Concepts Of Portfolio Management And Investment Management Commerce Essay

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The paper is an application of concepts of Portfolio Management and Investment Management. In this research paper, a portfolio of 15 assets was constructed with the help of portfolio and investment management concepts. The total 15 assets include 13 equity assets and 2 bond assets. The portfolio has been constructed with an aim of achieving at least an 18% annual return. The 13 equities are taken from four potential sectors which are transportation, technology, retail and utilities.

The companies have been shortlisted on the basis of their financials such as revenues, market capitalizations, P/E and net income. In this paper, the portfolio is constructed for a short period of five weeks. Therefore the past one year's record and data of the assets are given most of the attention. The past one year's stock prices were used to construct the portfolio by using statistical tools such as solver. The FTSE 100 stock was taken as a benchmark to this portfolio.

Once the portfolio is constructed, the paper focuses on monitoring the performance of this portfolio during the five weeks. Each week's price data was noticed and analyzed to actively manage the portfolio. As a result it was found that the average weekly returns of 1.43% and annual returns of 74.77% of the portfolio were drastically more than the average weekly returns of 1.13% and annual returns of 59.88% of the FTSE 100. The portfolio gave more than the expected 18% annual returns.

Sectors:

This fund has been built to invest in four sectors which are currently performing well and are also expected to perform well. These four sectors are transportation, technology, retail and utilities.

The transportation sector plays a major role in the economy. Though this sector was not untouched by the negative impact of recent recession, the prospects of this sector are still good because there has been a surge in public transport usage and a greater demand for effective and integrated transport solutions. This sector is more able to come out of the recessionary impact because of the increasing number of passengers. The sector's outlook is more positive compared to other sectors.

The technology sector has seen many deals in the last 18 months. Now the sector is well prepared for the nest growth. The demand in the technology sector is picking up with the recovery from recent recession. Past mergers and acquisitions has consolidated the sector and given birth to many giants.

The retail market in the UK is set to increase by 15% over the next five years, even though it is facing many challenges, such as a rise in operating costs and credit costs (Prospects, 2011). The demand has picked up now after some signals of recovery. This sector employs a large chunk of the population around the globe. The retail sector also generates about 8% of the GDP of the UK.

The utility sector plays a vital role in the economy. This industry is always in demand and is better able to recover from recession. This is a high fixed cost sector and therefore most of the players in this sector are big groups.

Portfolio Overview:

This fund has invested in two types of assets: Equities and Bonds. The major portion of fund has been invested in equities and a small part has been invested in government securities. There are in total 13 equity assets and 2 government bonds in this portfolio.

Equities:

The list of equity assets is given in the table below.

Names and Symbols of Equities

Name

Symbol

Sector/Industry

Stagecoach Group plc

SGC

Transportation

BBA Aviation plc

BBA

Transportation

The Sage Group plc

SGE

Technology

NEXT plc

NXT

Retail

Supergroup PLC

SGP

Retail

N Brown Group plc

BWNG

Retail

Marks and Spencer Group Plc

MKS

Retail

Sports Direct International Plc

SPD

Retail

Halfords Group plc

HFD

Retail

WH Smith Plc

SMWH

Retail

Centrica PLC

CAN

Utilities

Drax Group Plc

DRX

Utilities

Northern Electric plc

NTEA

Utilities

Bonds:

The list of bond assets is given in the table below.

Names and Symbols of Bonds

Name

TREASURY 5% TREASURY STK 14

TREASURY 5% TREASURY GILT 07/03/18

Financial Analysis:

All of the companies taken for investment have revenues of more than GBP 100 million. Some of the main items from the Income Statements of all of the equities for the recent financial year/recent four quarters are given in the table below.

Important Income Statement Items (Recent Financial Year/Recent Twelve Months)

Sr. No.

Symbol

Quote (15/03/11)

Market Cap

Revenue

Net Income

EBIT

A.

