M.J Magwadi Research final draft

i
Investment portfolio returns: a comparative analysis
Matsepho Julia Magwadi
STUDENT NUMBER:
23177640
BComm Honours in Risk Management
in the
SCHOOL OF ECONOMIC SCIENCES
in the
FACULTY OF ECONOMIC SCIENCES AND IT
at the
NORTH-WEST UNIVERSITY (VAAL TRIANGLE CAMPUS)
Supervisor: Dr D. Viljoen
Co-supervisor: Dr A. Mellet
November 2016

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DECLARATION BY AUTHOR
I, the undersigned Matsepho J Magwadi current student at North-West University Vaal
Triangle Campus, hereby declare that the research study titled
Investment Portfolio Returns: a comparative analysis
is a record of my own distinctive work in partial fulfilment of the requirement for the award
of the degree of BComm Honours in Risk Management carried out under the guidance and
supervision of Dr Diana Viljoen & Dr André Mellet.
I further declare that to the best of my knowledge all sources employed in this research study
have been correctly recorded and acknowledged in both the in-text and list of references and
that this paper does not contain any part which has been submitted to any other institution of
higher learning.
Signature: Date:

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ACKNOWLEDGEMENT
First and foremost I would like to express my most sincere gratitude to the Lord Almighty,
whom has entrusted me with the unflagging strength, knowledge and wisdom to complete this
research paper given the challenges faced. A special note of gratitude is also extended to the
following people:
 To my father Mr Moalosi Magwadi, my sister Miss Dikeledi Magwadi for their endless
love, support, prayers and encouragement. To my dearly departed mother Mrs Emily
Magwadi, whom would have been very proud of my achievements up to this far.
 To my supervisors, Dr. Diana Viljoen and Dr. André Mellet, for all their input, constructive
criticism and valuable guidance that they have provided during the course of completing
this research paper.
 To my dearest friends Reneilwe Magoane and Itumeleng Ndebele for their endless support,
tutoring, guidance and motivation throughout this whole year.
 A heartfelt appreciation to the North-West University Vaal Triangle Campus for granting
me this opportunity of being a student at this campus, and providing me with the necessary
resources in order to complete my studies.

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ABSTRACT
Investment portfolio returns remains widely neglected in the financial industry, as previous
studies have limited their extensive research of investment portfolio returns. This study
primarily focused on identifying the different investment/investment companies, and
comparing them to the CPI and ALSI benchmarks. Interest in the concept of portfolio
investments has intrigued investors to consider traditional portfolio management strategies
(Booth, Tehranian, et al., 1988:1). An insured portfolio is one in which the wealth of the
investor can gain value and increase if a reference portfolio appreciates, although losses need
to be avoided by purchasing investment for a fixed premium. Portfolio investment, in its most
pure and simplest form, is similar to a securities position which encompasses an underlying
portfolio which makes a guarantee that of the insured portfolio against loss through a specified
policy expiration date as noted by Rubinstein (1985:42).
The data used in this study is not used in previous studies, since it uses different time frames
and sample sizes. The portfolios used include a conservative, moderate, aggressive as well as
the equity market, money market and the optimal portfolio this is to incorporate diversity in
the portfolios. The time frame of 6 years of data was used for this sample, to measure two sets
of portfolio returns for each respective portfolio.
According to theory of risk/reward the aggressive portfolio ought to outperform the moderate,
conservative as well as the portfolio benchmark as it bears a lot of risk and is exposed to a lot
more volatility than the other portfolios. It can be concluded the conservative portfolio may
suit an investor who has a low tolerance for risk and a short time to invest as this portfolio type
has a low portion of equities.
Keywords: Investment portfolio returns, performance measures, types of investors,
conservative, moderate, aggressive, portfolio types, CPI, ALSI.

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TABLE OF CONTENTS
DECLARATION BY AUTHOR......................................................................................................ii
ACKNOWLEDGEMENT...............................................................................................................iii
ABSTRACT......................................................................................................................................iv
LIST OF FIGURES........................................................................................................................vii
LIST OF TABLES.........................................................................................................................viii
1. INTRODUCTION.........................................................................................................................1
2. THEORETICAL FRAMEWORK FOR PORTFOLIO INVESTMENTS..............................3
2.1. Introduction................................................................................................................................3
2.2. Diversification ............................................................................................................................4
2.3. Portfolio performance measures...............................................................................................7
2.3.1. The Treynor Index..................................................................................................................7
2.3.2. The Sharp Performance Index...............................................................................................8
2.3.3. The Jensen Index...................................................................................................................10
2.4. The 3 types of investors and portfolio types ..........................................................................11
2.4.1. Types of investors..................................................................................................................11
2.4.1.1. Conservative investor ........................................................................................................11
2.4.1.2. Moderate investor ..............................................................................................................11
2.4.1.3. Aggressive investor ............................................................................................................12
2.4.2. Portfolio types........................................................................................................................12
2.4.2.1 A more in-depth analysis of the three portfolio types......................................................13
2.4.2.2. The conservative portfolio.................................................................................................13
2.4.2.3. The moderate portfolio......................................................................................................14
2.4.2.4. The aggressive portfolio.....................................................................................................15
3. RESEARCH DESIGN, DATA AND METHODOLOGY .......................................................16
3.1. Introduction..............................................................................................................................16
3.2. Data description .......................................................................................................................19
3.3. Sample description...................................................................................................................20
3.4. Methodology.............................................................................................................................21

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3.4.1. Estimating portfolio returns ................................................................................................21
4. RESULTS AND DISCUSSION .................................................................................................22
4.1. Discussion of the conservative portfolio.................................................................................24
4.2. Discussion of the moderate portfolio......................................................................................24
4.3. Discussion of the aggressive portfolio.....................................................................................24
5. CONCLUSION ...........................................................................................................................25
REFERENCE LIST........................................................................................................................27

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LIST OF FIGURES
Figure 1: Asset allocation of portfolios by investors' profile...........................................................16
Figure 2: Risk vs. potential return for different portfolio types.....................................................18
Figure 3: The risk/return characteristics of different portfolio types............................................19

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LIST OF TABLES
Table 1: Investment returns against CPI (inflation) and ALSI......................................................23
Table 2: Benchmark (CPI and ALSI) ...............................................................................................23
Table 3: Risk and Volatility classification of each portfolio type ...................................................25

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LIST OF ABBREVIATIONS
AG: Arithmetic Mean
ALSI: All-Share Index
CAPM: Capital Asset Pricing Model
CD: Certificate of Deposit
CPI: Consumer Price Index
GM: Geometric Mean
JSE: Johannesburg Stock Exchange
MPT: Modern Portfolio Theory
PMT: Portfolio Management Theory
SARB: South African Reserve Bank
SR: Sharpe Ratio
TPI: Treynor Performance Index

