Annualised Risk and Return

Topics: Variance, The Return, Modern portfolio theory Pages: 4 (807 words) Published: November 20, 2012
FM Assignment

Q) Obtain daily, weekly and monthly closing prices of the stock given to you. Get adjusted closing prices. Daily and weekly prices should be for one financial year. Monthly prices should be for 2 years. E.g. FY 2011-2012 and FY 2010-11. Compute annualized return and risk.

Weekly| -16.952| 36.449|
Daily| -16.241| 39.347|
Monthly| -11.21| 30.209|

Comparing this with a suitable peer company,

Company| Annualized return| Annualized risk|
JSP| -11.2154| 30.209|
TATA STEEL| -4.0020| 47.202|

As can be seen from the observations above, the stock which gives the maximum return also comes with the maximum risk (TATA STEEL). So when it comes to selecting the stock, the following two cases can be considered:

a) Maximum return :- If you are a person who values maximum return and is willing to take the risk for the same, go for TATA STEEL

b) Minimum Risk :- If you are a risk averse person, go for JSP as the risk associated with it is less compared to TATA STEEL

In either case, whether TATA STEEL or JSP, the annualized return is negative.

Q) Construct 10 different portfolios with another company (Correl < 0.70) and compute return and risk for each portfolio. Identify the best portfolio. Construct the minimum variance portfolio.

Company| Correl|

Initially we compared JSP and TATA STEEL. We found the Correl = 0.89 which was greater than 0.70. Next we compared JSP and Cummins and found the Correl to be 0.65. So we will choose Cummins for making the portfolio.

Portfolio| Return(%)| Return(%)| | | Percentage ofJSP| | Percentage of CUMMINS| | Portfolio Return| | JSP| CUMMINS| | | | | | | |
1| -11.21| 14.83| | | 10%| | 90%| | 12.2233|
2| -11.21| 14.83| | | 20%| | 80%| | 9.6196|
3| -11.21| 14.83| | | 30%| | 70%| | 7.0159|
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