9008INMT Investment Management

The assessment aims in understanding the level of returns, which could be generated from investment. In addition, risk attributes, and return position of the portfolio is mainly calculated in the assessment, which helps in creating an adequate efficient frontier for identifying the best possible portfolio for investment. Moreover, different level of economic indicators is mainly evaluated to understand the impact of the portfolio, which has been created by investors. Therefore, adequate Black-Scholes model is mainly used in the assortment to detect the level of call and put values for investment. Moreover, the mark-to-market settlement is calculated for the future contract, which has been shorted and generate higher rate of return from investment. Lastly, adequate calculation is mainly conducted for detecting the level of Sharpe Ratio, Tyner Ratio, Jensen’s Alpha and the information ratio is calculated for detecting the performance of the portfolio.

There is a major difference between the arithmetic and geometric mean, where the former has the difference between two consecutive terms constant, which is named as common difference. On the other hand, the geometric mean has a ration between the two consecutive terms constant. This difference forces the Arithmetic mean to be higher or equal to geometric mean. Similarly, there is significant difference between the dollar-weighted and time-weighted. Time weighted returns is mainly calculated on compounded basis, where the fund does not experience any withdrawals or contributions (Asker, Farre-Mensa and Ljungqvist 2014). The main implication of time-weighted returns is the duration in which the investment needs to be conducted. However, the dollar weighted returns mainly reflect the cash inflows and outflows, which has been conducted in the fund. The returns are mainly derived from the level of level of cash, which is involved for investment purpose. The implication of the dollar weighted returns is the level of investment, which needs to be conducted in the fund for generating higher returns from investment.

Investors use the past return to determine the future changes in prices, as it is believed in share market that historical trends, support levels and resistance level are always tested. Hence, with the identified rationale the investors design their investment strategy in accordance with the historical data. In addition, standard deviation is mainly calculated by the organisation to determine the systematic risk, which is involved in investment. Therefore, with the values of standard deviation investors are mainly able to detect the level of risk involved in investment, which direct influences their portfolio creation. The other aspects of risk such as unsystematic risk is not captured by the standard deviation calculation, as these risks are relatively unsystematic in nature. Unsystematic risk is Also considered risk, as it might reduce the actual investment capital of an investor (Paramati, Ummalla and Apergis 2016).

Take 1: Identifying the Arithmetic Mean, Geometric Mean and Standard Deviation

(Source: As created by the author)

The calculations conducted in the above TV adequately identify the Arithmetic mean, Geometric mean, and standard deviation of the five selected stocks. The calculation directly helps in detecting the level of Geometric and arithmetic returns, which could be associated with the investment. The calculation also put trees this is attributes of each investment class, which needs to be taken under consideration while preparing the portfolio. According to Gu (2016), investors before conducting investments in a particular stock need to identify the relevant risk and return attributes, which is associated with the stock. Furthermore, the classification of the risk and return attributes of each asset class are depicted as follows.

Australian Shares:

Adequate Australian shares are evaluated from the above calculation, which has both risk and return components, as the investment is focused on ASX market. The shares listed in ASX market is mainly traded with the help of exchange and brokers. After evaluating the calculation conducted in the above table, it could be detected that the risk attributes of the Australian shares are relatively high and takes third place in the 5-sector asset class. From the valuation it could be detected that the relevant Geometric mean is at the levels of 4.71%, while the Arithmetic mean is at the levels of 6.01%. This directly indicates that the compounded returns provided from the investment class is lower than the normal returns provided to the investor. Furthermore, the risk attributes of the Australian shares is considered high, As the standard deviation value is at the levels of 15.47%. Therefore, it could be identified that under the five-asset class, Australia shares are considered to be third riskiest. Hence from the evaluation of the standard deviation, Geometric mean, and Arithmetic mean, it could be detected that Adequate investment can be conducted in the specific asset class by the using adequate optimal portfolio diversification method (Bogle 2017).

Australian Bonds:

The Asset class is considered to be one of the least risky, as it falls under the category of risk-free investments. The Australian bonds are considered to be one of the major contributors of risk less investment options, which is provided to the investors. However, this directly portrays the negative attribute of the asset class, as it reduces their capability to generate abnormal returns from investment. The calculation conducted in the above table regarding the Australian bonds main leader pick the geometric mean at the levels of 4.47% while the Arithmetic mean at the levels of 4.48%. This directly indicates that there is no difference between the normal and compounded returns provided by the Australian bonds. The standard deviation of the overall Australian bond is at the levels of 1.47%, which is relatively lower as compared to other five asset class. The use of Australian bonds in the portfolio would eventually allow the investor to reduce its overall risk attributes and maintain its return generation capacity (Bogle 2017).