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1. INTRODUCTION
Fahad et al. (2013) explains that portfolio investment is an investment strategy where various
instruments of finance like debts, equities, and derivatives are merged in such a way that
depreciation of portfolio value is protected. Portfolio investment is a method of hedging a
portfolio of stocks against market risk, by short selling stock index futures.
Interest in the concept of portfolio investment has intrigued investors to consider traditional
portfolio management strategies (Booth, et al., 1988:1). An insured portfolio is one in which
the wealth of the investor can gain value and increase if a reference portfolio appreciates,
although losses need to be avoided by purchasing investment for a fixed premium. Portfolio
investment, in its most pure and simplest form, is equivalent to a securities position which
encompasses an underlying portfolio that guarantees the insured portfolio against loss through
a specified policy expiration date as noted by Rubinstein (1985:4).
According to Marx et al. (2013:294) both risk and return makes up an integral part of the
investment management and portfolio construction decision, thus the evaluation of the
performance of a portfolio without taking the risk of the portfolio into consideration will be an
incomplete task.
All investments do involve some degree of risk and it is not guaranteed that an investor will
end up with more money when they withdraw the investment that they originally put into it. It
is important to be aware that different forms of investments have different types of risks
associated with them (MFIC, 2016).
Reilly and Brown (2015:8) define risk as “the uncertainty that an investment will earn its
expected rate of return”. Based on the definition of risk it is quite evident that an investor faces
risks primarily due to factors that are beyond the investors’ control. A number of risks types
that affect the investment comes in many forms, such risks are but not limited to business risk,
credit or default risk, interest rate risk, political risk, market risk, liquidity risk, inflation risk,
political risk, as well as investment risk.
MFIC (2016) states that the risk of an investment cannot be eliminated, but it may be managed
through diversification: holding a variety of different types of securities, as in a mutual fund.
Throughout the process of building an investment portfolio, an investor must remember that it
is important to regularly rebalance their portfolio in order to make sure they meet their
investment goals. A well-diversified portfolio of investments is the best way to manage risk.

2
There are 3 investment approaches to balance risk and return potential namely conservative,
moderate and aggressive approach.
According to Markowitz (1952:77) the decision of which portfolio to select may be partitioned
into two stages and rules. The initial stage begins with inspection and experience and concludes
with beliefs that the portfolio holder has about the future exhibitions of accessible securities.
The second stage begins with the applicable beliefs of the portfolio holder about future
performances and concludes with the choice of portfolio. The first rule is that the investor
should maximise expected returns. The next rule to be considered for the investor to
contemplate expected return an advantageous option and variance of return a disadvantageous
option. This rule has a variety of valuable points, both as a saying for and the hypothesis
regarding investment behaviour. One kind of rule when the investor makes a choice of portfolio
is that the investor should maximize the discounted value of future returns. Considering the
future is quite uncertain, the investor must “expect” or “anticipate” the returns which they will
discount (Markowitz, 1952:77).
Vanguard (2015:10) contends that an investor must consider diversification as a method of
investing across various asset classes and sectors. Investors should hold investments that do
not tend to rise and fall simultaneously, in order to manage the overall risk of the portfolio.
According Vanguard (2015:8) younger investors and those with a higher risk tolerance may
pursue an investment strategy that is more aggressive which holds an excessive portion of
equities since they might convey excessive returns in the long run, but most certainly at a higher
level of risk. Investors that are older and those who have a low tolerance for risk, and are
seeking capital preservation may want to carry a larger portion of cash and bonds, which is also
advantageous as it will pay a certain level of income.
There are three portfolio types that an investor can choose from based on their risk profile,
investment objective, investment constraints, time horizon, liquidity needs, tax factors,
regulatory and legal requirements, unique needs and preferences (Reilly & Brown, 2015: 250).
Reilly and Brown (2015:260) states that the conservative portfolio may suit an investor who
has a low tolerance for risk and a short time to invest as this portfolio type has a low portion of
equities. The moderate portfolio is suitable for investors who have a medium risk tolerance and
a medium time horizon as the portfolio has a lower portion of equities in contrast to bonds. The
aggressive portfolio, is suitable for investors with a high tolerance for risk, and those with a
longer investment time horizon as this portfolio has a higher portion of equity-based

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investments. Market fluctuations may affect an investor’s asset choice and alter the risk/return
objectives of the portfolio. An investor should rebalance their portfolio, by adjusting the
portfolio back in line with their initial investment objective, this rebalancing strategy will
minimize the risk relative to a target asset allocation, rather than maximising the returns of the
portfolio (Jordan & Miller, 2008:28).
Asset classes tend to convey different returns over a period of time, hence the change in the
portfolio’s asset allocation. In order to rebalance the portfolio, the portfolio’s original risk-and-
return characteristics should be recaptured (Jaconetti et al, 2010:1).
Investment portfolio returns have an extensive number of comparative advantages where
previous studies have compared performance measures with respect to certain portfolios but
focused less on investment portfolio returns. Hartz (1994:79) discussed some of the problems
resulting from measuring the investment companies’ investment performance.
Braun (2015:7) presented a simple framework to gauge a portfolio called the “book yield”
which is an ideal measurement of income performance on an investment portfolio, to name a
few of its attributes, the book yield is a very close approximation to investment income and is
not sensitive to changes in the size of the portfolio. However there has been no measure
specifically on investment portfolio returns.
The significance of this research is brought about to establish the core focus on the returns of
a well-diversified investment portfolio and why it is important to determine returns across
different portfolio types.
2. THEORETICAL FRAMEWORK FOR PORTFOLIO INVESTMENTS
2.1. Introduction
The fundamental purpose of this chapter is to review the literature on portfolio investments.
Reilly and Brown (2015:8) define an investment portfolio as a pool of various ventures by
which an investor hopes to get a reward while planning to protect the principal amount invested.
Investment portfolio theories direct the manner in which an investor assigns money and other
capital resources inside an investment portfolio. An investment portfolio entails long run goals
unconventional of a markets daily variation; due to these objectives, investors are aided through
the point of the investment portfolio theories with utensils to evaluate the expected risk and
returns associated with investments (Omisore, et al., 2012:19-20).

