841
Diversification (With Negative Correlation)
(Zakamulin, 2015)

2017

Market Risk Vs Portfolio Risk

1.4

1.2

0.8

0.6

0.4

0.2

0
1 2 3 4

Market Risk Portfolio Risk

Market V/s Portfolio Return

1.2

0.8

0.6

0.4

0.2

0
1 2 3 4

Series1 Series2
2016

Market Risk V/s Portfolio Risk

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1 2 3 4

Series1 Series2

Market Return V/s Portfolio Return

1.5

0.5

0
1 2 3 4

Series1 Series2
2015

Market Risk V/s Portfolio Risk

1.2

0.8

0.6

0.4

0.2

0
1 2 3 4

Series1 Series2

Market Return V/s Portfolio Return

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1 2 3 4

Series1 Series2
2014
Market Return V/s Portfolio Return

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1 2 3 4

Series1 Series2

Market Risk V/s Portfolio Risk

0.8

0.6

0.4

0.2

0
1 2 3 4

Series1 Series2
Literature
Golds negative correlation:

Many investors hold gold and silver to hedge against various economic crises. But

does this hedge hold up during stock market crashes? Knowing what effect, a

market plunge and subsequent dollar collapse will have on silver and gold is vital

to making investment decisions now and then deciding what course to take should

a major recession or depression occur.

It’s a common assumption that gold and silver prices will fall right along with the

market. And if that’s the case, wouldn’t it be better to wait to buy them until after

the dust settles? But suppose that the investors have it right and that their precious

metals do retain their value — or even gain value. During a depression, is it better

to hold gold or invest in stock? (Mensi, Beljid, Boubaker & Managi, 2013)

1. In most cases, the gold price rose during the biggest stock market crashes.

Does gold go up if a stock plunge occurs? In recent times, the answer has usually

been, “Yes!” Notice this was regardless of whether the crash was short-lived or

stretched over a couple years. Gold even climbed in the biggest crash of them all:

the 56 percent decline that lasted two full years in the early 2000s. It seems clear
that we should not assume gold will fall in a stock market crash — the exact

opposite has occurred much more often.

2. Investors shouldn't panic over an initial drop in gold prices. (Chong & Miffre,

2009)

You’ll recall that gold did fall in the initial shock of the 2008 financial crisis. This

recent, albeit memorable, instance is perhaps why many investors think gold will

drop when the stock market does. But while the S&P continued to decline, gold

rebounded and ended the year up 5.5 percent. Over the total 18-month stock

market selloff, gold rose more than 25 percent. The lesson here is that, even if gold

initially declines during a stock market collapse, one should not assume it’s down

for the count. In fact, history says it might be a great buying opportunity. (Huang,

Zhou & Zhu, 2009)

3. Gold’s only significant selloff (46% in the early 1980s) occurred just after its

biggest bull market in modern history.

Gold rose more than 2,300 percent from its low in 1970 to the 1980 peak. So it

isn’t terribly surprising that it fell with the broader stock market at that point. In

recent years, the situation has been the exact opposite. Gold endured a 45 percent

decline from its 2011 peak to its 2016 low, which was one of its worst bear
markets in modern history. At the same time, this isn’t entirely a shock either,

given its quick gains during the 2008 crisis and the 2011 crash.

4. Silver did not fare so well during stock market crashes.

In fact, it rose in only one of the S&P selloffs and was basically flat in another one.

This is likely due to silver’s high industrial use (about 56% of total supply) and

that stock market selloffs are usually associated with a poor or deteriorating

economy. However, you’ll see that silver fell less than the S&P in all but one

crash. This is significant because silver’s high volatility would normally cause it to

fall more. Also notice that silver’s biggest rise (+15% in the 1970s) took place

amidst its biggest bull market in history. It also ended flat by the end of the

financial crisis in early 2009, which was its second-biggest bull market. In other

words, we have historical precedence that silver could do well in a stock market

crash if it is already in a bull market. Otherwise, it could struggle.

The overall message from history is this:

• Odds are high that gold won’t fall during a stock market crash, and in fact, it will

likely rise instead. Silver might depend on whether it’s in a bull market.

The reason gold tends to be resilient during stock market crashes is that the two are

negatively correlated. In other words, when one goes up, the other tends to go

down.
This makes sense when you think about it. Stocks benefit from economic growth

and stability while gold benefits from economic distress and crisis. If the stock

market falls, fear is usually high, and investors typically seek out the haven of

gold. If stocks are rockin’ and rollin’, the perceived need for gold from mainstream

investors is low.

Historical data backs up this theory of negative correlation between gold and

stocks. This chart shows the correlation of gold to other common asset classes. The

zero line means gold does the opposite of that investment half of the time. If the

line is below zero, gold moves in the opposite direction of that investment more

often than with it; if it’s above zero, it moves with that investment more often than

against it.

You can see that, on average, when the stock market crashes (U.S. Equities on the

chart), gold has historically risen more than declined. Gold has also historically

outperformed the cash sitting in your bank account or money market fund. Even

real estate values follow gold only a little more than half the time.

This is the practical conclusion for investors:

If you want an asset that will rise when most other assets fall, gold is likely to do

that often.
This doesn’t mean gold will automatically rise with every downtick in the stock

market. In the biggest crashes, though, history says gold is more likely to be sought

as a haven. So, if you think the economy is likely to be robust, you may want to

own less gold than usual. If you think the economy is headed for weakness, then

you may want more gold than usual. And if you think the economy is headed for a

period of upheaval, you may want to own a lot.

