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Investment Analysis And Portfolio System

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Question:

Discuss about the Investment Analysis and Portfolio System.
 
 

Answer:

Introduction:

From the valuation of Bloomberg's Market index evaluator, it could be understood that S&P ASX 200 is currently in an uptrend, where it has provided a 15.07% return on 52 weeks basis. In addition, ASX has also provided a 3.96% change from here to date. This positive depiction of index value mainly indicates the willingness of investors to utilise and improve the overall portfolio for generating higher income from investment. Furthermore, the 52-week high of ASX was at 5950.10 while 52-week low is at 5051.00.  This only indicates that ASX is touching new highs everyday, which might help in improving investors return from investment (Bloomberg.com 2017). 

The current pricing of AGL Energy Limited is at 27.70 whereas its 52-week high is at 28.47, which depicts that the company is attaining higher value each day. However, the 52-week low of the company was at 16.50 with a YTD change of 25.4%. The company's current PE ratio is under 51.03 with high volume growth the companies over share price as relevantly increased from 2016 and 5-year net growth of 6.17% could be detected from the evaluation. Furthermore, the company's beta as compared to index is actually at 0.74, which depicts ability to reduce the overall risk from investment. Thus, the company’s return depicts an effective investment opportunity, which could be used by investors to increase the return from investment (Bloomberg.com 2017). 

The current pricing of BHP Billiton is at 24.31 with a 52 week high is at 27.95, which depicts that the company is attaining higher value each day. The company's current PE ratio is under 39.36, with high volume growth the companies over share price has relevantly increased from 2016 and 5 year net growth has declined by -6.99% from the evaluation. The 52-week low of the company was at 17.29 with a YTD change of -2.99%. Furthermore, the company's beta as compared to the index is actually at 1.57, which depicts ability to increase overall risk of investment. Thus, investment in the company could be avoided due to low return and increased risk provided by the company (Bloomberg.com 2017).

 

CBA AT Equity - Commonwealth Bank of Australia:

The 52-week low of the company was at 69.22 with YTD change of 4.66%. The company's current PE ratio is under 15.57, with high volume growth the companies over share price has relevantly increased from 2016 and 5 year net growth has moved up by 5.4% from the evaluation. The current pricing of Commonwealth Bank of Australia is at 86.25 with a 52 week high is at 86.68, which depicts that the company making higher highs. Furthermore, the company's beta as compared to the index is actually at 1.13, which depicts ability to increase overall risk of investment. Thus, investment in the company is viable, as it provides higher return with adequate risk associated with investment (Bloomberg.com 2017).

The company's current PE ratio is under 33.33, with high volume growth the companies over share price has relevantly increased from 2016 and 5 year net growth has moved up by 16.71% from the evaluation. The current pricing of CSL Ltd is at 127.98 with a 52-week high of 129.70 and 52-week low of 91.62 with a YTD change of 27.46%. Furthermore, the company's beta as compared to the index is actually at 0.70, which depicts ability to increase overall risk of investment. Thus, investment in the company is viable, as it provides higher return with adequate risk associated with investment (Bloomberg.com 2017).

The Fortescue Metals Group Ltd current PE ratio is under 6.86, with a 5-year net growth has of 31.95% from the evaluation. The current pricing of the company is at 5.50 with a 52-week high of 7.27 and 52-week low of 2.81 with a YTD change of -6.62%. Furthermore, the company's beta as compared to the index is actually at 1.61, which depicts ability to increase overall risk of investment. There is no investment opportunity, which could be provided to the investor, as beta is high and return is negative (Bloomberg.com 2017).

The Transurban Group current PE ratio is under 190.44, with a 5 year net growth has of 11.35% from the evaluation. The current pricing of the company is at 11.97 with a 52-week high of 12.655 and 52-week low of 9.45 with a YTD change of 15.99%. Furthermore, the company's beta as compared to the index is actually at 0.56. After seeing the overall investment opportunity, it is advisable to use the stock in the portfolio (Bloomberg.com 2017).