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Omisore et al. (2012) states that passive portfolio speculations, on one hand, joins together an
investor’s objectives and personality with financial actions. Passive theories propose less
contribution from the investor; rather, passive strategies depend on enhancement, purchasing
numerous stocks in the same market or industry, to coordinate the market index performance.
Investment performance is forecasted by passive theories through the use of market data and
other readily available information.
Harry Markowitz, an American economist, developed a theory of portfolio choice in the 1950s,
which allowed investors to make an analysis of risk relative to return they are expecting on
their investment. Markowitz’s theory is known on this present day as the Modern Portfolio
Theory (MPT) (Markowitz, 1952). The MPT is an investment theory which aspires to increase
the expected return of the portfolio for a certain measure of portfolio risk, or proportionately
decrease the amount of risk for a given level of expected return, by deliberately picking the
extents of different assets. In spite of the fact that the MPT is generally utilized as a part of
practice in the finance industry, as of late, the fundamental assumptions of the MPT have had
a number of challenges (Omisore, et al., 2012:20-21).
The MPT which is also known as the Portfolio Management Theory (PMT) is a modern
speculation choice approach that guides an investor to group, estimate, and control both the
kind and the measure of expected risk and return. Fundamental to the portfolio theory is the
evaluation of the relationship amongst risk and return and the presumption that investors must
be remunerated for assuming risk. Portfolio theory withdraws from traditional security analysis
in shifting the emphasis from analyzing the attributes of individual investments to deciding the
statistical relationships among the individual securities that involve the general portfolio
(Edwin & Martins, 1997).
2.2. Diversification
According to Marx et al. (2013:10) diversification refers to a technique of minimizing the
unsystematic risk of a portfolio by investing in different asset classes. The most unique
significant determinant of a portfolio return is asset allocation. Reilly and Brown (2015:29)
took into consideration the idea of merging a number of assets into a portfolio and acclaimed
that in order to reduce the variability of returns over time the investor should create diversified
portfolios. Thorough diversification reduces the measure of risk of the portfolio over time as
different investments have distinct patterns of returns. More specifically, some of the investors’
investments yield negative or below average rates of returns, while other investments in the

5
portfolio could potentially experience above-average rates of returns. Diversification cannot
necessarily remove all the variance of the portfolio.
Markowitz (1952) presented the investigation of the portfolios of investments with a new
approach which included portfolio arrangements that takes into account the normal rate of
return and the risk of single stocks as well as their interrelationship measured by correlation.
Investors used to analyse investments separately, develop portfolios of appealing stocks, and
not consider how they are associated with each other. Markowitz manifested how it may be
conceivable to better off these shortsighted portfolios by checking the relationship between the
returns on these stocks.
Markowitz' broad work on the modern portfolio theory has yielded a measurement to the asset
management theory, i.e. diversification. The diversification emerges when assets, which
correspond adversely or freely with each other, are collectively put into a portfolio. Tactical
asset allocation puts forward the long-term allocations for assets that entails such qualities. The
process of allocation depends on the assumption that markets are productive, which makes it
difficult to acquire returns that are not normal on investments, and thus makes market timing
to be irrelevant (Hilsted, 2012:2).
The risk connotes the likelihood of existence of one circumstance in which the acquired results
are a long way from the focused objectives. Assuming the risk through the business visionaries
turns into a source of benefit for the economy; this is the reason why its analysis is an earlier
goal in substantiating choices related on the investments efficiency (Burja & Burja, 2009:98).
Da Vinci (2010:51) states that diversification plays a very major role in modern portfolio
theory. Markowitz methodology is seen as a solitary period approach: toward the start of the
period the investor must settle on a choice in what specific securities to invest and hold these
securities until the end of the period.
Asset classes tend to convey different returns over a period of time, hence the change in the
portfolio’s asset allocation. In order to rebalance the portfolio, the portfolio’s original risk-and-
return characteristics should be recaptured (Jaconetti et al., 2010:1).
According to Markowitz (1952:77) the decision of which portfolio to select may be partitioned
into two stages and rules. The first stage begins with inspection and experience and concludes
with beliefs that the portfolio holder has about the future exhibitions of accessible securities.
The second stage begins with the applicable beliefs of the portfolio holder about future
performances and concludes with the choice of portfolio. The first rule is that the investor

6
should maximize expected returns. The next rule to be considered for the investor is to
contemplate expected return on an advantageous option and a variance of return on a
disadvantageous option. This rule has a variety of valuable points, both as a saying for and the
hypothesis regarding investment behavior. One kind of rule when the investor makes a choice
of portfolio is that the investor should maximize the discounted value of future returns.
Considering the future is quite uncertain, the investor must “expect” or “anticipate” the returns
which they will discount.
MFIC (2016) states that investment risk cannot be eliminated, but it can be managed through
diversification: holding a variety of different types of securities, as in a mutual fund.
Throughout the process of building an investment portfolio, an investor must remember that it
is important to regularly rebalance their portfolio in order to make sure they meet their
investment goals. A well-diversified portfolio of investments is the best way to manage risk.
As an investor builds up their investment portfolio, it is important that they remember to
rebalance it regularly in order to by certain that they meet the investment goals they have set
for their portfolios (Berstein & Damodaran, 1998:24).
Portfolios contain categories of securities that are chosen to accomplish the highest return for
a given level of risk – the accomplishment relies upon how well the investor can figure the
economic conditions and the future prospects of organizations, and how well the investor can
survey the risk of every security under thought. A number of investors and some portfolio
managers embrace a passive portfolio strategy by just holding stocks so that the returns of the
portfolio will track those of a market index over a certain period (Investment fundamentals,
2016).
Few portfolio managers and speculators think they can show improvement over the business
sector, thus take part in dynamic portfolio administration, purchasing and offering securities as
conditions change. Most dynamic portfolio administrators use advanced monetary models to
base their investment choices.
According to Marx et al. (2013:293) the most significant determinant of portfolio performance
is asset allocation. A portfolio manager may follow a passive or active management style based
on the mandate. Due to taxes and transaction costs, a passive management style is seldom
outperformed by an active portfolio management style. Furthermore, the active management
style is not closer to pure investment rather it is closer to speculation (Marx, et al., 2013:293).
Speculation generally refers to the commitment of capital with the desire to making maximum

