Behavioural Portfolio Analysis And Asset Allocation - Evaluation Using Portfolio Theory

Analyse your portfolio choices from a behavioural perspective and Evaluate the asset allocation adopted applying the portfolio theory concepts studied.

Choosing the portfolio: Behaviour perspective

The report consist a portfolio of 9 assets which has been discussed and evaluated on the basis of behavioural and performance point of view of the portfolio. The idea is to manage the performance of the portfolio and evaluate the best 5 assets from the 9 assets to make new portfolio. The evaluation and the analysis is based on the calculations which have been shown in the appendix. The entire calculation explains that how the portfolio is fluctuating and behaving. Further, it focuses on the failure or the success of the portfolio of 5 assets. The report considers the behaviour perspective as well as few theories to evaluate and manage the portfolio of 5 assets.

At initial level, nine companies have been taken into the consideration for preparing a portfolio in relation to the investment. The portfolio has been prepared to evaluate and analyze the investment position. The analysis evaluates that whether the portfolio is successful or it would lead o the failure. The nine companies which have been considered while preparing the portfolio are Amazon, Netflix, Exxon Mobil, Apple, Starbucks, Alphabet, Microsoft, Boeing and FedEx. These companies are registered into various stock exchanges (Mainik and Rüschendorf, 2010). The stock price of these assets has been evaluated to identify the portfolio performance.

Behaviour perspective of investors regarding the portfolio explains that the behavioural investors build and maintain the portfolios as pyramid of assts, layer by layer. In this, layers are associated with specific goals and attitudes in relation with the risk. In terms of the consumer experience, portfolio assets have been chosen on the basis of various factors such as those companies which offer daily products, computers, smart phones, food etc. these companies manages and enhances the value to services on rapid basis. The chosen companies for the portfolio are providing better returns to their stockholders and thus the confidence have been enhanced to choose these assets (Fogarty, 2010). The assets have been chosen after evaluating the financial analysis report about the company and the performance of the comapny in the market. It has been found that the In the third quarter, 65% of Amazon's e-commerce sales came from North America, with the remaining 35% coming from international markets. Clearly, there are massive international e-commerce growth opportunities.

Netflix is one of the largest stocks in NASDAQ. The price is increasing every year and it keeps continuing. Exxon stock is one of the most profitable stocks in NASDAQ. The price is increasing every month and the company does a great job innovating. Apple stock is one of the largest capitalizations in the world. A company that never fails and the stock price increases continuously. Starbucks is strongly increasing during the past two years and continuing (Yang et al, 2014). The company is becoming the strongest in this market. Alphabet: The petroleum business in Brazil is increasing massively. The stock is increasing a lot in the past 6 months, especially in 2018. Microsoft: A brand that people can trust. The price is the stock is increasing every year and continuing. Boeing: One of the most technology increasing stocks in final 2017 and 2018.  FedEx: The most increasing communication / technology stock in 2018. Hence, these securities have been chosen (Brière, Oosterlinck and Szafarz, 2015).

Portfolio diversification consideration

It has been found that at the domestic and local level, people are quite aware about these companies and the market position of these companies are also well which is directly impacting on the performance of the portfolio. The study explains that the position and the performance of the portfolio are better in context with the domestic level. Further, it has been found that at the international level, people are also aware about these companies and the market position of these companies in well manner which is directly impacting on the performance of the portfolio (Abreu and Mendes, 2010). The study explains that the position and the performance of the portfolio are better in context with the international level. Hence, behaviour perspective of investors about the assets and the portfolio explains that all the 9 assets are better and it would lead the portfolio towards success.

The evaluation on the portfolio diversification has been done to further. The study explains that which 5 assets are better in the total of 9 assets. It has been evaluated through the study that the position of Alphabet’s stock, Netflix, Exxon mobile, FedEx and starbucks are far better than the other stock. All of these stocks are mainly registered into the US market. These stocks are offering high return and the associate risk of these assets are quite lesser. These stocks have been chosen after being confident about the portfolio position and the portfolio success. No doubt has been found while preparing the portfolio and choosing the 5 assets out of 9 assets. These 5 assets represent a better portfolio and explain that the investment into these securities would be more profitable for the investors. The amount of news and the presence of the stocks have put the portfolio in a better position. International level is quite aware about these assets.