The current pricing of Telstra Corp Ltd is at 4.16, whereas its 52-week high is at 5.86 and 52-week low at 4.15 with a YTD change of -18.43%. The company's current PE ratio is under 14.56 with high volume growth the companies over share price as relevantly increased from 2016 and 5-year net growth of 2.06% could be detected from the evaluation. Furthermore, the company's beta as compared to index is actually at 0.69, which depicts ability to reduce the overall risk from investment. Thus, after seeing the overall return from the company, it is not advisable for investors to use it for investment (Bloomberg.com 2017).

 


The current PE ratio of Westfield Corp is under 10.73 with high volume growth the companies over share price as relevantly increased from 2016 and 5 year net growth of -7.54% could be detected from the evaluation. The current pricing of Westfield Corp is at 9.32, whereas its 52-week high is at 11.14 and 52-week low at 8.21 with a YTD change of -0.64%. Furthermore, the company's beta as compared to index is actually at 0.71, which depicts ability to reduce the overall risk from investment. Thus, it is not advisable for investors to use it for investment, as return from the company is relatively low (Bloomberg.com 2017).

The current pricing of Woolworths Ltd is at 26.47, whereas its 52-week high is at 26.98 and 52-week low at 20.30 with YTD changes of 9.83%. The current PE ratio of Woolworths Ltd is under 18.57 with high volume growth the companies over share price as relevantly increased from 2016 and 5 year net growth of -11.58% could be detected from the evaluation. Furthermore, the company's beta as compared to index is actually at 1.02, which depicts ability to reduce the overall risk from investment. Thus, it is not advisable for investors to use it for investment, as return from the company is relatively low (Bloomberg.com 2017).

WPL AT Equity - Woodside Petroleum Ltd:

The current PE ratio of Woodside Petroleum Ltd is under 24.16 with high volume growth the companies over share price as relevantly increased from 2016 and 5-year net growth of 1.14% could be detected from the evaluation. The current pricing of Woodside Petroleum Ltd is at 33.15, whereas its 52-week high is at 33.97 and 52-week low at 24.98 with a YTD change of 6.39%. Furthermore, the company's beta as compared to index is actually at 1.11, which depicts ability to reduce the overall risk from investment. The overall return from the company is adequate and it is advisable for investors to use it for investment (Bloomberg.com 2017).

The overall correlation of all the stocks with the market index is relatively positive and above 0.40, which indicates that the companies used in the portfolio are compliant with the returns of the index. Moreover, the positive correlation also indicates that an increment in the overall market value could also help in increasing return on investment. DeFusco et al. (2015) stated that correlation allows investors to detect the overall relation between two stocks, which could be used in hedging process. The correlation table is mainly depicted in appendix 1 where is state’s all the positive values into related with different stock this indicates that portfolio is created with stocks that provide a positive correlation with each other. This could eventually help in gaining adequate profits from the momentum and reduce any kind of risk from investment. Saunders and Cornett (2014) argued that the use of hedging process allows investors to nullify the losses, which commence from the volatile capital market. Thus, it could be understood that the portfolio used in the assignment has a positive correlation with the index.

According to appendix 2, the overall equally weighted portfolio has been created, which depicts the return that is provided from investment in the 10 stocks. Relative return of 59.89% could be identified from the portfolio if equal weights are being distributed among the ten stocks.  However, the standard deviation is relatively higher and portfolio beta is near to 0.97. This mainly depicts that with adequate returns is relatively lower than the risk from investment is relatively higher. Any negative movement in the capital market could lead to decline in its return from investment, as it is not adequately hedged. The portfolio has a Sharpe ratio is equal to 2.47 where is Treynor ratio only provide a 0.59 valuation. Kevin (2015) stated that portfolio creation mainly allows investors to reduce the overall risk from investment and increase capacity to generate continuous revenue from investment. Damodaran (2016) argued that without adequate research, creation of portfolio could lead to high-end losses accumulated by the investor where its investment capital could be at high risk.

From the overall evaluation of appendix 2, return generated from the portfolio is adequate, where it provides a nominal in return from investment for 5 years. However, the risk involved within the overall portfolio is higher and close to 1, which indicates higher risk involved in the investment. Relative improvement in the portfolio could be made with adequate research, as it could help in improving return from investment and secure the investment capital (Spronk, Steuer and Zopounidis 2016).