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profit (returns) with the prior assumption regarding the risks and feasible returns that are
associated with a particular transaction (Marx, et al., 2013:4). The return and risk both form an
essential part in the construction of the portfolio decision, therefore the evaluation of the
performance and return of the portfolio will not be a complete task if the risk of the portfolio
is not taken into consideration (Marx, et al., 2013:294).
The comparison of portfolios based solely on their historical performance is not sufficient. The
risk that the portfolio is exposed to is not included in such an analysis. Risk-adjusted
performance measures are at a later stage used to discover whether the risk averse investor has
been compensated sufficiently for the total risk that he assumed in the portfolio (Wiesinger,
2010:1).
Some studies that follow a quantitative analysis make use performance measures to analyse
portfolio returns, in order for this study to be aligned with studies of a similar nature, a brief
theoretical framework of the use of performance measures will be discussed. However this
study will take a qualitative approach inclusive of an in-depth discussion of three portfolio
types, as well as the types of investors and comparison of the returns of various investment
companies with the ALSI and CPI as a benchmark.
2.3. Portfolio performance measures
There are 3 measures available for the measurement of portfolio performance:
 Jensen Index (Jensen, 1968);
 Sharp Index (Sharp, 1966); and
 Treynor Index (Treynor, 1965).
2.3.1. The Treynor Index
In 1965, Treynor was the first analyst who processed the measure of the portfolio performance.
A measure of a portfolio excess return for every unit of risk is equivalent to the portfolio rate
of return less the risk free rate of return, divided by the portfolio beta. This is helpful for
surveying the excess return, assessing investors to analyse how the structure of the portfolio to
various levels of systematic risk will influence the return (Shahid, 2007:26).
This risk adjusted portfolio measure indicates the portfolio’s return per unit of risk. A portfolio
has achieved superior performance if its TPI value exceeds that of the market (Marx, et al.,
2013:294). The ratio measures the relationship between the risk premium of the investment

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fund and its systematic risk. Treynor thus focused on the systematic risk in the portfolio, rather
than the total risk, all unsystematic (unique risk) should be diversified away in a fully
diversified portfolio, leaving only the market risk. The Treynor performance index (TPI) may
be calculated mathematically using the equation 2 below (Marx, et al., 2010:284):
𝑇‫﷩𝑝﷩‬ =
(𝑅 𝑝)− 𝑅 𝑓
𝛽 𝑝
(1)
Where 𝑇𝑅 = Treynor ratio
𝑅𝑝 = portfolio expected return
𝑅𝑓 = risk-free rate of return
𝛽 𝑝 = portfolio beta
The Treynor index utilizes the security market line as a benchmark. Treynor index has a
geometric explanation which is like the Sharp index. It quantifies the slope of a line that begins
at the risk free rate and interfaces with the point that denote the asset beta as well as the expected
return (Shahid, 2007:26).
2.3.2. The Sharp Performance Index
The Sharpe ratio that was the first ratio used to measure risk-adjusted return presented by
Sharpe (1966:119-138). Despite the fact that it was often used in practice and theory the Sharpe
Ratio has a noteworthy disadvantage as it is intended for the utilization in a µ-σ-system and in
this manner requires returns to be normally distributed. The occasions of the past financial
crises have demonstrated plainly that this presumption does not remain true and that
particularly occasions at the tails of the distribution – above all high losses – are more probable
than accepted by the typical dispersion. Therefore, the Sharpe Ratio may prompt off inaccurate
investment decisions (Wiesinger, 2010:1).
The initial and most commonly used performance measure (Sharpe ratio), which utilizes
volatility as a risk measure is the Sharpe Ratio (Sharpe, 1966). The Sharpe Ratio (SR), likewise
regularly referred to as "Reward for Variability", takes the excess rate of return of an asset and
divides it over the risk-free interest rate by the volatility of the asset (Wiesinger, 2010:10).
Due to its coherence and being easily interpretable the Sharpe Ratio is one of the most broadly
used risk-adjusted performance measures (Weisman, 2002:81). However, there are a few
deficiencies of the Sharpe Ratio that should be considered while utilizing it.

9
Firstly, the Sharpe Ratio assumes normally distributed returns as it gauges the risk by volatility.
Thus, the Sharpe Ratio may prompt wrong investment decisions when returns steer away from
the normal distribution and for this situation it may not be the correct tool to quantify risk-
adjusted performance (Ingersoll et al., 2007). Secondly, studies such as Ingersoll et al., (2007)
and Leland (1999) have demonstrated that the Sharpe Ratio is inclined to be controlled through
the so-called information-free strategies for trading. Based on these strategies the portfolio
manager increases the portfolios performance by manipulative action with the necessity of
adding value (Ingersoll, et al., 2007:1540). This is particularly appealing to managers whose
rewards are corresponded to the Sharpe Ratio of the assets they oversee. With a specific end
goal to increase the Sharpe Ratio, they perceive a gain in an early phase of the assessment
period and after that invest the whole amount of funds in a risk-free asset for the remaining
period of time (Leland, 1999).
The Sharp ratio is used to rank the performance of a portfolio in accordance with the estimation
of return (risk premium) per unit of total risk (standard deviation) (Sharpe, 1994; Marx, et al.,
2013:295). The Sharpe ratio may be calculated mathematically as in Equation 3 (Marx, et al.,
2013:295):
𝑆 𝑝 =
𝑅 𝑝− 𝑅 𝑓
𝜎 𝑝
(2)
Where: S= Sharpe ratio
𝑅𝑝 = expected return of portfolio
𝜎 = standard deviation of portfolio (total risk)
As helpful as the Sharpe ratio is, it has genuine constraints. It depends on the Markowitz mean–
variance portfolio theory, which recommends that a portfolio can be portrayed strictly by two
measures: its standard deviation of returns as well as its mean. The Sharpe ratio makes a
measurement of only a single dimension of risk which is the variance. Therefore, the Sharpe
ratio is intended to pertain to investment strategies that have typical anticipated return
distributions; it is not reasonable for measuring performances that are relied upon to have
deviated returns (Kidd, 2011:1).

10
2.3.3. The Jensen Index
According to Marx et al. (2013:295) the Jensen performance evaluation done by Michael
Jensen in 1968 was based on the Capital Asset Pricing Model (CAPM), which calculates the
expected one-period return on any security or portfolio (Reilly & Brown, 2015: 678). The
Jensen Measure stipulates the excess actual return (referred to as “alpha”) that a portfolio
produced over the required return of the portfolio indicated by the CAPM (Marx et al., 2013:
295). Jensen Alpha is calculated using the following equation:
𝛼 = 𝑅 𝑝 − [𝑅𝑓 + 𝛽 𝑝(𝑅 𝑚 − 𝑅𝑓)] (3)
Where 𝛼 = Jensen’s Alpha
𝑅𝑝 = expected return of portfolio
𝑅𝑚 = expected return of the market
𝛽 = portfolio beta
Jensen's alpha rewards the ability to select stock by making an identification of the average
unexpected return of the portfolio. CAPM reflects expected returns, as unexpected returns
generated by risks that are firm-specific are not reflected in CAPM. In the event that a manager
can make a selection of stocks with unforeseen positive returns, this will lead to the manager
producing an alpha that is positive (Reilly & Brown, 2015: 679).
The drawbacks of Jensen's alpha are (Shahid, 2007:23): it doesn't remunerate a portfolio for
being well diversified, and it doesn't remunerate positive skewness. An important matter with
regards to the use of the Jensen index is the option of the market index, since there will be a
comparison between performance of the portfolio as well as the market portfolio.
In accordance to the CAPM, in the equilibrium risk return model (Levy & Sarnat, 1984) the
rate of return that is expected from a portfolio is conveyed as:
𝐸𝑟𝑝 = 𝑟𝑝 + (𝐸𝑟 𝑚 − 𝑟𝑓)𝛽 𝑝 (4)
Where 𝐸𝑟𝑝= expected return of the portfolio
𝑟𝑝= risk free rate of return
𝐸𝑟 𝑚 = Expected return on the market portfolio

