Annualised Risk and Return

FM Assignment Q) Obtain daily, weekly and monthly closing prices of the figurer memory given to you. Get adjusted closing prices. Daily and weekly prices should be for whizz financial year. Monthly prices should be for 2 years. E. g. FY 2011-2012 and FY 2010-11. Compute annualized pass and run a run a luck. DATA ANNUALIZED RETURN ANNUALIZED 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 number Annualized pretend JSP -11. 2154 30. 209 TATA STEEL -4. 0020 47. 202 OBSERVATIONAs can be seen from the observations above, the stock which gives the supreme return likewise comes with the maximum risk (TATA STEEL). So when it comes to selecting the stock, the following two cases can be considered a) supreme return - If you are a person who values maximum return and is allow foring to take the risk for the same, go for TATA STEEL b) borderline Risk - If you are a risk averse(predicate) per son, 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. 0) and compute return and risk for each portfolio. Identify the best portfolio. Construct the stripped variance portfolio. Company Correl JSP AND TATA STEEL 0. 89 JSP AND CUMMINS 0. 65 Initially we compared JSP and TATA STEEL. We give 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 provide choose Cummins for making the portfolio. Portfolio Return(%) Return(%) percent ofJSP Percentage of CUMMINS Portfolio Return JSP CUMMINS 1 -11. 21 14. 83 10% 90% 12. 2233 2 -11. 21 14. 3 20% 80% 9. 6196 3 -11. 21 14. 83 30% 70% 7. 0159 4 -11. 21 14. 83 40% 60% 4. 4122 5 -11. 21 14. 83 45% 55% 3. 11035 6 -11. 21 14. 83 50% 50% 1. 8085 7 -11. 21 14. 83 60% 40% -0. 7952 8 -11. 21 14. 83 70% 30% -3. 3989 9 -11. 21 14. 83 80% 20% -6. 0026 10 -11. 21 14. 83 90% 10% -8. 6063 min Variance -11. 21 14. 83 36% 64% 5. 45368 Portfolio Risk(%) Risk(%) Percentage ofJSP Percentage of CUMMINS Covariance Portfolio Risk JSP CUMMINS 30. 21 27. 36 10% 90% 543. 6637905 6. 99497971 2 30. 21 27. 36 20% 80% 543. 6637905 9. 326639613 3 30. 21 27. 36 30% 70% 543. 6637905 10. 685008 4 30. 21 27. 36 40% 60% 543. 6637905 11. 42275403 5 30. 21 27. 36 45% 55% 543. 6637905 11. 59986156 6 30. 21 27. 36 50% 50% 543. 6637905 11. 65829952 7 30. 21 27. 36 60% 40% 543. 6637905 11. 42275403 8 30. 21 27. 36 70% 30% 543. 6637905 10. 685008 9 30. 21 27. 36 80% 20% 543. 6637905 9. 326639613 10 30. 21 27. 36 90% 10% 543. 637905 6. 99497971 Min Variance 30. 21 27. 36 36% 64% 543. 6637905 11. 19196754 From the above observation, for decision regarding the best portfolio the following cases can be considered- a) Maximum Return - If on e wants to maximize the return, one should have a portfolio mix consisting of 10% JSP and 90% Cummins b) Minimize Risk - A risk averse person should go for a portfolio mix consisting of 10% JSP and 90% Cummins c) nominal Variance Ideally, as per the nominal variance rule, one should have 36% of JSP and 64% of Cummins as their portfolio mix.But in this case, it does not give the maximum return nor the least risk. Since maximum return as well as minimum risk is observed for a portfolio mix of 90% Cummins and 10% JSP, one should opt for that. Learnings * For studying the valuation of assets or securities, familiarity about the concepts of Risks and Returns are essential * Variance or standard deviance is the measure of the risk of returns * Combination of multiple securities are called portfolios * Portfolio risk is not a weighted average risk as the securities include in the portfolio are associated with each other.Hence, portfolio risk also accounts for the covariance between th e returns of securities * Covariance is the reaping of standard deviation of individual securities and their correlation coefficient * The magnitude of the portfolio risk will depend on the correlation between the securities.The portfolio risk will be equal to the weighted risk of individual securities if the correlation coefficient is +1. 0. If correlation coefficient < 1, the portfolio risk will be less than the weighted average risk. When the correlation coefficient = -1. 0, the portfolio risk becomes 0. Submitted By Group C14 Vaibhav Bhasin 2012182 Vinay Harinarayanan 2012184