Addis Ababa University: College of Business and Economics Departement of Accounting and Finance
Addis Ababa University: College of Business and Economics Departement of Accounting and Finance
Addis Ababa University: College of Business and Economics Departement of Accounting and Finance
INVESTEMENT ANALYSIS
GROUP ASSIGNMENT ON
PORTFOLIO ANALYSIS AND MODERN PORTFOLIO
THEORY
Prepared by: ID No
1. Aberash Tibebe GSE/9966/13
2. Alem Berhe GSE/5078/13
3. Bethlehem Negussie GSE/5809/13
4. Bulcha Tasissa GSE/0129/13
5. Feysel Faris GSE/7761/13
A portfolio is the total collection of all investments held by an individual or institution. provides
the highest return for a given level of risk
Cont…..
1. Where to Invest?
2. When to Invest?
3. How much to Invest?
Objectives of portfolio management
Capital appreciation
Investment goals
Portfolio efficiency
Risk mitigation
Asset allocation
Liquidity diversification
Tax planning
4.1.3 The key elements of portfolio
management
The key to effective portfolio management is the long-
term mix of assets.
Asset Allocation
is based on the understanding that different
types of assets do not move in concert, and some
are more volatile than others.
Diversification
Rebalancing
Analyzing returns:
4.3 MEASURING EXPECTED
PORTIFOLIO RETURN AND RISK
For the purpose of portfolio construction, the financial
assets are primarily looked at from the perspective of
risk and returns.
E(Rp) =
Example of expected return of a portfolio
The expected rate of return is always b/n the lower and the highest
asset of
4.3.2 Measuring portfolio risk
Where:
σP = portfolio standard deviation
wA = weight of asset A in the portfolio
wB = weight of asset B in the portfolio
σA = standard deviation of asset A
σB = standard deviation of asset B; and
ρAB = correlation of asset A and asset B
For example, consider a two-asset portfolio with
equal weights, standard deviations of 20% and
30%, respectively, and a correlation of 0.40.
Therefore, the portfolio standard deviation is:
[√(0.5² * 0.22 + 0.5² * 0.32 + 2 * 0.5 * 0.5 * 0.2 * 0.3 * 0.4)] = 21.1%
4.3.3 Variance and standard Deviation as a measure of risk
Bond 150 50 %
p w w 2wA wB A,B A B
2 2
A A
2 2
B B
p WA2 A2 (1 WA ) 2 B2 2WA (1 WA ) AB A B
0.32 (0.2 2 ) 0.7 2 (0.4 2 ) 2(0.3)( 0.7)(0.6)( 0.2)(0.4)
0.309
4.5 PORTFOLIO RISK-RETURN ANALYSIS
of N SECURITIES
As we add more assets, co-variances become a
more important determinant of the portfolio’s
variance (diversification).
σp2= ∑∑WiWjPijσiσj
σp= [∑∑WiWjPijσiσj]
The extension for many securities Variance is a
bit more complicated.
The extension for three securities look as
follows:
Correlation coefficient
P12= Cov(1,2)Implies▬►Cov (R1,R2)=P12*σ1σ2
σp=[0.52*102+0.32*152+0.22*202+2*0.5*0.3*0.3*10*15+2*0.5*0.2
*0.5*10*20+2*0.3*0.2* 0.6*15*20]1/2
σp=10.79
4.6 DIVERSIFICATION AND PORTFOLIO
RISK