11
𝛽 𝑝 = beta or systematic risk of the portfolio
2.4. The 3 types of investors and portfolio types
2.4.1. Types of investors
2.4.1.1. Conservative investor
A conservative investor prefers securing initial capital over the appreciation of invested capital.
This investor is open to tolerating lower returns for a higher level of liquidity and/or stability.
Normally, a Conservative investor essentially looks to minimize risk and loss of capital (Stifel
& Company, 2012).
According to Kandziolka (2012:86) conservative investors’ desire investments that lose the
most value from inflation, for example, settled annuities. Money (bank accounts, money market
funds, and CDs) most dependably lose real value after some time on account of the consolidated
impact of inflation and taxation. Conservative investors have a higher return over the most
moving three-year time spans versus investing 100% in fixed annuities, money market funds,
CD’s, and other bank instruments would yield.
2.4.1.2. Moderate investor
A moderate speculator considers decreasing risks and upgrading returns similarly. The investor
is compliant to acknowledge modest risk to look for higher returns in the long-term and the
investor may go through a loss of principal for a short period of time and lower level of liquidity
given a return for a long-term (Stifel & Company, 2012).
The larger part of investors fall into the Moderate investment risk classification. The most
widely recognised reasons behind individuals to be in the moderate category is their desire to
invest for their retirement or children’s education. The moderate investor needs great returns,
and therefore go through great lengths to obtain these returns. These investors ought to
anticipate that returns will be comparable to a basket of similar weighted market indexes and
their portfolio returns ought to increase less than the market sectors overall returns and their
portfolio ought to likewise decrease less when markets go down (Kandziolka, 2012:88).
According to Kandziolka (2012:88) the moderate investor ordinarily utilizes the biggest
number of asset classes to increase profits and reduce risk. Both risky and safe asset classes are
used. A harmony amongst loss reduction and profit making is the objective. Moderate investors
know that they will lose cash if the market sectors go down, however they additionally hope to
gain in the event that the market goes up.

12
2.4.1.3. Aggressive investor
An aggressive investor values boosting returns and will acknowledge substantial risk. This
investor considers receiving maximum long-term returns more than protecting the capital. The
investor is exposed to substantial volatility and critical misfortunes. Liquidity is mostly not that
important to an aggressive investor (Stifel & Company, 2012).
According to Kandziolka (2012:88) an aggressive investor wants to outperform a basket of
correspondingly weighted indexes when the markets are going up, and they pay little attention
to declining market returns. The aggressive investors prefer mostly downside risk than the
market sectors and hope to be considerably ahead when the markets go up. Settled salary
positions are minimized and risky asset classes are completely used. The majority of the
worldwide stock common funds and bonds in this portfolio are managed aggressively.
Aggressive investors take extreme measures in order to acknowledge large returns and will not
prefer to lose a lot of returns in a short period of time. These investors also need to gather a
great amount of return at a later stage as they are taking the risk to wait a certain period of time
for the returns and to recover transitory losses, and have some income to add to the portfolio
after some time (Kandziolka, 2012:88).
2.4.2. Portfolio types
There are three investment portfolio types that an investor can choose from based on their risk
profile, investment objective, investment constraints, time horizon, liquidity needs, tax factors,
regulatory and legal requirements, unique needs and preferences in order to balance risk and
return.
Omisore et al. (2012) elaborates that there are active portfolio theories that come in three
categories. The active portfolios can either be moderate, aggressive or conservative. Moderate
portfolios are characterised by investments in well-established, steady industries which
compensates dividends and earn income regardless of economic conditions. Aggressive
portfolios purchase more risky developing stocks, in order to grow returns; in view of the
volatility to which this kind of portfolio is exposed to, leading to an increased turnover rate. As
the name conservative infers, these kind of portfolios in this category contribute with caution
on the long-term solidness and return.

13
2.4.2.1 A more in-depth analysis of the three portfolio types
Benz (2014) states that the principle thought behind the bucket approach is to segment the
portfolio by the spending time horizon: assets that will be utilized sooner are invested in short-
term holdings, and the long-term cash is invested in higher return, high-volatility asset types,
more especially stocks.
To develop a bucket portfolio, the investor begins with expected salary needs for a given year,
then deducts certain sources of remuneration, for example, Pension and Social security. The
remainder of the income will be invested in the bucket portfolio in order for it to supply returns
for the next coming years (Laura, 2015). With regards to the conservative portfolio, living
expenses of one to two years (those not secured by Social Security, et cetera) are capitalized in
real money instruments (bucket 1), and an additional 10 years of everyday living costs are
invested in bonds (bucket 2). The rest of the portfolio is financed into stocks and other volatile
assets, for example, high-risk bond fund and commodities. Rebalancing and income proceeds
that are generated from bucket 2 and 3 are utilized to renew bucket 1 as it diminishes (Benz,
2014).
2.4.2.2. The conservative portfolio
A conservative portfolio is a low risk portfolio and it consists of the following assets:
government securities, Banks’ Fixed Deposits, Capital Guaranteed, Corporate Bonds/ Asset
Backed Securities, and Bond funds. This portfolio is suitable for older investors because they
have a shorter life span (Solnik & Mcleavey, 2003:58).
The conservative portfolio has a more modest objective, to preserve the purchasing power and
conveying everyday living costs for the retiree who has a time horizon/life expectancy of about
15-years. This portfolio typically consists of around 58% in bonds, 25% in equities, and 12%
of its assets in cash. What remains in the portfolio is a stake in commodities and other securities,
such as preferred stock and liquidities (Benz, 2014). Vanguard (2015:9) states that the
conservative portfolio may suit an investor who has a low tolerance for risk and a short time to
invest as this portfolio type has a low portion of equities.
The conservative portfolio's emphasis is on capital safeguarding and income generating, so it
stakes approximately 70% in bonds and money. That will probably have a negative effect on
numerous retirees and pre-retirees as excessively bond-heavy. Ultimately, beginning yields are
micro, and the following couple of decades are probably not going to be as favorable to bonds
as the past three years. Bond prices will be strained through the process of yields increasing

