The principal of 9,984.31 dollars was invested in my portfolio consisting of 7 securities from 6 different industries including telecommunications, retail, energy, etc. The beta targeted was 0.8 (0.78) to maintain a safe investment involving less risk. My risk-averse approach brought me the following results;
The Expected Return on my portfolio is; EX RETURN = RF + BETA X RM – RF = 0.0550 + 0.78 x 9.89 – 0.0550 (0.0550 = RF 1 YEAR US) (RM = 9.89 RETURN ON MARKET (1 YEAR DOW JONES INDEX)) = 8.20315 % The portfolio Variance is 3.52 The portfolio Correlation is 0.88 The portfolio Standard Deviation is 12.37 The Treynor measure is 0 The Sharpe index is 1.74
The assets ranked in accordance to the geometric mean are as follows; SECURITY| WEIGHTAGE| TOTAL RETURN 1YR|| | | Telecommunication Services| 17.31%| 33.95%| ROGERS COMMUNICATIONS INC| 17.31%| 33.95%| Consumer Discretionary| 16.87%| 20%| TARGET CORP| 16.87%| 20%| Consumer Staples| 15.78%| 12%| COCA-COLA CO| 15.78%| 12%| Information Technology| 19.11%| 12%| GOOGLE INC| 8.16%| 24%| INTL BUSINESS MACHINES CORP| 10.95%| 4%| Energy| 12.96%| 7%| EXXON MOBIL CORP| 12.96%| 7%| Financials| 17.96%| 2%| TORONTO-DOMINION BANK| 17.96%| 2%| Overall| 99.99%| 14.43%|
SECURITY| BETA| TREYNOR| SHARPE| STD DEV| | | | | | Telecommunication Services| 0.58| 1| 2.6| 20.67| ROGERS COMMUNICATIONS INC| 0.58| 1| 2.6| 20.67| Consumer Discretionary| 0.53| 1| 1.68| 18.71| TARGET CORP| 0.53| 1| 1.68| 18.71| Consumer Staples| 0.84| 0| 1.13| 16.95| COCA-COLA CO| 0.84| 0| 1.13| 16.95| Information Technology| 0.98| 0| 0.98| 18.83| GOOGLE INC| 0.91| 0| 1.55| 25.32| INTL BUSINESS MACHINES CORP| 1.03| 0| 0.38| 19.48| Energy| 1.03| 0| 0.63| 17.17| EXXON MOBIL CORP| 1.03| 0| 0.63| 17.17| Financials| 0.76| 0| 0.23| 16.9| TORONTO-DOMINION BANK| 0.76| 0| 0.23| 16.9| Overall| 0.78| 0| 1.74| 12.37|
Since I wanted to play it safe, investing in Rogers which has a beta of 0.58 gave my portfolio exposure to the telecommunications sector without any volatility involved. The same theory applies for investment in Target Corporation. Both these stocks give me a Treynor ratio of 1. Coca-Cola is a personal favourite so I felt it right to diversify my portfolio into consumer products. Google and IBM provided betas that move with the market. The oil and gas industry still shows promise so I chose Exxon to invest in. As I have a bank account with Toronto Dominion and like their future business plans I gravitated towards them to help me diversify by investing in the banking sector.
The total return of 14.43% exceeds the expected return of 8.20%. We have calculated the beta, Treynor and Sharpe ratios that help measure the risk adjusted performance for the portfolio. The portfolio’s beta of 0.78 indicates it will be less risky than the market. The beta is the systematic risk in comparison to the market. Therefore, a beta of 1 means the security or portfolio will move along with the market price. Anything more than 1 such as my investment in Exxon has the possibility of a greater rate of return while posing increased amount of risk.
The Treynor ratio which measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk is calculated by; (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio A ratio of 1 for the Rogers and Target securities shows that the fund has produced more units of return than of risk. However, the portfolio’s ratio is 0. The Sharpe ratio is calculated by subtracting the risk free rate from the rate of return of a portfolio/security and then dividing the outcome by the standard deviation of the portfolio/security. The ratio shows if a portfolio's returns are due to clever decisions or just results of excess risk.
Although one security can gain higher returns than others, it is only a smart investment if the security does not come along with much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed. All the securities I have invested in display positive Sharpe ratios therefore making them sound decisions. I believe the portfolio performed to my satisfaction bringing me a return while being less volatile.