Sector - Transportation

(In Millions)

(In Millions)

(In Millions)

(In Millions)

1

Stagecoach Group plc

SGC

235.20

1,693.72

2,164.40

107.80

177.10

2

BBA Aviation plc

BBA

207.70

987.99

1,183.00

65.00

100.40

B.

Sector - Technology

3

The Sage Group plc

SGE

282.90

3,737.99

1,435.00

227.30

330.00

C.

Sector - Retail

4

NEXT plc

NXT

2,193.00

3,886.00

3,453.70

400.90

574.80

5

Supergroup PLC

SGP

1,474.00

1,182.59

139.40

72.16

22.62

6

N Brown Group plc

BWNG

292.00

818.86

690.00

62.50

97.60

7

Marks and Spencer Group Plc

MKS

381.80

6,051.00

9,536.60

523.00

852.00

8

Sports Direct International Plc

SPD

198.90

1,146.76

1,451.62

89.22

58.03

9

Halfords Group plc

HFD

379.00

798.86

831.60

77.00

112.30

10

WH Smith Plc

SMWH

471.00

673.34

1,312.00

69.00

89.00

D.

Sector - Utilities

11

Centrica PLC

CAN

330.69

17,046.61

22,423.00

1,942.00

3,074.00

12

Drax Group Plc

DRX

448.30

1,635.58

1,648.40

188.40

277.90

13

Northern Electric plc

NTEA

115.00

146.84

288.57

97.17

153.60

Some of the main items from the Balance Sheets of all of the equities for the recent financial year/recent four quarters are given in the table below.

Important Balance Sheet Items (Recent Financial Year/Recent Twelve Months)

Sr. No.

Symbol

Shares Outstanding

Equity

Debt

Current Assets

Current Liabilities

A.

Sector - Transportation

(In Millions)

(In Millions)

(In Millions)

(In Millions)

(In Millions)

1

Stagecoach Group plc

SGC

720.12

12.70

626.20

627.20

645.10

2

BBA Aviation plc

BBA

475.68

482.40

319.20

441.80

404.90

B.

Sector - Technology

3

The Sage Group plc

SGE

1,321.31

1,649.40

249.30

351.20

770.80

C.

Sector - Retail

4

NEXT plc

NXT

177.20

232.30

471.20

1,067.30

832.90

5

Supergroup PLC

SGP

80.23

100.53

1.37

66.97

23.98

6

N Brown Group plc

BWNG

280.43

319.00

230.00

585.90

129.50

7

Marks and Spencer Group Plc

MKS

1,584.86

2,185.90

2,278.00

1,520.20

1,890.50

8

Sports Direct International Plc

SPD

576.55

259.72

337.01

372.11

593.68

9

Halfords Group plc

HFD

210.78

278.50

192.00

220.90

170.40

10

WH Smith Plc

SMWH

142.96

186.00

0.00

285.00

300.00

D.

Sector - Utilities

11

Centrica PLC

CAN

5,154.86

5,819.00

4,036.00

5,551.00

5,268.00

12

Drax Group Plc

DRX

364.84

958.00

127.00

826.30

734.30

13

Northern Electric plc

NTEA

127.69

690.43

359.12

128.67

100.73

Some of the main items from the Cash Flow Statements of all of the equities for the recent financial year/recent four quarters are given in the table below.

Important Cash Flow Statement Items (Recent Financial Year/Recent Twelve Months)

Sr. No.

Symbol

CF from Operation

CF from Investing

CF from Financing

A.

Sector - Transportation

(In Millions)

(In Millions)

(In Millions)

1

Stagecoach Group plc

SGC

216.40

-37.20

-79.90

2

BBA Aviation plc

BBA

151.60

-26.60

-138.20

B.

Sector - Technology

3

The Sage Group plc

SGE

341.50

-24.20

-300.70

C.