S&P500:

S&P 500 is considered to be one of the second highest risk portraying investment scope among the five-asset class, which directly increases the return and risk attributes of the investment. S&P 500 is considered to be an international investment, which allows the investors to generate higher returns while having large risk attribute. The calculation conducted in the above table relatively represents the geometric mean of 8.36% and Arithmetic mean of 10.03%, which directly indicates the level of returns that could be provided under normal circumstances by the Asset class. The calculation also depicted the level of risk that is associated with the investment, which is derived from the values of 18.28%. The investment scope is considered to be one of the riskiest investment options presented to the investor, while the return attributes is highly attractive. Therefore, investors considering the Use of the investment class needs to adequately conduct diversification in its portfolio to reduce the overall risk and maximize the profit from investment (Azar and Lo, 2016).

US Fed Funds Rate:

The investment scope of the Asset class is a relatively low as compared to its return and risk attributes. The US Fed Funds mainly provides the least returns from investment as it has the lowest risk attributes. This directly in the case that the asset class is not able to generate adequate returns from investment as compared to the other asset classes. The asset class directly focuses on providing a fixed interest rates to the investor, while giving the assurance of risk free asset. The overall returns that is provided by the Asset class is at the levels of 2.63% for arithmetic returns and 2.34% for geometric returns, while the overall standard deviation is at the levels of 2.38%. The risk that is associated with the US Fed Funds Rate is close to the configuration of bonds, which help in generating constant returns with the lowest risk. Investors could use the asset class to diversify the portfolio and reduce the risk attributes of their high return generating stocks (Ghosh and Kanjilal 2016).

Brent Oil:

Brent oil is considered to be one of the riskiest investment assets, as the investment class directly increases the relevant risk attributes of the investor. The volatility in the prices of oil is the main reason behind the risk attributes of the Asset. After evaluating the calculations in the above table, it could be detected that the returns generated from Brent oil is at the levels of 5.32% for Geometric mean and 15.58% for arithmetic mean. Moreover, the risk attributes of the asset are relatively at the levels of 51.97%, which is higher than any of the other assets. The difference between the Arithmetic mean and geometric mean is due to the continuous fluctuations in the prices of Brent oil. Therefore, investors can use the Asset class to generate high returns from investment by adequately applying the diversification method for adjusting the risk associated with investment (Manuel and Mathew 2017).

Optimal risky portfolio is the combination of assets with different weights, which increases the returns from investment while having the least risk. With the help of optimal risky portfolio investors are able to improve the level of returns from investment by having the least risk affecting their investment capital. The portfolio risk is a relatively calculated on the basis of weight which is used for investment purposes in different strokes. Moreover, the main role of diversification is to maximize the returns that could be generated from a particular portfolio created with a combination of high and low risk stocks. Sharpe ratio is calculated for understanding the level of returns, which can be generated from a particular stock after adjusting the risk-free returns. Sharpe ratio directly allows the investor to detect the level of investment and risk associated with the portfolio, which provides the returns that is higher than risk free rate. Separation property is relatively depicted, as a crucial element for modern portfolio theory, which allows the manager for segregating the assets into two parts. This directly helps in segregating the investments into two different sections comprising of optimal risky portfolio and maximum return yielding portfolio.

The Efficient Frontier and CAL line Is mainly calculated in the above figure, which helps in depicting the optimal portfolio that would generate higher returns while portraying the least risk from investment. From the evaluation of the above figure it could be detected that the portfolio identified, as the optimal investment option has the returns of 5% and risk of 1.36%. Therefore, with the current portfolio investor would eventually generate higher returns will have the least risk involved in investment. Gay (2016) indicated that optimal portfolio mainly consists of stocks with different weights for reducing the risk and maximising the level of return, which could be generated from the risk exposure.

The calculations conducted in the above table relatively represents the borders correlation and borders covariance of the five-asset class. both the calculation is relatively used for identifying the optimal portfolio, which allows the investors to maximize the output from its investment capital. The derived output from the above figure might eventually allow the investors to generate higher rate of return by maximizing values of the stock.