The correlation among all the 9 securities of the company is as follows:

The above table briefs about the correlation of each assets with other. Further, it has been evaluated through the calculations and the analysis, that Alphabet’s stock, Netflix, Exxon mobile, FedEx and starbucks are better assets than the total available assets. It explains that the portfolio of the assets would offer better return to the investors.

According to the Markowitz theory, it has been found that the portfolio would be created on the basis of real data and conventional wisdom. In the current case, the 5 stocks have been evaluated on the basis of Markowitz theory. It explains that the position and the performance of portfolio could be evaluated easily on the basis of Markowitz theory.

Portfolio analysis: Markowitz theory

The calculations on the 5 assets portfolio explains that the average return of these 5 assets are 4.74%, 0.32%, 1.48%, 2.00% and 1.78% respectively while the standard deviation of these assets are 12.76%, 4.21%, 4.52%, 5.74% and 5.81%. It explains that the position of the assets is way better (GAUDECKER and VON, 2015).

After giving the equal weight to each asset, it has been evaluated that the expected return of the portfolio has been better than last year. Further, it has been found that the variance and standard deviation of the portfolio would also be lower in new portfolio. This portfolio would offer better return to the investors as well as the risk of the portfolio would also be lower (Coeurdacier and Guibaud, 2011).

In addition, beta calculations of the portfolio have been evaluated to identify the performance and the position of portfolio. The beta calculation explains that the equal weight portfolio would be a better choice for the investors to make investment. The beta of recalculated weight, equal weight and descending weight are 1, 0.99 and 1.10 which explains that the fluctuations in the asset price would be lesser and it would offer better returns to the company.

Sharpe ratio explains about the average return which is earned in excess of the R (f) risk free rate per unit of total risk volatility. Further, the Sharpe ratio of the portfolio explains that in case of initial weight, recalculated weight, equal weight and descending weight, the Sharpe ratio of the portfolio would be almost similar (Seo, 2010). The Sharpe ratio of the portfolio explains that the equal Weight portfolio is way better than others.

Conclusion

To conclude, presenting a list of various companies which have been chosen on the basis of their performance and representativeness bases, it has been evaluated that the total return of the portfolio would be 2.28% which is quite better than the individual return and the risk basis. According to the some traditional and modern theories and the correlation matrix, it has been discovered that the allocations of the invested amount in the 5 assets are also good. It has been found that the risk of the portfolio is quite higher but in the context of the market and the individual security, it is average. It has been found that the volatility is quite lesser in the stock price and on the other hand, the Sharpe ratio is also lesser which made it easier to reconsider and recalculate the portfolio. Though, the obtained results are somehow same.

Basically, the above portfolio represents about a good diversification strategies and explains that the investment into this portfolio would be less risky and it would also offer better returns to the investors.

References

Abreu, M. and Mendes, V., 2010. Financial literacy and portfolio diversification. Quantitative finance, 10(5), pp.515-528.

Brière, M., Oosterlinck, K. and Szafarz, A., 2015. Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), pp.365-373.

Coeurdacier, N. and Guibaud, S., 2011. International portfolio diversification is better than you think. Journal of international money and finance, 30(2), pp.289-308.

Fogarty, J.J., 2010. Wine investment and portfolio diversification gains. Journal of Wine Economics, 5(1), pp.119-131.

GAUDECKER, H. and VON, M., 2015. How does household portfolio diversification vary with financial literacy and financial advice?. The Journal of Finance, 70(2), pp.489-507.

Mainik, G. and Rüschendorf, L., 2010. On optimal portfolio diversification with respect to extreme risks. Finance and Stochastics, 14(4), pp.593-623.

Seo, S.N., 2010. Is an integrated farm more resilient against climate change? A micro-econometric analysis of portfolio diversification in African agriculture. Food Policy, 35(1), pp.32-40.

Yang, Y., Narayanan, V.K. and De Carolis, D.M., 2014. The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity. Strategic Management Journal, 35(13), pp.1993-2011.