Investment Portfolio

‘It is not possible to reduce the variance by investing in several securities. ‘1 At the same time avoiding investing in securities with high covariance. Markowitz has used his observations and experience in stating that the diversifications across industries with different characteristics have a lower covariance than firms within an industry. ‘The Portfolio theory of Markowitz makes people to describe and solve the optimisation question of a portfolio by the numbers. ‘2 In other words Markowitz theory shows how the investors ought to behave.

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Markowitz has used mathematical analysis to assist in relating and implying a diversification strategy for range assets of expected value and variance. Specifying the Assets I have selected 7 assets, which include 3 equity shares and in 3 UK companies, 3 Treasury Bonds of UK Glits and one deposit account from Alliance and Leicester. Individual Securities I have chosen to invest in different securities also I have allocated different proportions of your investment amount to go in each individual security. To find out if these will give an appropriate return.

To see the relationship between these groups of security I have calculated covariance between two of selected securities. The covariance represents the correlation in terms of two diverse securities. I have carried out this calculation to see how these assets perform with each other as this covariance can give negative and positive return. A positive return indicates that if expected returns of one asset increases the other will follow. However, sadly the rule works if the covariance is negative. For this portfolio 21 calculations were carried out.

All the selected assets have given the positive return which shows that all these will work well together and it is a good group. There is a very good chance of all of your securities increasing in future. To estimate what proportion of your capital to invest in each of the security, I did a calculation to see the proportion of risk and percentage of expected return for each of asset. I made an assumption of the probability figure used and then I multiplied the return percentage with it. To find the proportion of risk I had to do standard deviation to get to this.

The figured achieved at the top by multiplying return percentage probability is taken away from the return percentage to provide the deviation which is later squared. I have carried a sensitivity analysis and all of the results have 3 scenarios of Boom, growth and Recession. These results were then added together and the square root was calculated to show the risk factor. All this is shown clearly in Appendix. Equity Shares These represent an ownership claim on the earnings and assets of a corporation.

The unique feature of investing in stock market is that shareholder has as limited liability. This does not mean that it has low risk all this means is that if company goes Bankrupt you would only lose your original investment. The actual risk is calculated for all 7 assets and shown by standard deviation. To create a balanced portfolio the expected return is also calculated.


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