The economic indicators such as consumer index, employment rate, and GDP are mainly calculated to identify the current condition of the country. These economic factors directly help the investor to identify whether the capital market would flourish in near future. The condition of employment rate and the GDP eventually allows the investor to understand the current trajectory of the country’s Economy. The low unemployment rate and high GDP that eventually indicates that the business operations within the country is high, which would eventually benefit the organisation and increased its revenue generation capability. From the evaluation, cyclical stocks eventually you good business during the economic boom, as the consumers are able to spend high amount of money on luxury and necessary items (Merkle and Weber 2014). However, the defensive stocks relatively progress during the economic downturn, such as electricity, gas and water, which is necessary for the livelihood of consumers. Governments with the help of fiscal and monetary policy are able to increase the cash within the economy, which eventually helps in controlling the level of inflation. this control of the government on the inflation factor eventually allows the investors to reduce the risk from external factors.

Black Scholes option valuation mainly allows the investors to detect the level of put and call option of a particular investment. This determination directly helps in making the investment decisions regarding the options, which allows the investors to maximize their investment capital usage. Option is considered an investment instrument which allows the investor to adequately sell or buy a particular stock with designated exercise price and premiums. There are two types of options, which are used by the financial market that are put option and call option. There are different variable characteristics that identify the value of an option.  interest rate, time period of investment, strike price, the current price and risk of the stock is considered the variable characteristics which determine the option value. The main relation between price of an option and its Variables is the detection of price sensitivity of a particular stock. Higher the stock higher will be the values of option, as volatility in the stock will eventually increase over time (Belo, Lin and Bazdresch 2014).

Options could be used for the purchase of particular stock on a recommended price, as for example if a person wants to buy shares of BHP Billiton at certain price he will take the put option, which will ensure that the person by the stock at the same level without enduring extra expenses if stock prices increase or extra income if the stock price decrease. Options are mainly considered an insurance tool by the investors, as they are able to hedge their current Exposure and reduce the negative impact of the capital market volatility.  options are not thought to be a representing real Investments, as they are based on underlying asset and not the actual stocks.

Futures market play a vital role in the economy, as it identifies the level of demand for a particular commodity or stock. This eventually helps in depicting the level of pricing that needs to be adjusted with the current spot price to determine the overall future price of for financial instrument. Future contracts are the financial instruments which allows the investor to hedge their current financial exposure and reduce the level of risk affecting the portfolio value. Future contracts are considered to be an insurance device, which allows investors to reduce the negative impact of price volatility on their current portfolio. Mark to market is the overall profit or loss which and future contract investor generates each day after the trading has been closed. The main reason behind the imposing of margins on futures is to curb the level of exposure or risk that an investor can take before the trade could be squared off. Basis of risk is the overall risk that values the future contract if it is not moving in line with the underlying exposure. The situation under which investors in futures market should be concerned is when the spread between the underlying asset value and the value of future is widening. This will mainly concern the investor, as the futures contract is not behaving according to the underlying asset (Carpenter, Lu and Whitelaw 2015). The calculation in the above table indicates the losses, which has been incurred from the increment in value of the future contract.

After validating the shop ratio, Treynor measure, Jensen's Alpha, and information ratio adequate decision needs to be conducted regarding the choice of an investment manager. The calculation in the above table directly indicates that shop ratio is at the levels of 52.12%, while the Treynor ratio is at the levels of 11.48%, Jensen's Alpha is at 5.82% and information ratio is at the levels of 52.918%. The use of Sharpe ratio directly in the case that the portfolio has higher returns in comparison to the risk period, which will eventually boost the return generation capability of the investor (Dimpfl and Jank 2016). Furthermore, with the help of Treynor ratio the excess returns from investment that was not diversifiable can be detected. Moreover, Jensen's Alpha directly depicts the level of abnormal returns that could be generated by the portfolio for the investment period. Lastly, with the help of information ratio, the capability of the portfolio is detected but it could generate access return in comparison to the benchmark.

The morning star risk adjust return model is adequately depicted in the above figure, which is used by the website to value the relevant return generation capability of stocks and portfolio (Morningstar.com 2017). The major limitation of Sharpe ratio, Treynor measure, Jensen’s Alpha, and information ratio is the method in which the calculation is being conducted. Manipulation of data can directly hamper the results obtained by the above calculations, which will directly hamper the portfolio valuation. These measures can be manipulated when conducting the calculations, as use of tampered data would eventually hamper the output result.

The assessment aims in depicting the different measures that is taken by a investor to formulate an adequate portfolio, which could generate higher returns while reduce the risk from investment. In addition, the different formulas used for the calculation of Return and risk adequately depicted with the measures that could be used for identifying the optimal portfolio. the use of optimal portfolio would eventually allowed investor to generate the highest mountain returns with the limited risk. The risk adjusted return model of morning star is also depicted in the assessment, which would allow investors to adequately for emulator portfolio, which has the least risk with high return capability.

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