14
(Benz, 2014). According to Dumas et al. (2009:579) risk-averse investors pick a conservative
portfolio; in addition, this portfolio depends not only on the present values’ uniqueness but also
on their expectation about future assumption and the speed of value convergence.
According to Kandziolka (2012:86) a conservative portfolio will have most of the cash held in
real money and high quality intermediate and short-term bonds. Highly volatile and risky assets
are avoided as much as possible. Fulfilling the requirements of a conservative portfolio is
difficult to accomplish when inflation is high, or increasing, in light of the fact that the market
estimation of fixed income securities regularly are declining because of expanding interest
rates.
The conservative portfolio has the following characteristics (Kandziolka, 2012:87):
 Conservative portfolios deliver the most astounding yearly income yields ordinarily in the
scope of 4% to 7%;
 Conservative portfolios deliver almost no capital additions distributions. The run of the mill
scope of yearly returns for conservative portfolios include: in down money related markets
(- 3% to +2%), in level markets (3%-6%), and in up business sectors (7%-9%); and
 The conservative model portfolio for the most part incorporates an asset mix of: stocks
(15%- 20%), bonds (70% -75%), and money (5%-15%).
2.4.2.3. The moderate portfolio
A moderate portfolio is a medium risk portfolio and it inherently carries medium risk. This
portfolio is characterized by the following assets: Equity funds, Listed Large Cap Stocks, and
investment-linked Investment.
The moderate portfolio is appropriate for investors that have a medium risk tolerance and as
well as a medium time horizon as the portfolio has a lower portion of equities in contrast to
bonds. A moderate portfolio will hold an adjusted blend of a large portion of the major asset
classes, which will incorporate conservatively oversaw bond funds and in addition high-risk
stock funds (Kandziolka, 2012:88).
According to Kandziolka (2012:88) the following are attributes of a moderate portfolio:
 Moderate portfolios create moderate yearly income yields ordinarily in the scope of 2% to
4%;

15
 Moderate portfolios deliver a direct measure of capital increases distributions and are
regularly going to accomplish returns more prominent than inflation and taxation. At the
point when the major markets are expanding, they could without much effort acknowledge
two-digit returns. The normal scope of yearly returns for moderate portfolios include: in
down money related markets (8%-4%), in level markets (5%-9%), and in up business
sectors (10%-15%); and
 The moderate model portfolio by and large incorporates an asset mix of: stocks (50%-55%),
bonds (35%-40%), and money (5%-10%).
2.4.2.4. The aggressive portfolio
The aggressive portfolio is a highly risky portfolio which is characterized by a few number of
asset classes, namely: options and warrants as well as listed small cap stock. These portfolios
assets are highly volatile and expensive if the underlying assets price become volatile. The
assets in this portfolio are subject to economic and market trends, and are geared thus they
carry a lot more risk than non-geared assets. The aggressive portfolio, is suitable for investors
with a high tolerance for risk, and those with a longer investment time horizon as this portfolio
has a higher portion of equity-based investments (Kandziolka, 2012:87).
An aggressive portfolio makes an effort to maximize returns by taking a moderately higher
level of risk. An aggressive management strategy underlines capital appreciation as an essential
investment objective, as opposed to income or the safety of the principal amount - such a
portfolio would therefore consist of an asset allocation that has a substantial weight in stocks,
and a much lesser weight of cash and fixed income. This portfolio is more suitable for young
investors given their longer time horizon which enables them to outperform the market
volatility compared to older investors who have a short lifespan/time horizon. Despite the
investor’s age, a high resilience for risk is an absolute requirement for an aggressive portfolio
(Kandziolka, 2012:88).

16
Figure 1: Asset allocation of portfolios by investors' profile
Source: Merril Edge (2016)
Different asset classes intrinsically convey some type of risk and relying upon the kind of
investment portfolio an investor wishes to develop it will be vital to assess the level of risk
connected with every asset class. Figure 1 illustrates a clear breakdown of what each portfolio
type entails, more precisely a breakdown of different asset classes namely bonds, stocks and
cash. The relationship amongst risk and return is a critical thought to consider. A wide
assortment of investment choices is accessible to the investor, running from the virtually risk
free government securities (bonds, T-bills) to exceptionally risky subsidiary instruments. The
blend of these asset classes will add to the risk and return qualities of an investment portfolio
(Merril Edge, 2016).
Regarding the above-mentioned literature, market fluctuations may affect an investor’s asset
allocation decision and alter the risk/return objectives of the portfolio. An investor should
rebalance their portfolio, by adjusting the portfolio to its initial investment objective, this
rebalancing strategy will reduce the risk relative to a target asset class, rather than increasing
the returns of the portfolio.
3. RESEARCH DESIGN, DATA AND METHODOLOGY
3.1. Introduction
A persisting component with regards to portfolio performance concerns the relationship
amongst risk and return on investment portfolios. A financial, rather than a real investment,
which includes substantial resources for example, land and production offices, is an allotment
of money whose value should increase over time. A security is an agreement to get planned
benefits under expressed conditions like bonds and stocks (Hilsted, 2012: 8).

17
The two principle characteristics that differentiates securities are risk and time. Generally the
rate of return or interest rate (contingent upon whether the security is a bond or stock) is
characterized as the loss or gain of the investment in respect to the underlying principal value
of the investment. An investment dependably contains some kind of risk, arranged into two
sorts – unsystematic and systematic risk, and the higher these risks are the higher the return
that will be assumed by investors (Hilsted, 2012: 8).
Investors are regularly worried with long-term execution when looking at other investments.
Geometric Mean (GM) is viewed as a prevalent measure of the long haul mean rate of return
since it demonstrates the compound yearly rate of profit based for the closing value of the
venture versus its starting value. In spite of the fact that the arithmetic mean gives a decent sign
of the normal rate of return for a venture within a future individual year, it is one-sided upward
on the off chance that you are making an attempt to quantify an asset’s long haul performance.
This is clear for a security that is volatile (Reilly & Brown, 2015:7).
The empirical section of this study will include a methodology, which will examine the average
returns (growth) of the conservative, moderate and aggressive portfolios using a sample of six
different investment and/or investment companies. The study will make use of South African
based companies.
Section 3.2 and 3.3 is a description of both the sample and the data that were collected and
used. Section 3.4 is a description of the methodology that is applied to this study. The
measurements of the abnormal and aggregate abnormal returns were also elucidated upon. The
measurement of the return on portfolio of the investment companies was discussed in the last
section.

