Investment Portfolio Analysis

Posted: August 26th, 2021

Finance Project: Investment Portfolio Analysis

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Finance Project: Investment Portfolio Analysis

Introduction

Selecting an appropriate portfolio for implementing an investment program requires a detailed evaluation of the available investment options. Notably, an investment portfolio refers to a set of selected assets that an investor is holding, for example, stocks, bonds, options, among others. In this assessment, the aim is to analyze selected companies from Saudi Arabia. An investor Sara is an interest to invest in the shares of these companies,given that they assure her ofa 20% return. Sara has a yearly income of SR 360,000. She is aged 35 years and has 2 children; 17 and 12 years old. The subsequent parts of the paper perform this assessment to establish an appropriate investment portfolio for the investor. The focus is on two Saudi Arabian and one foreign company, namely; Wegaya, National Agricultural Development Corporation (NADC), and 3M Companies.

Analysis and Interpretation

Investment Portfolio Selection Analysis

Sara’s investment expectation return is 20% though she would prefer a portfolio comprising of risk-free investments, local companies, and international firms. The analysis reveals that the only company that offers the expected rate of return is the National Agricultural Development Company (NADC). Hence, her investment option would be limited only to this company.However, it is advisable to spread the risk through investing in the various portfolios. In this case, the standard deviation is used to show how the data from these companies are spread out. When the standard deviation is high, it implies that different portfolios are widely distributed hence not suitable to invest in that particular combination or portfolio (Wen et al., 2014). On the contrary, when the standard deviation is low, then the investment options on average are close to each other and will collate well. Therefore, the analysis shows that Sara should invest in 3M Company as it has the lowest standard deviation of 3.19%. As such, its stocks are less sparse hence limited exposure to risks. 

Correlation Analysis

Further to the above exploration, correlation analysis was done between the different portfolios options. Correlation data shows an investor the possible way to diversify and hedge risk in various portfolios. A portfolio with a high correlation is riskier than the one with low correlation information. It implies that when one stock falls, then there is a probability that the others will fall with a similar amount.

Table 1: correlation between different portfolios

Table 1 above table shows that Sara should invest in Weqaya and 3M Companies. The portfolio has the lowest risk as represented in correlation results of -13.48%. In comparison,NADC and T-bill possess the most significant risk of 70.18%.

Figure 1: efficient portfolio frontier

Figure 1 is an efficient portfolio frontier that summarizes the anticipated distribution. According to the figure, the dynamic portfolio is attained where the risks are low or moderate with maximum returns. At an anticipated 20% returns, the risk level would be at 7.5%.

Conclusion

The analysis looked at three major companies that could give the investor a required portfolio for investment with an assured return of 20%. The critical investment qualities examined are equity performance and returns. Across the three companies, NADC offers the appropriate choice to implement the investment project. The company, with assured equity return of 36.34%, distributing the investment across its assets, would assure the desired returns. However, since there is a need to spread the risks that accompany portfolio investment, Sara will have to distribute the risks accordingly. Correlation analysis was used to identify the appropriate distribution. 

Lessons Learned

The analysis of portfolio investment has been an informative concept in my career as a future financial analyst. In this case, I learned that in any investment, there is a need for an adequate study of the available options to make the appropriate selection. I understood that diversification could be executed using correlation analysis and utilization of standard deviation to attain appropriate distribution criteria of assets.

References

Tawadul. (2020). Home. Tadawul.com.sa. Retrieved 18 March 2020 from             https://www.tadawul.com.sa/wps/portal/tadawul/home/

Wen, X., Guo, Y., Wei, Y., & Huang, D. (2014). How do the stock prices of new energy and fossil fuel companies correlate? Evidence from China. Energy Economics, 41, 63-75.