Risk And Return Of The Portfolio


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Risk And Return Of The Portfolio

  1. 1. PORTFOLIO RISK AND RETURN prepared by : hocine boughezla hamad –akhmedov davr an UUM-2009
  2. 2. <ul><li>OULTLINE </li></ul><ul><li>Introduction </li></ul><ul><li>Objectives </li></ul><ul><li>Company background </li></ul><ul><li>Recommendation </li></ul><ul><li>Key Concepts and Skills </li></ul><ul><li>The risk and return of this portfolio </li></ul><ul><li>Portfolio's analysis </li></ul><ul><li>Conclusion </li></ul>
  3. 3. <ul><li>Introduction </li></ul><ul><li>In modern portfolio theory there is a trade-off between risk and return for many years , investment advisers and investment managers focused on return with the occasional caveat subject to risk, while the risk related to individual companies can be removed by diversification </li></ul><ul><li>We show you simple portfolio including two companies from the same industry of traveling </li></ul>
  4. 4. objectives <ul><li>the purpose is to determine risk and return of the portfolio for operating on the efficient frontier portfolio, maximize expected return and minimize risk . </li></ul><ul><li>addition optimizes to make recommendations to their investor </li></ul><ul><li>The portfolio of individual stocks will help us to reduce the overall risk and possibly increasing rate of return </li></ul>
  5. 5. <ul><li>COMPANY </li></ul><ul><li>BACKGROUND </li></ul>
  6. 6. <ul><li>Air Asia </li></ul><ul><li>The airline was established in 1993 and started operations on 18 November 1996 </li></ul><ul><li>Air Asia had large fleet ( more than 72 aircrafts) . </li></ul><ul><li>By May 2008, the airline had flown 55 million cumulative passengers </li></ul><ul><li>Air Asia operates over 200 flights a day, to over 75 domestic and international routes </li></ul>
  7. 7. <ul><li>Malaysia Airlin es </li></ul><ul><li>Was established and commenced as Malayan Airways Limited (MAL) on 12 October 1937. </li></ul><ul><li>connects nearly 50,000 passengers daily to some 100 destinations worldwide across 6 continents . </li></ul><ul><li>Holds a lengthy record of service and best practices excellence, having received more than 100 awards in the last 10 years </li></ul>
  8. 8. <ul><li>Recommendation </li></ul><ul><li>Efficiency creates savings which are then passed on to guests so that affordable air travel can become a reality. Through the philosophy of ‘Now Everyone Can Fly’, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport </li></ul><ul><li>With its dedicated team of 19,000 employees worldwide, Malaysia Airlines will continue to soar for many more years to come as it transforms into The World’s Five Star Value Carrier. </li></ul>
  9. 9. <ul><li>Key Concepts and Skills </li></ul><ul><li>Know how to calculate expected returns </li></ul><ul><li>Understand the impact of diversification </li></ul><ul><li>Understand the risk-return trade-off </li></ul><ul><li>Steps calculation </li></ul><ul><li>Expected Returns and Variances </li></ul><ul><ul><li>Expected returns </li></ul></ul><ul><ul><li>Calculating the variance </li></ul></ul><ul><li>Portfolios </li></ul><ul><ul><li>Portfolio weights </li></ul></ul><ul><ul><li>Portfolio expected returns </li></ul></ul><ul><ul><li>Portfolio variance </li></ul></ul><ul><ul><li>Correlation and Diversification </li></ul></ul>
  10. 10. <ul><li>RISK & RETURN </li></ul>
  11. 11. Correlation: r am =
  12. 12. <ul><li>The risk and return of this portfolio </li></ul><ul><li>Computation for Individual Stock </li></ul>ASSET Expected Return Standard Deviation Covariance Correlation AIRASIA 0.02132 0.06459 0.00388 0.43765 M AIRLINES 0.02269 0.13738
  14. 14. <ul><li>Constant Covariance with Different Weight Proportion </li></ul>CASE AIRASIA M AIRLINES E(R port(a,m) ) σ port(a,m) A 0.00 1.00 0.02269 0.13738 B 0.20 0.80 0.02241 0.11614 C 0.40 0.60 0.02214 0.09657 D 0.50 0.50 0.02200 0.08776 E 0.60 0.40 0.02187 0.07991 F 0.80 0.20 0.02160 0.06832 G 1.00 0.00 0.02132 0.06459
  15. 15. <ul><li>Portfolio's analysis </li></ul><ul><li>we will use the probability distribution for the returns on stocks Air Asia and Malaysia Airlines. </li></ul><ul><li>we know that the expected return on Stock A is 2.13% and on Stock M is 2.27% the variance on Stock A is 0.00417, on Stock M is 0.01887, the standard deviation on Stock M is 0.06459, and the standard deviation on Stock A is 0.13738. </li></ul><ul><li>Correlation coefficient 0.43765 </li></ul><ul><li>Correlation more than (0) means that the returns of the two assets always move in the same direction and they are perfectly positively correlated . </li></ul>
  16. 16. <ul><li>Conclusion </li></ul><ul><li>The total risk of a portfolio has no simple relation to the total risk of the assets in the portfolio. </li></ul><ul><li>Recall the variance of a portfolio equation For two assets, you need two variances and the covariance </li></ul><ul><li>Most investors look for 2 main objectives in forming a portfolio: To obtain a large expected return and a small variance and standard deviation. </li></ul><ul><li>These companies could then use this model to reallocate assets annually or monthly , to make sure changes in the risk of the assets and correlations between the assets are still maximizing their required return while minimizing the portfolio variance </li></ul><ul><li>We choose case G with lower coefficient of variances which is 3.02915 where 100% of our investment goes to Air Asia with expected of return of 2.13%. </li></ul>
  17. 17. <ul><li>THE END </li></ul><ul><li>THANK YOU </li></ul>