A202 SESSION 2020/2021

BWFN 3033 PORTFOLIO MANAGEMENT

GROUP A
GROUP 14
GROUP ASSIGNMENT 1

LECTURER NAME:

PROF. MADYA DR. RASIDAH BINTI MOHD RASHID

PREPARED BY:

NO NAME MATRIC NUMBER

1. MOHAMAD AIMAN HANIF BIN SAMSUDIN 262738
2. AHMAD AZHARI BIN IHWANTO 264403
3. LEONG MENG YANN 264666
4. MUHAMMAD SHUKRI BINAZAMAN 264763
5. KANOK VHAN A/P YEAN 264811
6. AIN NAZIRAH BINTI MOHAMAD ADNAN 265411

DATE OF SUBMISSION:

29 APRIL 2021
 QUESTION 1X Mean Standard Deviation Covariance
S&P CNX Nifty Index 0.2590 0.3982 0.1790

CNX Bank Index 0.3560 0.4737 0.1790

S&P CNX Nifty Index vs CNX Bank Index

Correlation 0.9488

First of all, S&P CNX Nifty Index has a mean of 0.2590, while the CNX Bank Index has a mean
of 0.3560. Besides that, the standard deviation of the S&P CNX Nifty Index was 0.3982, and the
standard deviation of the CNX Bank Index was 0.4737.

Next, the covariance for these two portfolios is 0.1790. This shows that the two assets are
positively related and move in the same direction.

Meanwhile, the correlation for these two portfolios is 0.9488. Hence, this show that these two
portfolios have a strong correlation. This is because the result was more than 0.5.

Portfolio Return 0.29780

Portfolio Risk 0.41269

The return for these two portfolios is 29.78% while the risk is 41.27%.
QUESTION 2

Mean Standard Deviation Covariance

Gold 0.1870 0.0959 -0.0144

S&P CNX Nifty Index CNX Bank Index

vs Gold vs Gold
Correlation -0.3780 -0.4864

Firstly, the mean for gold is 0.1870 and the standard deviation for gold is 0.0959.

Next, the covariance for S&P CNX Nifty Index and Gold is -0.0144. Meaning that, both of the
asset has a negative correlation in between.

Next, lets proceed to correlation from the table. In comparison between S&P CNX Nifty Index
and Gold, there is negative, -0.3780. According to the relationship stated, one variable increase
tends to be resulting in another variable decreasing. In this case, if index of S&P CNX Nifty
Index increase, gold index tends to drop and vice versa. While, CNX Bank Index has a negative
correlation with gold also, which is -0.4864, meaning that if CNX Bank Index surged, the index
of gold will increase in tandem.

Portfolio Return 0.27370

Portfolio Risk 0.19693

The return for these three-existing portfolios is 27.37% while the risk of portfolio is 19.69%.
From the figure we calculated in question 1, after we included a new set of asset which is gold,
we can see that the portfolio return has been decreased from 29.78% to 27.37% while the
portfolio return is also dropping from 41.27% to 19.69%.

As due to gold asset comes with more stable return and low volatility or unknown risk, it has
diversified the portfolio risk but also lower the overall average return.
For this diversified portfolio combination, it is a good investment for those who are risk adverse
that seeking for stable passive income in long term and lower volatility. They would rather
commit with low uncertainty even if the average outcome of the portfolio is low.
QUESTION 3

Rp−Rrf
Sharpe Ratio=
σp

Rp = Expected return of portfolio

Rrf = Risk-free rate of return

σ p = Standard deviation of portfolio

Question 1

(29.78 %−8.11 %)
Sharpe Ratio=
18.22 %

= 1.1894

Question 2

(27.37 %−8.11 %)
Sharpe Ratio=
25.32%

= 0.7607

The allocation of hedge funds to existing asset classes is 60% (S&P CNX Nifty Index) and 40%
(CNX Bank Index) in investment portfolio stocks having a Sharpe Ratio of 1.1894. A Sharpe
ratio greater than 1 is considered good because it obtains a high return on investment compared
to the risk incurred. The new portfolio allocation has resulted in the Sharpe Ratio declining to
0.7607 from the existing ones, namely 50% (S&P CNX Nifty Index), 30% (CNX Bank Index)
and 20% (Gold). This shows that the investment is not good for investors because the risk that
will be borne is greater.
QUESTION 4

From the data analysis made from the two portfolio we can conclude that Kaushesh need to
diversify their portfolio and add gold into their portfolio. This is because of the lower risk that
they will gain from the second portfolio. Even though they will get 2% less return which is
29.78%from first portfolio and 27.37% from second portfolio, the risk that they will take does
not compensate the amount of extra return they will get which is 41.27% risk (first) and 19.69%
(second). From the covariance calculation we can also deduct that the portfolio is negatively
correlated which means that the portfolio is diversified. As we made the Sharpe Ratio calculation
which determine the average return earned per amount of risk taken or unit of volatility, we can
see that the second portfolio have lower ratio of 0.7607 rather than the first (1.1894). Higher
Sharpe Ratio might seem favourable to investor, but if we see the bigger picture of all the
analysis made, it is better to diversify the portfolio and go for the second portfolio as investor
will take less risk while still gaining good return.