18
Figure 2: Risk vs. potential return for different portfolio types
Source: Quora (2016)
Figure 2 depicts a classical view of the risk/potential return characteristics and trade-off of
some of the major asset classes available to investor.
The conservative portfolio entails government securities, banks’ fixed deposits, capital
guaranteed products, bond funds, corporate bonds/asset backed securities, the bonds are seized
out by the government or company over a fixed period of time in exchange for a fixed interest
rate furthermore the return of the initial capital. Each type of bond has a different level of risk.
The assets in this portfolio are predominantly considered to have a lower risk rather than
property or shares. Therefore this portfolio has low volatility and the lowest risk (Discovery,
2014:1).
Moderate portfolio comprise investment-linked insurance, listed large cap stocks, equity funds
and separately managed equity portfolios. This portfolio also entails property for example
commercial properties such as warehouse and offices, which are leased out to tenants in order
to earn an income from the rent that is charged. Property usually has a lower return than shares
although it can be higher than fixed interest and cash (Discovery, 2014: 2).
Aggressive portfolio comprise listed small cap stocks, equities, options and warrants. Equities
are equally known as shares, and they are issued by a company in order to make money for
developing the business. Investors purchase shares that may be traded on the stock market.

19
Assets in this portfolio are highly illiquid and highly volatile as they convey superior
performance. These assets are considered to be amongst the best investment that realize
excellent long-term returns (Discovery, 2014: 2).
Figure 3: The risk/return characteristics of different portfolio types
Source: Merril Edge (2016)
The relationship between risk and return is the most important attribute of any investment.
Latha (2012) has manifested that risk and return are associated in the capital markets and that
predominately by taking on greater risk an investor will achieve higher returns. Risk is not just
the possible loss of return, it is also the possible loss of the whole investment itself i.e. loss of
interest and principal amount. Accordingly, the decision to take on additional risk in the hope
of higher returns should not be taken lightly.
Figure 3 substantiates the theory that the aggressive portfolio should outperform the other two
portfolios (conservative and moderate) as it assumes great risk in order to achieve higher
returns. The higher the risk an investor assumes, the greater the return they will achieve.
3.2. Data description
The data that is used in this study with regards to investment portfolio returns is based on
information collected from secondary sources such as the selected companies fund fact sheets,
books, and investment companies’ website and journals. The origin of the data is reflected

20
through public domain. With no previous study and literature based on Investment portfolio
return, the main aim of this study is to analyse whether an investor is sufficiently compensated
for the risk that they assume based on their portfolio type. The empirical section of this study
is based on the historical annualised performance of each individual company for a period of 6
consecutive years, as well as the benchmark of that certain portfolio.
This study is intended to underline both hypothetical and scientific parts of investment
decisions and manages cutting edge speculation hypothetical ideas and instruments.
The Consumer Price Index (CPI) data was extracted from the INET (BFA), as well as from the
South African Reserve Bank (SARB), of which INET (BFA) is the basic/primary provider of
analysis tools and financial data. The All-Share Index (ALSI) data was collected from INET
BFA which is used as the portfolio benchmark along with the CPI.
3.3. Sample description
The final sample frame has a reduced number of observations (6 investment companies)
because it is very distinctive and it has included companies that offer capital growth for
different types of investors in South Africa.
The sample data used a time frame of 6 years, to measure two sets of portfolio returns for each
respective portfolio. The data used in this study is not used in previous studies, since it uses
different time frames and sample sizes.
The following is a list that represents the sample of 6 investment/investment companies chosen
for this study namely:
 PSG;
 Liberty;
 Momentum;
 Sanlam;
 Discovery; and
 Old Mutual.
The portfolio returns for each company are calculated to distinguish the performance between
the different portfolio types. These six companies were selected because they all operate in the
same industry and offer more or less the same services.

21
The respective investment portfolios were chosen based on the following criteria:
 The portfolio should be in existence for the whole sample time frame, which is January
2010 until December 2015;
 The portfolio used may have an asset allocation of international assets and also represent
local investment portfolios allocation; and
 The asset allocation of international assets may not be more than the allocation of locally
invested assets. The investment portfolios selected of each company in South Africa
publish a fund fact sheet which clearly identifies how the funds within the investment
portfolio is diversified and indicates the performance of the portfolio for a certain number
of years. The fund fact sheets will firstly be used to establish the historic performance of
the certain portfolio.
3.4. Methodology
The empirical segment of this study encompass the description of each selected companies
data, the performance of the portfolio for a period of six years.
The methodology is designed to dissect the theory that conservative portfolio yields lower
returns, moderate portfolio yields medium returns and aggressive portfolio yields higher
returns for a given period of time on a consecutive basis. The data extracted for the respective
investment companies’ concerned is analysed with the use of Microsoft Office Excel 2013.
3.4.1. Estimating portfolio returns
For a number of annual rates of return (HPYs) of an individual investment, there exists two
measures of performance for the return. The first measure is the arithmetic mean (AM), and
the second is the geometric mean (Reilly & Brown, 2015:6). In order to calculate the AM, the
total sum (∑) of annual rates of return HPY’s is divided by the total number of years (n) given
a set of Annual rates of Return (HPYs) for n years. Then the Arithmetic mean is:
𝐴𝑀 =
∑ 𝐻𝑃𝑌
𝑛
(3.1)
The Geometric mean is the nth root of the product of the HPRs:
𝐺𝑀 = [𝜋𝐻𝑃𝑅]
1
𝑛 − 1 (3.2)
Characteristics of the Geometric mean (Reilly & Brown, 2015:6):
• High-ranking in measuring the long-term rate of return;

22
• Designates the compound annual rate of return; and
• Convenient when markets are highly volatile.
Reilly and Brown (8:2015) define risk as the vacillation that an investment will gain its normal
rate of return. An investor decides how certain the normal rate of return for an investment is
by breaking down appraisals of conceivable returns. In order to get this done, the investor
allocates a probability to every single conceivable return. These likelihood values go from zero,
which implies no way of the return, to one, which shows complete conviction that the
investment will give the predefined rate of return. These probabilities are normally subjective
evaluations in light of the past performance of the venture or comparable investments altered
by the investors’ desires for the future. Risk of a single asset is measured by the standard
deviation and the coefficient of variation.
There has to be a calculation for the expected rate of return and it is formulated as follows:
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 = ∑(𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛)𝑥 (𝑃𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑅𝑒𝑡𝑢𝑟𝑛) (3.3)
𝑁
𝑖=1
The expected rate of return of an investment can be calculated and the risk or uncertainty can
be evaluated, by making an identification of the possible range of returns from that particular
investment and assigning a value to each possible return considering the probability of the risk
(Reilly & Brown, 2015:11).
4. RESULTS AND DISCUSSION
Investment portfolio returns remain widely neglected in the financial industry, previous studies
have limited their extensive research of investment portfolio returns. This study aims to prove
that the different portfolio types (more especially the aggressive portfolio) may outperform the
benchmark i.e. inflation and ALSI. The aggressive portfolio ought to outperform the moderate,
more volatility than the other portfolios. Should the aggressive portfolio not outperform the
above mentioned, it will be considered useless according to the risk/return theory. This section
will discuss the findings and results of the calculations carried out in order to convey the
historical performance within the sample of companies for each of the given portfolio types.
This chapter comprises three sections, where each chapter will be a description of the combined
average of each company given their respective portfolio type and a further analysis will be
based on the comparison of the average returns towards the portfolios benchmark.

