PORTFOLIO RISK AND PORTFOLIO RISK AND RETURN RETURN prepared by :

hocine boughezla hamad –akhmedov davran

UUM-2009

OULTLINEOULTLINE Introduction ObjectivesCompany backgroundRecommendationKey Concepts and SkillsThe risk and return of this portfolioPortfolio's analysisConclusion

Introduction Introduction

In modern portfolio theory there is a trade-off between risk and return for many years , investment advisers and investment managers focused on return with the occasional caveat subject to risk, while the risk related to individual companies can be removed by diversification

We show you simple portfolio including two companies from the same industry of traveling

objectivesobjectives

the purpose is to determine risk and return of the portfolio for operating on the efficient frontier portfolio, maximize expected return and minimize risk .

addition optimizes to make recommendations to their investor

The portfolio of individual stocks will help us to reduce the overall risk and possibly increasing rate of return

COMPANYCOMPANYBACKGROUNDBACKGROUND

COMPANYCOMPANYBACKGROUNDBACKGROUND

Air AsiaAir Asia

The airline was established in 1993 and started operations on 18 November 1996

Air Asia had large fleet ( more than 72 aircrafts) .

By May 2008, the airline had flown 55 million cumulative passengers

Air Asia operates over 200 flights a day, to over 75 domestic and international routes

Malaysia AirlinMalaysia Airlineses

Was established and commenced as Malayan Airways Limited (MAL) on 12 October 1937.

connects nearly 50,000 passengers daily to some 100 destinations worldwide across 6 continents .

Holds a lengthy record of service and best practices excellence, having received more than 100 awards in the last 10 years

RecommendationEfficiency creates savings which are then passed

on to guests so that affordable air travel can become a reality. Through the philosophy of ‘Now Everyone Can Fly’, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport

With its dedicated team of 19,000 employees worldwide, Malaysia Airlines will continue to soar for many more years to come as it transforms into The World’s Five Star Value Carrier.

Key Concepts and SkillsKnow how to calculate expected returnsUnderstand the impact of diversificationUnderstand the risk-return trade-offSteps calculation Expected Returns and Variances

◦ Expected returns◦ Calculating the variance

Portfolios◦ Portfolio weights◦ Portfolio expected returns◦ Portfolio variance◦ Correlation and Diversification

RISK & RETURNRISK & RETURNRISK & RETURNRISK & RETURN

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1

)]E(R)[RP(

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i

Variance

Variance Deviation Standard

ma

Covam

Correlation: ram=

The risk and return of this portfolioComputation for Individual Stock

ASSETExpected Return

Standard

Deviation

Covariance

Correlation

AIRASIA 0.02132 0.06459

0.00388 0.43765M AIRLINE

S0.02269 0.13738

PORTFOLIO RISK-RETURN PORTFOLIO RISK-RETURN PLOTS FOR DIFFERENT PLOTS FOR DIFFERENT

WEIGHTS WEIGHTS

Constant Covariance with Different Weight Proportion

CASE AIRASIAM

AIRLINESE(Rport(a,m)

)σport(a,m)

A 0.00 1.00 0.02269 0.13738B 0.20 0.80 0.02241 0.11614C 0.40 0.60 0.02214 0.09657D 0.50 0.50 0.02200 0.08776E 0.60 0.40 0.02187 0.07991F 0.80 0.20 0.02160 0.06832G 1.00 0.00 0.02132 0.06459

Portfolio's analysis

we will use the probability distribution for the returns on stocks Air Asia and Malaysia Airlines.

we know that the expected return on Stock A is 2.13% and on Stock M is 2.27% the variance on Stock A is 0.00417, on Stock M is 0.01887, the standard deviation on Stock M is 0.06459, and the standard deviation on Stock A is 0.13738.

Correlation coefficient 0.43765 Correlation more than (0) means that the returns

of the two assets always move in the same direction and they are perfectly positively correlated .

ConclusionConclusion1. The total risk of a portfolio has no simple relation to the

total risk of the assets in the portfolio.2. Recall the variance of a portfolio equation For two assets,

you need two variances and the covariance3. Most investors look for 2 main objectives in forming a

portfolio: To obtain a large expected return and a small variance and standard deviation.

4. These companies could then use this model to reallocate assets annually or monthly , to make sure changes in the risk of the assets and correlations between the assets are still maximizing their required return while minimizing the portfolio variance

5. We choose case G with lower coefficient of variances which is 3.02915 where 100% of our investment goes to Air Asia with expected of return of 2.13%.

THE END

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