Portfolio Project 1 Harvard Case Solution & Analysis

Portfolio Project 1 Case Solution

Table 2: Descriptive Statistics of Unilever Group Plc

Table 3 shows the descriptive analysis of the Tesco Group Plc Security, in which it has been identified that the mean stock price of Tesco Group Plc is 214.13 with the minimum stock price of 161.29 and the maximum stock price of 248.08. The standard deviation of the stock price is 19.03, while the standard error and median are 0.69 and 218.03, respectively. The standard deviation of the stock is low and the difference between the minimum and maximum Tesco Group Plc stock price is also low, which shows that the daily and yearly dispersion between the returns and stock prices is low in this case.

Table 3: Descriptive Statistics of Tesco Group Plc

Table 4 shows the descriptive analysis of the Glaxo Smith Kline Group Plc Security, in which it has been identified that the mean stock price of Glaxo Smith Kline Group Plc is 1445.61 with the minimum stock price of 1079.42 and the maximum stock price of 1779.61. The standard deviation of the stock price is 167.6 while the standard error and median are 6.08 and 1444.15, respectively. The standard deviation of the stock is low and the difference between the minimum and maximum Glaxo Smith Kline Group Plc stock price is also low, indicating that the daily and yearly dispersion between the returns and stock prices is low in this case.

Table 4: Descriptive Statistics of Glaxo Smith Kline Group Plc

Table 5 shows the descriptive analysis of the Anglo American Group Plc Security, in which it has been identified that the mean stock price of Anglo American Group Plc is 1685.17 with the minimum stock price of 1079.66 and the maximum stock price of 2165.65. The standard deviation of the stock price is 245.84 while the standard error and median are 8.92 and 1676.34, respectively. The standard deviation of the stock is low and the difference between the minimum and maximum Anglo American Group Plc stock price is also low, which shows that the daily and yearly dispersion between the returns and stock prices is low in this case.

Table 5: Descriptive Statistics of Anglo American Group Plc

Performance of the Portfolio

The covariance and correlation between the stocks are presented in the Table 6 of the document, which shows the positive correlation for each stock with the London Stock Exchange. This positive relationship shows that if the asset return of one security will increase; it will increase the asset return of another security, such as: an increase in the asset return of Anglo American Group Plc will increase the asset return of the London Stock Exchange. In addition to this, the correlation of each of the stock with the London Stock Exchange is positive, which also shows the positive relationship between each security with the London Stock Exchange. This positive correlation is below the 0.5 coefficient level, which shows that there is a weak positive relationship between each security and London Stock Exchange.

Table 6: Covariance and Correlation of Each Stock with London Stock Exchange

Capital Asset Pricing Model (CAPM)

It has been assumed that the capital asset pricing model exists and is used to calculate the required rate of return of an investor. For the CAPM, firstly, there is a need to calculate the beta for each stock, which has been calculated by using the formula mentioned at the start of the document. Table 7 of the document shows the beta of each stock, which is lower than 1. This lower beta shows that the selected four securities have lower risks as compared to the market because the market risk is 1 and the four securities risks are lower than 1. After the beta calculations; the required rate of return of each security has been calculated by using the CAPM.

Table 7: Capital Asset Pricing Model (CAPM)

Rationale for the Changes

The changes have been made by reducing the Anglo American from the current portfolio in order to reduce the current variance of the portfolio.

Market Events

To beat the market refers to the phenomenon of earning the returns on the investment that tends to exceed the London Stock Exchange index’s performance. Commonly referred to as London Stock Exchange index; it is one of the most popular and widely known benchmarks of the overall stock market performance of the United Kingdom (UK). Additionally, the London Stock Exchange index is reasonably representative of the markets and economy of the UK. Some investors in the market consider that their portfolio could beat the market when it returns more than the annual average of 7 to 10 percent of the stock market. The speculators and investors always look out for the investment having the potential to beat the market.

Future Events

One of the most effective way of outperforming the market is to take more and more risk. The simple measure of the risk based on the past volatility refers to Beta, which might be used to build a balanced portfolio as well as to measure whether active money managers were just taking on extra risk or beating the market (Fox, 2002). Choosing the low stock beta as it is a less risky component of the portfolio, is an optimal way to beat the market.

Furthermore, another way of outperforming the market is employing a Dynamic Asset Allocation program, which involves shifting a mix of the portfolio between the safe asset and the risky asset so that the expected return of the portfolio would fall between the expected returns on the two assets including safe asset and risky asset. It has been indicated by the historical simulations that the Dynamic Asset Allocation strategy with the use of the one-year treasury bill and levered London Stock Exchange and with the specified minimum return of 15 percent annually, would beat the London Stock Exchange in 58.9 percent from 1928 to 1983, as well as achieve a 10.4 percent compound annual return versus 9.1 percent for the undelivered London Stock Exchange. Moreover, the investor could stipulate any minimum return that does not exceed the safe asset’s return; the higher the minimum return the lower the portfolio proportion are allocated to the risky asset and vice versa (Ferguson, 1986)...........................

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