Investment management strategies Essay Example | Topics and Well Written Essays - 2000 words

Investment management strategies - shew ExampleThe correlation coefficient between the daily stock return in separately portfolio is also appeard and combined with the type deviations in a co divergence matrix to calculate the variance and standard deviation for each portfolio. Sensitivity analysis is also carried out by changing the weights of each stock in the portfolio to take heed how the performance changes.The variance and thus the standard deviation are far more difficult to calculate because the variance of a portfolio is not simply a weighted modal(a) of the individual variances of the stocks included in the portfolio except for the special case where the individual stock returns are uncorrelated with one another. The variance for a two stock portfolio is given byWe need to set up a covariance matrix to environ covariance matrix to be able to calculate the 1variance and standard deviation for a portfolio of more than two stocks. For a three stock portfolio the borde red covariance matrix end be written as follows (Bodie et al., 2002)The portfolio variance is cipher from the above nine terms by multiplying the bordered weights by the corresponding covariance and then summing the different terms. The standard deviation is calculated by taking the square root of the variance. From the table above, the variance is given by(3) and the standard deviation of the portfolio is given by(4)The covariance matrix in table 1 above can be extended to any number of stocks.Haven discussed how to calculate the expected return on portfolio, the variance and standard deviation we now apply the above models to the U.S and Australian portfolios.Std. Dev (%)Ave Ret (%)Citi Group Inc.3.58-0.03American persuade2.990.26Motorola Inc2.25-0.30Boeing Co.1.85-0.38McDonalds bay window1.45-0.44Coca Cola0.91-0.34Table two above show the standard deviation and average return of each of the stocks included in the U.S portfolio over the period under study (details of the calcu lations are prepare in the attached excel file). To be able to calculate the covariance between the different stocks, we need to do the correlation coefficients between the different stocks. We use the correlation function in Excel to calculate the correlation coefficient between the different stocks. Doing this we obtain the following correlation matrix for the different stocksTable 2 correlation coefficient matrix (U.S Portfolio)Citigroup Inc.American ExpressMotorola IncBoeing Co.McDonalds CorpCoca ColaCiti Group Inc.1.000.900.540.740.780.25American Express0.901.000.640.780.870.34Motorola Inc0.540.641.000.370.530.23Boeing Co.0.740.780.371.000.720.16McDonalds Corp0.780.870.530.721.000.31Coca Cola Co.0.250.340.230.160.311.00To obtain the covariance matrix we use the following formula formula to calculate the