 

Commenting on the performance of the portfolios using different performance measures:

According to the appendix 3, the overall efficient portfolios have been created, which starts the return from 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, 20% and 25%. The relative risk and weight of the portfolio for all the returns mentioned in appendix 3, which helps in depicting price action or price movement of the stocks involved in the portfolio. There are relatively different risks, which are involved for the different returns needed from the portfolio. These different returns mainly comprise of different kind of risk associated with investment, which could help in identifying the minimum portfolio variance weight. This detection of minimum portfolio variance could eventually help in improving the return and reduce any kind of risk involved in the investment. Furthermore, the appendix 3 also identifies the relative calculations, which is needed for deriving the overall portfolio weights that provides targeted returns. Aouni, Colapinto and La Torre (2014) mentioned that use of adequate portfolio, which allows investors to minimise the risk from investment could hamper its overall capital. On the other hand, Altuntas and Dereli (2015) criticizes that focusing on minimum variance portfolio could not allow the investors to obtain higher return, where it could increase the invested capital exponentially.

However, convergence related to the portfolio was not detected while conducting the calculations, as overall return is effectively achieved.  The overall appendix 3 mainly depicts all the relative weights, risk and returns associated with investment. This evaluation of the appendix could eventually help in detecting the adequate portfolio, which is needed for the investment. As mentioned in the appendix 3 the return of 1% mainly provided a risk of around 18.57%, whereas increment in return led to decline in risk. The return of 11% merely portrayed risk of 11.48%, this depicted that higher return mainly allowed investors to reduce its overall risk from investment. However, after the 12% return portfolio, the other portfolios created only increase the risk from investment. Whereas, a return of 13% portrayed a risk of 11.46% and return of 20% portrayed a risk of 13.38%. This only indicates that after the 12% the risk and return it increased exponentially. However, before the 12% the risk was declining while the return increased. This phenomenon only occurs when a portfolio is being created which constitutes of different stocks with varying risk and return. The combination of the overall portfolios mainly depicts list of weights, which could be used by investors according to their investment capacity. Rutkauskas, Stasytyte and Borisova (2015) mentioned that use of adequate investment portfolio allows investors to gain continuous returns even if the market is not providing adequate returns. The construction of portfolio is the main attribute, which allows investors to increase the return and reduce the overall risk from investment.

The created portfolios in appendix 3 could be evaluated with the help of Sharpe ratio, Treynor ratio, Portfolio beta, risk and return. This could eventually help in detecting the viability of the portfolio. The return of 1% has a negative Sharpe ratio of -0.083 and Treynor ratio of -0.014 with a beta of 1.136. However, Sharpe ratio, Treynor ratio, Portfolio beta, risks and return is mainly seen increasing from the rising returns of different portfolio. In addition, the return of 25% mainly provides a Sharpe ratio of 1.240 and Tenyor ratio of 0.325 with a beta of 0.692. This only indicates that with rising return the overall beta also decreases and increment in both Sharpe and treynor ratio could be seen (Brook and Pagnanelli 2014). Thus, it could be understood that the overall return from investment is relatively increasing with a decline in the overall risk involved in investment. This could only indicate that use of adequate portfolio has improved the return generation capacity of the investors. Furthermore, the conversion of adequate portfolio could eventually help in improving the return and reducing any kind of risk, which is associated with the investment (Lappe and Spang 2014).

Thus, from the overall evaluation it could be understood that use of adequate portfolio creation could eventually help in protecting the maximum return generation with the minimum risk-portraying portfolio. This could eventually help in minimising any kind of impact from the external risk involved in portfolio creation. Guerard, Markowitz and Xu (2015) stated that the use of adequate investment portfolio could eventually help investors obtain target returns from investment and reduced negative impact from volatile capital market.

 

Commenting on the general global minimum variance portfolio and efficient frontier:

From appendix 4, the overall Global minimum variance portfolio could be identified, which help in reducing risk from investment and create an effective return. The minimum risk portfolio mainly provides a return of 12% from investment, whereas the risk is relatively lower as compared to other portfolios (Szego 2014). In addition, the minimum support for the point of efficient frontier, which depicts the highest return to the least risk associated with investment. Furthermore, the creation of minimum portfolio variance could eventually help in depicting the portfolio returns, which is at 82.28%.  This return is relatively higher than the previous equal weighted portfolio returns. This only indicates that with the use of aggregate portfolio creation system and effective portfolio could be created, which might help in reducing risk and increasing profits from investment. The portfolio beta is at 0.713, which is relatively lower than the equally weighted portfolio. Both Sharpe ratio Treynor ratios are relatively higher than the equal weighted portfolio (Mahakud and Mishra 2014).

