Portfolio Theory and Investment Analysis Assignment

Portfolio Theory and Investment Analysis - Assignment ExampleMore specifically, the trustees neediness to know the following (1) The impacts of having a small number of stocks in the portfolio and concentrating the investment funds in large stocks. (2) The benefits of miserable some of the investment to international securities. (3) How derivatives may be used to enhance interprets and manage risk.The answer to the first-class honours degree concern depends on the answer to the following basic question in the minds of the charitys trustees what is the highest possible and most real annual break that the investment portfolio could earn It is not easy to predict the return of a portfolio because umpteen things could happen to funds once these are invested. To find out the realistic historical returns for various investments, investors chaffer the Equity and Gilt Study of Barclays (2006), which has studied this for over half a century.Figures 1 (68) and 2 (69) immortalize how e quities performed better compared to gilts and T-bills over the last century since a 100 investment in equities at end-1899 was charge 1,340,324 by end-2005. The same investment in gilts was outlay 20,159 and in T-bills 17,021. When adjusted for inflation, the investment in equities would be worth 22,426 gilts 337 and T-bills 284 (Barclays, 2006, p. 62-63). This proves that the strategy of investing in equities would give the highest and most realistic return. In the year 2005, for example, equities returned 18.8% for the year, oft higher than gilts (6%) and T-bills (2.7%), all figures having been adjusted for inflation. The Barclays Equity Income Index is derived from the yield of the FTSE All-Share Index because in their view, this is the most illustration method of evaluating equity performance over the period (Barclays, 2006, p. 59). Given these pieces of information, what would be the best return that the UK charity could expect from its investmentsThe drawing card of any investment, whether bonds, securities, real estate, or a corner street patronage, depends on devil variables (1) Expected return how much the investment would earn over a period of time and, (2) pretend the uncertainty that the investment would earn the expected return.One finance model used to assess an investments attractiveness based on these two factors is the Capital Asset Pricing Model or CAPM,1 which equates expected return with the market return, the risk free rate, and the relative behaviour - defined as beta () - of the price of a security relative to the behaviour of the market. The basic criterion of CAPM is straightforward an investment is attractive if its risk allowance (the additional return over the risk-free rate) is equal to or higher than the risk of the market. Given the charitys investment portfolio = 1.03, the investment gave a return that was 3% higher than the All-Share Index return. If the All-Share Index had an 18.8% return, meaning a 1 million investm ent was worth 1,018,800 by year-end, the charitys investment would earn an extra 3% and would be worth 1,019,364 instead. The , however, has a downside if the All-Share Index dropped, the value of the charitys investments would drop by an additional 3%. Why this happens is explained by risk, which affects the return of any investment. Every investment is exposed to two types of risk the risk affected by the factors to which the business is