Analysis:

Bank:

Financial markets example banks can directly affect economic growth by studying

the relaxation of bank branch restrictions around the globe. The rates of real, per

capita growth in income and output increase significantly following branch reform.

We also see that the changes in growth are the result of changes in the banking

system. Improvements in the quality of bank lending, not increased volume of

bank lending, appear to be responsible for faster growth. The level of financial

development is strongly associated with real per capita GDP growth, the rate of

physical capital accumulation, and improvements in the efficiency with which

economies employ physical capital. Further, the predetermined component of

financial development is robustly correlated with future rates of economic growth,

physical capital accumulation, and economic efficiency improvements.

These are few of the major reasons why the bank is positively co related to the

finance and how do the positive change in one effect the other positively.

In the first quarter, the highest correlation is between the finance sector and

banks. The Updated Financial Development and Structure Database”. This

research pools in a database ranging from 1960-2007 and introduces the updated

and expanded version of the Financial Development and Structure Database. It

includes indicators on the size, efficient and stability of banks, nonbank financial

institutions and equity and bond markets. It also pools in interest margins and

capital ratios and a positive impact of the finance sector results in the overall

increase of both interest margins and capital ratios of banks

GOLD:

Gold has the lowest correlation. “Households don’t buy gold with their savings,

they have plenty of other opportunities like stocks and bonds, the correlation is

negative in the industry is because of simple supply and demand function”

A gold trader would want to figure out the difference in duration of volatility of

gold and that of, say, oil or silver during a high volatility state. A commodity

portfolio manager would be keen on understanding whether one commodity, such

as gold, can be used as a hedge or a haven for another commodity such as copper

in the portfolio at times of high volatility. A commodity-exporting country such as

South Africa, Australia and/or Canada would want to understand the volatility of

its commodity-export revenues in order to assess their impact on their economies.

Gold has the lowest annualized average return among those commodities. The

yellow metal is known to have notorious extended bear markets.

Machinery correlation with building material

In 2010, the German construction equipment and building ma-terial machinery

industry saw a growth in turnover by 13 % to 10.6 billion € (Fig. 1). Of these, the

construction machinery sector made 6.3 billion €, whereas 4.3 billion € were made

in the construction equipment, glass and ceramics machinery sectors For the

current year, the industry is expecting to see growth of another 10 % in both areas.

Significant differences in product segments

In total, 2010 was a better year for the companies than they had expected (Fig. 2).

Differences were significant, however, when comparing the different segments

with each other. Whereas sales of earth moving machinery, with a growth of 25 %

and of road building machinery with a growth of 38 % have significantly

developed, things did not go so well for the building construction machinery and

for concrete technology with 10 % less sales. Manufacturers of building material

machinery also saw a slight growth in turnover albeit by 1 % only.

Orders are coming in again

However, with regard to incoming orders there is a different development. Already

during the second half of last year, demand grew significantly in all areas.

Manufacturers of construction equipment currently have 56 % more incoming

orders, whereas in building material machinery there are 34 % more than in the

same period in 2010.

Components are short in supply

Capacity utilization also developed positively. On average it is at about 80 % for

the entire industry. The fact that most companies retained their regular staff during

the crisis is now of a great advantage. The only factor slowing down these positive

trends is the supply industry. Some components see lead times of 25 to up to 32

weeks. Some manufacturers in the construction machinery industry already fear

not being able to fulfil some of their projects. In addition to some components

being in short supply, the high prices of raw materials, steel and natural rubber

fully affect the construction machinery manufacturers.

Foreign markets push demand

The current push comes from abroad. It is China and India where things are

booming, but also the Middle East as well as Brazil are setting trends. Russia, the

most important market in the industry on Germany’s doorstep, although it has an

enormous demand, it is currently in a waiting position. Demand within the

industrialized countries is still restrained and likely to stay like this mid-term,

according to experts. Times when Europe, North America and Japan together made

up two thirds of the international demand for construction ma-chinery are over.

Already today nearly every second construction machine which is being produced

worldwide is sold to China.

Markets are -shifting

The shift in markets promotes the internationalization of companies and, at the

same time, their localization in booming regions. Production sites in China, North

and South Africa and are currently opening a production site in Brazil. Today,

statistics on foreign trade and export quota are only one indication for how widely

international the German construction equipment and building material machinery

industry has already become.

EU regulations change markets

Companies and clients worldwide must meet several challenges from 2011

onwards: changing markets and high environmental standards, such as the new

exhaust standards, which must be met especially by mobile machinery to be used

in Europe and North America, for example. The next exhaust level 3b for mobile

machinery will come into force this spring. Then, a wide range of new models will

enter the European market after companies having carried out extended time- and

cost intensive developments. Manufacturers are therefore expecting some of their

clients to move investments forward and have already now decided to go for the

ultra-modern and environmentally friendly machines. Eventually, clients in Europe

and North America will have to go along in any case as only the low-emission

models will be offered on the market mid-term.

Combined Portfolio
Market & Portfolio Risk With Inclusion of
Combined Portfolios (16 Quarters)
1.2

0.8

0.6

0.4

0.2

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Market Risk Portfolio Risk

Market Return & Portfolio Return of

Combined Portfolio (16 Quarters)
1.2

0.8

0.6

0.4

0.2

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Portfolio Return Market Return

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