Sector - Retail

4

NEXT plc

NXT

452.00

-138.10

-377.20

5

Supergroup PLC

SGP

27.07

-15.74

18.46

6

N Brown Group plc

BWNG

91.70

-11.20

-72.30

7

Marks and Spencer Group Plc

MKS

1,229.00

-529.60

-792.90

8

Sports Direct International Plc

SPD

164.64

-28.62

-30.96

9

Halfords Group plc

HFD

148.10

-91.40

-34.60

10

WH Smith Plc

SMWH

104.00

-28.00

-67.00

D.

Sector - Utilities

11

Centrica PLC

CNA

2,683.00

-1,839.00

-1,677.00

12

Drax Group Plc

DRX

411.10

-102.30

-153.20

13

Northern Electric plc

NTEA

100.82

-82.76

-92.28

All stocks have high positive Cash Flow from Operations as shown in the table above. This shows that all of the companies have efficient operations and generated positive returns for the shareholders through operations. Despite significant positive cash flows from operations, some stocks have negative net cash flow due to high outflows in investing and financing activities. BBA, NXT, MKS and CNA are four stocks which have negative cash flows during the last financial year.

In order to make this cash flow picture clearer, free cash flows to the companies have been calculated in the table below. All the stocks BBA, NXT, MKS and CNA which have negative net cash change in the above table have positive free cash flows as shown in the table below. The stock SGC has positive change in cash of GBP 99.30 million but its free cash flows are negative GBP 218.79 million. Similarly stock SGP has positive cash change of GBP 29.78 million but its free cash flows are negative GBP 25.80 million. Only these two stocks have negative free cash flows. All of the remaining stocks have positive free cash flows.

Free Cash Flows (Recent Financial Year/Recent Twelve Months)

Sr. No.

Symbol

EBIT

EBIT*(1-Tax)

Dep./Amort.

Change in NWC

Capital Exp.

A.

Sector - Transportation

(In Millions)

(In Millions)

(In Millions)

(In Millions)

(In Millions)

1

Stagecoach Group plc

SGC

177.10

115.12

91.90

415.30

10.50

2

BBA Aviation plc

BBA

100.40

65.26

42.20

-99.70

-7.20

B.

Sector - Technology

3

The Sage Group plc

SGE

330.00

214.50

64.60

-32.20

5.10

C.

Sector - Retail

4

NEXT plc

NXT

574.80

373.62

119.30

-48.70

15.20

5

Supergroup PLC

SGP

22.62

14.70

3.31

32.76

11.05

6

N Brown Group plc

BWNG

97.60

63.44

14.30

-6.40

-6.10

7

Marks and Spencer Group Plc

MKS

852.00

553.80

427.90

546.80

-112.00

8

Sports Direct International Plc

SPD

58.03

37.72

50.35

106.21

-24.88

9

Halfords Group plc

HFD

112.30

73.00

24.10

-48.80

-4.60

10

WH Smith Plc

SMWH

89.00

57.85

39.00

4.00

-5.00

D.

Sector - Utilities

11

Centrica PLC

CAN

3,074.00

1,998.10

118.00

-47.00

339.00

12

Drax Group Plc

DRX

277.90

180.64

52.20

-140.70

7.00

13

Northern Electric plc

NTEA

153.60

99.84

48.70

-52.14

78.39

The table below gives information about key financial ratios for all stocks. The stock SGC has very high Return on Equity (ROE) of 848.82% but its Net Margin of 4.98% and EBIT margin of 8.18% are still thin, though not bad even. The company has Earnings per Share (EPS) of 0.15 and Price to Earnings (P/E) Ratio of 15.71. The company has very high debt as shown by its high debt equity ratio in the table below. The BBA stock has good ROE, Net Margin and EBIT margin of 13.47%, 5.49% and 8.49% respectively. It is a low debt stock with P/E of 15.20 and EPS of 0.14.

Key Ratios and Sector Comparison

Sr. No.

Symbol

EPS

ROE

Net Margin

EBIT Margin

P/E

A.

Sector - Transportation

1

Stagecoach Group plc

SGC

0.15

848.82%

4.98%

8.18%

15.71

2

BBA Aviation plc

BBA

0.14

13.47%

5.49%

8.49%

15.20

B.