The portfolio contribute funds to all the 9 stocks leaving out FMG at equity, as it portrays the highest risk involved in an investment. Portfolio adequately rejects the high-risk stocks and only accommodates stocks, which have lower risk involved in the investment. This only indicates that the portfolio creation is adequate and contributes the minimum risk involved in investment. Kaiser, Arbi and Ahlemann (2015) stated that use of optimal portfolio allows investors to omit stocks, which have higher risk involved in comparison to its return.

 

Reference and Bibliography:

Altuntas, S. and Dereli, T., 2015. A novel approach based on DEMATEL method and patent citation analysis for prioritizing a portfolio of investment projects. Expert systems with Applications, 42(3), pp.1003-1012.

Aouni, B., Colapinto, C. and La Torre, D., 2014. Financial portfolio management through the goal programming model: Current state-of-the-art. European Journal of Operational Research, 234(2), pp.536-545.

Ballestero, E., Pla-Santamaria, D., Garcia-Bernabeu, A. and Hilario, A., 2015. Portfolio Selection by Compromise Programming. In Socially Responsible Investment (pp. 177-196). Springer International Publishing.

Bloomberg.com. (2017). Bloomberg - Asia Edition. [online] Available at: https://www.bloomberg.com/asia [Accessed 14 May 2017].

Brook, J.W. and Pagnanelli, F., 2014. Integrating sustainability into innovation project portfolio management–A strategic perspective. Journal of Engineering and Technology Management, 34, pp.46-62.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Runkle, D.E. and Anson, M.J., 2015. Quantitative investment analysis. John Wiley & Sons.

Guerard, J.B., Markowitz, H. and Xu, G., 2015. Earnings forecasting in a global stock selection model and efficient portfolio construction and management. International Journal of Forecasting, 31(2), pp.550-560.

Jagric, T., Podobnik, B., Strasek, S. and Jagric, V., 2015. Risk-adjusted performance of mutual funds: some tests. South-eastern Europe journal of Economics, 5(2).

Kaiser, M.G., El Arbi, F. and Ahlemann, F., 2015. Successful project portfolio management beyond project selection techniques: Understanding the role of structural alignment. International Journal of Project Management, 33(1), pp.126-139.

Kevin, S., 2015. Security analysis and portfolio management. PHI Learning Pvt. Ltd..

Klingebiel, R. and Rammer, C., 2014. Resource allocation strategy for innovation portfolio management. Strategic Management Journal, 35(2), pp.246-268.

Kolm, P.N., Tütüncü, R. and Fabozzi, F.J., 2014. 60 Years of portfolio optimization: Practical challenges and current trends. European Journal of Operational Research, 234(2), pp.356-371.

Lappe, M. and Spang, K., 2014. Investments in project management are profitable: A case study-based analysis of the relationship between the costs and benefits of project management. International Journal of Project Management, 32(4), pp.603-612.

Mahakud, J. and Mishra, C.S., 2014. Security Analysis and Portfolio Management.

Najeeb, S.F., Bacha, O. and Masih, M., 2015. Does heterogeneity in investment horizons affect portfolio diversification? Some insights using M-GARCH-DCC and wavelet correlation analysis. Emerging Markets Finance and Trade, 51(1), pp.188-208.

Rutkauskas, A.V., Stasytyte, V. and Borisova, J., 2015. ADEQUATE PORTFOLIO AS A CONCEPTUAL MODEL OF INVESTMENT PROFITABILITY, RISK AND RELIABILITY ADJUSTMENT TO INVESTOR ‘S INTERESTS. Economics and Management, (14), pp.1170-1174.

Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,.

Spronk, J., Steuer, R.E. and Zopounidis, C., 2016. Multicriteria decision aid/analysis in finance. In Multiple Criteria Decision Analysis (pp. 1011-1065). Springer New York.

Szegö, G.P., 2014. Portfolio theory: with application to bank asset management. Academic Press.

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