Die Arbeit legt die Portfoliotheorie an Hand eine praktischen Beispiels dar. Auf der Basis von 10 Stocks aus dem FTSE 100 wird das optimale Portfolio errechnet und dessen Performance eingeordnet. ++++ According Warren Buffett, financial investors should never purchase a security, if they cannot accept that the value might be cut in half (Schömann-Finck, 2010).
One of the most successful global investors has illustrated with this quote the risks involved in the business of financial investments. In order to optimize risk-return tradeoffs, scientific research has developed efficient diversification techniques. This paper examines the process of portfolio diversification based on a sample of 10 randomly selected securities. First the optimal portfolio is identified in order to evaluate its performance against the market trend via industry accepted benchmarking comparison tools in a second step. Finally, potential portfolio gains, achieved via diversification across additional asset classes, are discussed and evaluated.
According to Bodie et al. (2008) the investment decision process can be separated into three major steps (see figure 1): Capital Allocation, Asset Allocation and Security Selection. For the purpose of this paper 100% of the available funds are assumed to be allocated into stocks. The portfolio created (see figure 2) consists of 10 randomly selected securities taken from the FTSE 100 index.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Investment Decision
- Portfolio Selection
- Return and Risk Level Calculations
- Correlation and Covariance Calculations
- The Efficient Frontier
- Optimal Portfolio
- Performance Measurement
- Risk Adjusted Performance Metrics
- Investments across Asset Classes
- International Diversification / Emerging Markets
- Commodities
- Corporate Bonds / Government Bonds ("Gilts")
- Real Estate
- Hedge Funds
- Conclusion - Analysis Limitation
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to analyze the process of portfolio diversification using a sample of 10 randomly selected securities from the FTSE 100 index. The primary objective is to identify an optimal portfolio and evaluate its performance against market trends using established benchmarking tools. Finally, the paper explores potential portfolio gains from diversifying across additional asset classes.
- Optimal portfolio selection
- Portfolio performance measurement
- Risk-return tradeoffs
- Diversification strategies
- Asset class diversification
Zusammenfassung der Kapitel (Chapter Summaries)
Introduction: This introductory chapter sets the stage for the paper by highlighting the inherent risks in financial investments, referencing Warren Buffett's cautionary advice. It introduces the concept of efficient diversification techniques to optimize risk-return profiles and outlines the paper's structure: identifying an optimal portfolio from a sample of 10 securities, evaluating its performance, and exploring diversification across additional asset classes. The chapter establishes the scope and methodology of the study.
Investment Decision: This chapter describes the investment decision process as outlined by Bodie et al. (2008), separating it into capital allocation, asset allocation, and security selection. The paper focuses solely on stock investments (100% allocation) and introduces the selected portfolio of 10 randomly chosen securities from the FTSE 100 index, emphasizing that the analysis period spans from March 2006 to March 2011.
Portfolio Selection: This chapter delves into the core methodology of portfolio optimization. It details the calculations of return and risk levels for each security, followed by an analysis of correlation and covariance to understand the relationships between assets. The efficient frontier is constructed, graphically illustrating the optimal risk-return trade-off. The chapter culminates in the identification of the optimal portfolio, considering both scenarios with and without short selling allowances. This chapter forms the methodological backbone of the analysis.
Performance Measurement: This chapter focuses on evaluating the performance of the optimal portfolio using risk-adjusted performance metrics. It discusses and applies industry-standard metrics like the Sharpe Ratio, M2 measure, Jensen's Alpha, and Treynor Ratio to assess the portfolio's performance relative to market benchmarks. The chapter provides a quantitative assessment of the portfolio’s success, taking into account the inherent risks involved.
Investments across Asset Classes: This chapter explores the potential benefits of diversifying beyond the initial 10-stock portfolio. It examines the impact of international diversification, including emerging markets, along with the inclusion of commodities, corporate and government bonds, real estate, and hedge funds. The analysis likely utilizes correlation analysis to assess the diversification effects of these asset classes on overall portfolio risk and return. This section explores the potential for risk reduction and enhanced returns through strategic diversification.
Schlüsselwörter (Keywords)
Portfolio selection, portfolio diversification, risk-return tradeoff, efficient frontier, performance measurement, Sharpe Ratio, M2 measure, Jensen's Alpha, Treynor Ratio, asset allocation, international diversification, emerging markets, commodities, bonds, real estate, hedge funds, FTSE 100.
Frequently Asked Questions: Portfolio Diversification Analysis
What is the subject of this paper?
This paper analyzes portfolio diversification strategies, focusing on identifying an optimal portfolio of 10 randomly selected FTSE 100 securities and evaluating its performance. It further explores the benefits of diversifying across additional asset classes.
What is the primary objective of this research?
The main objective is to identify an optimal portfolio from a sample of 10 FTSE 100 stocks, evaluate its performance using established benchmarks, and assess the potential gains from diversifying into other asset classes. This includes calculating key metrics like return, risk, correlation, and covariance to construct an efficient frontier.
What methodology is used in this analysis?
The analysis employs portfolio optimization techniques, calculating return and risk levels for each security and analyzing correlation and covariance. The efficient frontier is constructed to identify the optimal portfolio, considering scenarios with and without short selling. Risk-adjusted performance metrics such as the Sharpe Ratio, M2 measure, Jensen's Alpha, and Treynor Ratio are used to evaluate performance.
What are the key themes explored in the paper?
Key themes include optimal portfolio selection, portfolio performance measurement, risk-return tradeoffs, diversification strategies (both within and across asset classes), and the application of risk-adjusted performance metrics.
Which asset classes are considered for diversification?
Beyond the initial 10-stock portfolio, the paper explores diversification into international markets (including emerging markets), commodities, corporate and government bonds, real estate, and hedge funds. The impact of these asset classes on overall portfolio risk and return is analyzed.
What is the time period covered in the analysis?
The analysis period spans from March 2006 to March 2011.
What data is used in the analysis?
The data consists of 10 randomly selected securities from the FTSE 100 index.
What are the key performance indicators (KPIs) used to evaluate portfolio performance?
The paper uses risk-adjusted performance metrics such as the Sharpe Ratio, M2 measure, Jensen's Alpha, and Treynor Ratio to assess the portfolio's performance relative to market benchmarks.
What is the conclusion of the analysis?
The conclusion summarizes the findings of the analysis, including the identified optimal portfolio, its performance evaluation, and the potential benefits of diversifying across different asset classes. It also likely addresses any limitations of the analysis.
What are the key words associated with this research?
Key words include: Portfolio selection, portfolio diversification, risk-return tradeoff, efficient frontier, performance measurement, Sharpe Ratio, M2 measure, Jensen's Alpha, Treynor Ratio, asset allocation, international diversification, emerging markets, commodities, bonds, real estate, hedge funds, FTSE 100.
- Quote paper
- Patrick Daum (Author), 2011, Investment Portfolio Selection and Performance Measurement, Munich, GRIN Verlag, https://www.grin.com/document/193415