23
Table 1: Investment returns against CPI (inflation) and ALSI
CONSERVATIVE MODERATE AGGRESSIVE
6 years (per month) 6 years (per month) 6 years (per month)
PSG 11.06% MOMENTUM 13.32% DISCOVERY 27.87%
LIBERTY 9.59% SANLAM 17.88% OLD MUTUAL 19.45%
Average risk
adjusted growth
10.33% 15.6% 23.66%
The data is in monthly frequency for a time period of 6 years. The monthly figures are equivalent to returns that
are received on a yearly basis from the year 2010 till 2015.
Source: Calculations based on companies data
Table 2: Benchmark (CPI and ALSI)
Date Consumer prices:
CPI (Inflation %)
All-Share Index
(%)
2010 3.8 22.45
2011 5.4 -0.41
2012 5 22.71
2013 5.4 17.85
2014 5.8 7.60
2015 5.6 1.85
Average growth 5.17% 12.01%
The data is in monthly frequency for a time period of 6 years. The monthly figures are equivalent to returns that
are received on a yearly basis from the year 2010 till 2015.
Source: INET (BFA) and SARB (2015)

24
4.1. Discussion of the conservative portfolio
The conservative portfolio entails PSG and Liberty investment companies, this portfolio
outperforms the CPI (inflation) growth rate by 5.16% (i.e. 10.33%-5.17%=5.16%). The All
Share Index outperformed the conservative portfolio by 1.68% (i.e. 12.01%-10.33%=1.68%),
this difference may be because of a strong performance by JSE listed companies, with mid cap
shares and to an even lesser extent Small cap shares. These results also support the risk/return
theory that the conservative portfolio outperforms the benchmark by just over a little average
growth rate. This portfolio has a low volatility and low risk exposure therefore it will have a
low return. Based on the risk/return theory the conservative portfolio should yield the least
return than the other portfolios because it entails bonds and securities. The theory is only
consistent with regards the CPI benchmark as it outperforms this index. The return of the
conservative portfolio is lower than the ALSI return therefore the risk/return theory is not
consistent with regards to the comparison between the conservative return and the ALSI index.
4.2. Discussion of the moderate portfolio
The moderate portfolio entails Momentum and Sanlam investment companies, this portfolio
outperforms the CPI (inflation) growth rate by 5.16% (i.e. 15.6%-5.17%=10.43%). The
moderate portfolio outperformed the All Share Index by 1.68% (i.e. 15.6%-12.01%=3.59%).
These results also support the theory that the moderate portfolio outperforms the benchmark
by just over a little average growth, it also outperforms the conservative portfolio. This
portfolio has a medium volatility and medium risk exposure therefore it will have a medium
return.
4.3. Discussion of the aggressive portfolio
The aggressive portfolio entails Discovery and Old Mutual investment companies, this
portfolio outperforms the CPI (inflation) growth rate by 18.49% (i.e. 23.66%-5.17%=18.49%).
The aggressive portfolio also outperformed the All Share Index growth rate by 11.65% (i.e.
23.66%-12.01%=11.65%), this difference may be because of a strong performance by JSE
listed companies, with a large market cap. These results support the theory that the aggressive
portfolio outperforms the benchmark by a very large average growth rate, the results also
support the theory that the aggressive portfolio should outperform all the other portfolios (i.e.
conservative and moderate portfolio) as this portfolio has a high volatility and high exposure
to risk therefore it will have a very high return as it assumes greater risk. The portfolio has
superior returns compared to both the CPI (inflation) and All-share Index.

25
Table 3: Risk and Volatility classification of each portfolio type
Portfolio type Category Volatility
Conservative Low Risk Low volatility
Moderate Medium Risk Medium volatility
Aggressive High Risk High volatility
Source: Compiled by author
Table 3 illustrates a classification of the risk and volatility faced by the different types of
portfolios.
5. CONCLUSION
Investment portfolio returns remain widely neglected in the financial industry, as previous
studies have limited their extensive research of investment portfolio returns. The study
primarily focused on identifying the different investment/investment companies, and
comparing them to the CPI and ALSI benchmarks. The time frame of 6 years of data was used
for this sample, to measure two sets of portfolio returns for each respective portfolio. According
to theory of risk/reward the aggressive portfolio ought to outperform the moderate,
more volatility than the other portfolios.
Based on this study, the conservative portfolio that entails PSG and Liberty investment
companies conveyed lower returns than all the other portfolios due to its asset allocation and
low volatility. The All Share Index outperformed the conservative portfolio, this may be
because of a strong performance by JSE listed companies, with mid cap shares and to an even
lesser extent Small cap shares. The returns of this portfolio supports the theory that the
conservative portfolio outperforms the benchmark by just over a little average growth rate.
Furthermore, the moderate portfolio which entails Momentum and Sanlam investment
companies, outperformed the CPI (inflation) growth rate as well as the All Share Index. The
portfolios’ average returns supports the theory that the conservative portfolio outperforms the
benchmark by just over a little average growth, it also outperforms the conservative portfolio.
This portfolio has a medium volatility and medium risk exposure therefore it will have above
average normal returns.

26
The aggressive portfolio inclusive of Discovery and Old Mutual investment companies,
outperformed the CPI (inflation) growth rate as well as the All Share Index. The superior results
executed by this portfolio may have resulted from a strong performance by JSE listed
companies, with a large market capitalisation. Clear evidence was found that the aggressive
portfolio has proved the risk/return theory true, that this portfolio has superior performance as
it has the highest returns compared to the conservative and moderate portfolio, the greater risk
it is exposed to will lead to greater returns.
It can be concluded the conservative portfolio may suit an investor who has a low tolerance for
risk and a short time to invest as this portfolio type has a low portion of equities. The moderate
portfolio is suitable for investors who have a medium risk tolerance and a medium time horizon
as the portfolio has a lower portion of equities in contrast to bonds. The aggressive portfolio,
is suitable for investors with a high tolerance for risk, and those with a longer investment time
horizon as this portfolio has a higher portion of equity-based investments. Furthermore it is
evocative that the aggressive portfolio, yields and surpasses the benchmark as well as the
conservative and moderate investment portfolios.

27
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