Sector - Technology

3

The Sage Group plc

SGE

0.17

13.78%

15.84%

23.00%

16.45

C.

Sector - Retail

4

NEXT plc

NXT

2.26

172.58%

11.61%

16.64%

9.69

5

Supergroup PLC

SGP

0.90

71.78%

51.76%

16.23%

16.39

6

N Brown Group plc

BWNG

0.22

19.59%

9.06%

14.14%

13.10

7

Marks and Spencer Group Plc

MKS

0.33

23.93%

5.48%

8.93%

11.57

8

Sports Direct International Plc

SPD

0.15

34.35%

6.15%

4.00%

12.85

9

Halfords Group plc

HFD

0.37

27.65%

9.26%

13.50%

10.37

10

WH Smith Plc

SMWH

0.48

37.10%

5.26%

6.78%

9.76

D.

Sector - Utilities

11

Centrica PLC

CAN

0.38

33.37%

8.66%

13.71%

8.78

12

Drax Group Plc

DRX

0.52

19.67%

11.43%

16.86%

8.68

13

Northern Electric plc

NTEA

0.76

14.07%

33.67%

53.23%

1.51

The SGE stock has good ROE of 13.78%. It has high margins as compared to most of the companies in the portfolio. Its Net Margin is 15.84% and EBIT Margin is 23.00%. The company also has a low debt level. The NXT stock also has extraordinarily high ROE of 172.58% but the margins are 11.61% Net Margin and 16.64% EBIT margin. The debt level of the company is little high. The P/E of 9.69 is comparatively low, although it has high EPS of 2.26 which is favourable to the stock.

The SGP stock has EBIT Margin of 16.23%, lower than the Net Margin of 51.76%. This is due to significant income from non-operative activities. The company's debt level is also very low, as shown by its debt equity ratio in the table above. The ROE of 71.78% is very … and the company is currently trading at 16.39 P/E ratio. The stock BWNG has EPS of 0.22 and good ROE of 19.59%. The Net Margin and EBIT Margin of 9.06% and 14.14% respectively are also good. The P/E ratio is 13.10.

The MKS has high ROE of 23.93%, but the Net Margin of 5.48% and EBIT Margin of 8.93% are not as good as the ROE. The company has a significant but not high level of debt. The EPS is 0.33 and P/E is 11.57. Similarly, SPD also has high ROE of 34.35%, but the Net Margin of 6.15% and EBIT Margin of 4.00% are not as good as the ROE. The EBIT Margin of the company is lower than the Net Margin because of significant non-operative income during the last financial year. The debt level of the company is also significant. The EPS and P/E ratios are 0.15 and 12.85 respectively.

The stock HFD and SMWH both have high levels of ROE of 27.65% and 37.10% respectively, but Net Margins of 9.26% and 5.26% respectively and EBIT Margins of 13.50% and 6.78% respectively are not as impressive as the ROE of both stocks. The P/E ratios of both stocks are 10.37 and 9.76 with an EPS of 0.37 and 0.48 respectively. HFD has some level of debt but there is no debt in the case of SMWH.

The utility sector stock CNA has high ROE of 33.37% whereas other two stocks DRX and NTEA have ROE of 19.67% and 14.07% respectively. The stock NTEA has high EPS of 0.76, whereas the other two stocks CNA and DRX have EPS of 0.38 and 0.52 respectively. The Net Margin of 33.67% and EBIT Margin of 53.23% is high for the stock NTEA, whereas it is 8.66% and 13.71% respectively for CNA and 11.43% and 16.86% respectively for DRX. NTEA has the lowest P/E of 1.51, and the other two stocks DRX and CNA also have low P/E of 8.68 and 8.78 respectively.

Comparative Valuation

Sr. No.

Symbol

P/E

P/E (Sector)

EPS

Value

Price

A.

