The process of portfolio construction can be quite complex. Analysts go through reams of statistics – past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2009). Every investor aims to maximize returns while minimizing risk. Individual securities must be evaluated not only on the riskreturn tradeoff in isolation but also on their contribution to the riskreturn tradeoff of the entire portfolio. This memo will be based on the Constructing and Managing a Portfolio Simulation that details the fundamentals of portfolio construction in relation to the riskreturn tradeoff and the relationship between investment strategy and investment performance. As a treasury analyst for Casa Bonita Ceramics, I was tasked to select the best stocks and allocate company resources to construct a portfolio. This memo will detail my decisions made in the simulation, discuss the Sharpe ratio and how it relates to investment decisions, and lastly, provide recommendations for changes in the organization’s investment strategy in order to improve its investment performance.
Simulation Decisions
From excess cash generated in 2004, the company decided to invest $800,000 in the stock market in which eight stocks had already been chosen. With the consideration of a high return without the risk of losing capital in mind, I narrowed it down to the final four stocks worth investing in: Desktop, Inc., Levinthal Defense Systems, Transconduit, Inc., and Goldstein and Delaney Bank. This was an astute stock selection and showed good judgment by diversifying the stock selection to reduce stockspecific risks.
The next task was to allocate the $800,000 in a manner that maximized portfolio return and kept the portfolio risk below 22 percent. I chose to distribute the funds evenly between the four stocks, which resulted in 20.45% portfolio...
...themselves to risk. Your personality and lifestyle play a big role in how much risk you are comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you are probably taking on too much risk. Risk is defined as the chance that an investment's actual return will be different than expected. This includes the possibility of losing some or all of the original investment.
A financial decision...
...Risk and Return: Portfolio Theory and Asset Pricing Models
Portfolio Theory Capital Asset Pricing Model (CAPM)
Efficient frontier Capital Market Line (CML) Security Market Line (SML) Beta calculation
Arbitrage pricing theory FamaFrench 3factor model
Portfolio Theory
• Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard...
...of 1.6 and a
riskfree asset. How much should you invest in the riskfree asset?
a. $0
b. $140
c. $200
d. $320
e. $400
ANALYZING A PORTFOLIO
d 59. You have a $1,000 portfolio which is invested in stocks A and B plus a riskfree asset.
$400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7.
How much needs to be invested in stock B if you want a portfolio beta of .90?
a. $0
b. $268
c. $482
d....
...the context of a portfolio, the risk of an asset is divided into two parts: diversifiable risk (unsystematic risk) and market risk (systematic risk). Diversifiable risk arises from companyspecific factors and hence can be washed away through diversification. Market risk stems from general market movements and hence cannot be diversified away. For a diversified investor what matters is the market...
...14/12/12 
Risk and Return 
Advising Mark on issues relating to finance 

Martin Murphy 
S12795258 
Contents
The usefulness of stocks screeners 2
Defined Ratio’s 2
Dividend Yield 2
Dividend Cover 3
PriceEarnings Ratio 3
PriceCash Flow Ratio 3
Beta Coefficient 4
Cash Is King, Everything else is opinion 4
Advising Mark on the general riskiness of financial models: 4
Equities with high dividend and earnings yields 4
Small...
...Risk and Return Management
Risk and return management
Darlene LaBarre
MBA6161 Fin Markets & Institutions
Capella on Line
The riskreturn spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment.[citation needed] The more return sought, the more risk that must be undertaken!...
...1. Convert prices to total return (% change in the price) = (Pt – Pt1) / Pt1
2. Remove outliers – sort data and remove anything +/ 20%
3. Calculate historical average and historical risk
XBAR = Σx/n
Calculate the sum of the total return and divide by the number of observations
• Variance = σ2 = Σ(x – x bar) 2 / (n1)
Fix XBAR, double click to apply to all dates, get the sum, divide by (n1)
Risk = σ = √σ =...
...a. What are investment returns? What is the return on an investment that costs $1,000 and is sold after 1 year for $1,100?
Investment returns is the expectation of earning money in the future on the amount of money invested. The return is the financial performance of the investment. The return is the difference between the amount invested and the amount you are returned after said investment.
There are two ways to...
2515 Words 
9 Pages
Share this Document
{"hostname":"studymode.com","essaysImgCdnUrl":"\/\/imagesstudy.netdnassl.com\/pi\/","useDefaultThumbs":true,"defaultThumbImgs":["\/\/stmstudy.netdnassl.com\/stm\/images\/placeholders\/default_paper_1.png","\/\/stmstudy.netdnassl.com\/stm\/images\/placeholders\/default_paper_2.png","\/\/stmstudy.netdnassl.com\/stm\/images\/placeholders\/default_paper_3.png","\/\/stmstudy.netdnassl.com\/stm\/images\/placeholders\/default_paper_4.png","\/\/stmstudy.netdnassl.com\/stm\/images\/placeholders\/default_paper_5.png"],"thumb_default_size":"160x220","thumb_ac_size":"80x110","isPayOrJoin":false,"essayUpload":false,"site_id":1,"autoComplete":false,"isPremiumCountry":false,"userCountryCode":"US","logPixelPath":"\/\/www.smhpix.com\/pixel.gif","tracking_url":"\/\/www.smhpix.com\/pixel.gif","cookies":{"unlimitedBanner":"off"},"essay":{"essayId":35079502,"categoryName":"Periodicals","categoryParentId":"17","currentPage":1,"format":"text","pageMeta":{"text":{"startPage":1,"endPage":4,"pageRange":"14","totalPages":4}},"access":"premium","title":"Risk and Return Tradeoff Memo","additionalIds":[3,7,93,52],"additional":["Business \u0026 Economy","Education","Education\/Greek System","Business \u0026 Economy\/Organizations"],"loadedPages":{"html":[],"text":[1,2,3,4]}},"user":null,"canonicalUrl":"http:\/\/www.studymode.com\/essays\/RiskAndReturnTradeoffMemo772057.html","pagesPerLoad":50,"userType":"member_guest","ct":10,"ndocs":"1,500,000","pdocs":"6,000","cc":"10_PERCENT_1MO_AND_6MO","signUpUrl":"https:\/\/www.studymode.com\/signup\/","joinUrl":"https:\/\/www.studymode.com\/join","payPlanUrl":"\/checkout\/pay","upgradeUrl":"\/checkout\/upgrade","freeTrialUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fcheckout%2Fpay%2Ffreetrial\u0026bypassPaymentPage=1","showModal":"getaccess","showModalUrl":"https:\/\/www.studymode.com\/signup\/?redirectUrl=https%3A%2F%2Fwww.studymode.com%2Fjoin","joinFreeUrl":"\/essays\/?newuser=1","siteId":1,"facebook":{"clientId":"306058689489023","version":"v2.8","language":"en_US"},"analytics":{"googleId":"UA327183211"}}