Sector - Transportation

1

Stagecoach Group plc

SGC

15.71

14.94

0.15

223.65

235.20

2

BBA Aviation plc

BBA

15.20

14.94

0.14

204.15

207.70

B.

Sector - Technology

3

The Sage Group plc

SGE

16.45

17.00

0.17

292.44

282.90

C.

Sector - Retail

4

NEXT plc

NXT

9.69

18.70

2.26

4230.72

2193.00

5

Supergroup PLC

SGP

16.39

18.70

0.90

1681.86

1474.00

6

N Brown Group plc

BWNG

13.10

18.70

0.22

416.77

292.00

7

Marks and Spencer Group Plc

MKS

11.57

18.70

0.33

617.10

381.80

8

Sports Direct International Plc

SPD

12.85

18.70

0.15

289.37

198.90

9

Halfords Group plc

HFD

10.37

18.70

0.37

683.13

379.00

10

WH Smith Plc

SMWH

9.76

18.70

0.48

902.56

471.00

D.

Sector - Utilities

11

Centrica PLC

CAN

8.78

9.55

0.38

359.78

330.69

12

Drax Group Plc

DRX

8.68

9.55

0.52

493.15

448.30

13

Northern Electric plc

NTEA

1.51

9.55

0.76

726.74

115.00

The comparative valuation of each stock has been done on the basis of a P/E multiple of their respective sector. On the basis of that, both transportation sector stocks seem overvalued when we calculated the value by taking the EPS of the last FY but these stocks would actually be undervalued if we take the last four recent quarters' EPS, which is 0.21 (YahooFinance) for SGC and 0.74 (YahooFinance) for BBA. The Technology stock SGE has little upside of 3.37% as per the relative valuation on the basis of the P/E multiple of the technology sector.

All of the stocks of the retail sector are heavily undervalued and have a high upside currently as per the valuation done above. The NXT stock has 92.92% which is the highest among all of the retail stocks. When we took the sector's P/E multiple of 18.70 and the respective EPS of stock and multiplied them, the upside of stocks NXT, SGP, BWNG, MKS, SPD, HFD and SMWH are respectively 92.92%, 14.10%, 42.73%, 61.63%, 45.48%, 80.25% and 91.63%. The utility stock NTEA has a very high upside of 531.95%, whereas other utility stocks DRX and CNA have upsides 10.01% and 8.80% respectively.

Sr. No.

Name

Security

Type

Symbol

Coupon

Coupon

Frequency

(months)

Yield

Maturity

Price

Par

Value

1

TREASURY 5% TREASURY STK 14

Gilt

T514

5.00%

6

1.87%

07 September 2014

110.50

100

2

TREASURY 5% TREASURY GILT 07/03/18

Gilt

T18

5.00%

6

3.00%

07 March 2018

112.50

100

All bond data has been taken from http://www.londonstockexchange.com/exchange/prices-and-markets/retail-bonds/gilts-search.html

 

The two bonds in this portfolio have a coupon rate of 5% which is given two times a year. As per the maturity and current price levels, the yield to maturity of these two bonds T514 and T18 are 1.87% and 3.00% respectively.

Portfolio Construction:

The total amount of GBP 1.00 million was borrowed at 3.11% and would be invested in the assets selected for this portfolio. There are 13 equities and 2 bonds in this portfolio. The portfolio would start on 15th March 2011 and end on 20th April 2011. The benchmark for the portfolio is the FTSE 100 index. The portfolio is expected to give 18.10% annual returns.

Investment Amount (borrowed)

£1,00,00,000

Borrowing Rate

3.11%

Fund Start Date

15 March 2011

Fund End Date

20 April 2011

Number of Equities

13

Number of Bonds

2

GBP 1 Month LIBOR

0.61%

Expected Annual Return

18.10%

Benchmark

FTSE100

Since the portfolio has been set for a short period of 5 weeks, our main focus during the analysis would be on the most recent performance of the assets. In order to construct this portfolio we have taken historical prices of the equity stocks for the period 15th March 2010 to 15th March 2011. This one year historical price data has been used to calculate variance, standard deviation, mean return, coefficient of variation, covariance, and beta which are given in Appendix 2. The calculated values of standard deviation and beta, along with asset allocation weights, are given in the table below.

Sr. No.

Asset

Equity/Bond

Standard Deviation

Beta

Expected Return

Asset Allocation

Weighted Return

1

SGC

Equity

0.0173

0.8825

6.85%

5.03%

0.34%

2

BBA

Equity

0.0164

0.8380

8.00%

7.92%

0.63%

3

SGE

Equity

0.0147

0.8368

9.13%

10.00%

0.91%

4

NXT

Equity

0.0160

0.8311

30.97%

5.40%

1.67%

5

SGP

Equity

0.0322

0.5396

36.00%

3.00%

1.08%

6

BWNG

Equity

0.0180

0.4743

21.36%

9.71%

2.07%

7

MKS

Equity

0.0159

0.9040

20.54%

3.04%

0.62%

8

SPD

Equity

0.0227

0.9901

22.74%

3.00%

0.68%

9

HFD

Equity

0.0171

0.6492

26.75%

8.90%

2.38%

10

SMWH

Equity

0.0141

0.6106

30.54%

10.00%

3.05%

11

CAN

Equity

0.0129

0.6340

8.80%

10.00%

0.88%

12

DRX

Equity

0.0159

0.6274

10.01%

10.00%

1.00%

13

NTEA

Equity

0.0181

-0.2048

26.60%

10.00%

2.66%

14

T514

Bond

0.0000

0.0000

1.87%

2.00%

0.04%

15

T18

Bond

0.0000

0.0000

3.00%

2.00%

0.06%

On the basis of daily returns calculated from one year's price data, daily returns of stocks have been calculated. These daily returns have been used to construct the Variance/Covariance Matrix in Appendix 1. We have used this Matrix and the expected returns given above to construct the Covariance Matrix for the Efficient Portfolio in Appendix 3. We have also used the CAPM model in order to construct efficient portfolio by allocating the optimum level of resources to each of the assets. The following assumptions have been taken in order to construct the Efficient Portfolio.

Minimum 3% fund has to be allocated in each equity.

Maximum 10% fund can be allocated in each equity.

96% fund is allocated to equities and 4% to bonds.

Minimum expected annual return has to be 18%.

The portfolio variance is 0.0001 and standard deviation is 0.0084 with expected returns of 18.10%.

Expected Return of Portfolio

18.10%

Portfolio Variance

0.0001

Portfolio Standard Deviation

0.0084

Portfolio Performance:

Some assets gave positive returns and some assets gave negative returns each week. In week one stocks SPD, HFD and NTEA and Bonds T514 and T18 gave negative returns, whereas all other assets gave positive returns. The stock BWNG gave the highest return this week among all the assets of the portfolio of 10.38%. This stock was followed by SGP which has the second highest return of 8.89% during this week. The reasons behind negative returns in some stocks and bonds are stock specific not market specific because the broad market had an overall gain during this week, as depicted by a 1.18% gain in the FTSE 100 index.

Weekly Returns

Asset

Buy Price

W1

W2

W3

W4

W5

SGC

197.40

3.95%

4.29%

0.19%

-0.37%

10.11%

BBA

202.00

0.89%

0.59%

-0.44%

0.69%

1.07%

SGE

263.00

2.09%

4.10%

0.14%

-4.14%

5.44%

NXT

1,905.00

1.68%

6.61%

-1.65%

3.30%

4.53%

SGP

1,361.00

8.89%

-0.34%

-0.68%

-7.16%

8.22%

BWNG

252.50

10.38%

-5.02%

-1.51%

2.03%

9.77%

MKS

331.90

3.10%

2.66%

-3.16%

6.00%

5.88%

SPD

184.10

-0.81%

4.44%

-0.37%

1.11%

3.54%

HFD

370.60

-1.08%

2.35%

-4.99%

-0.41%

6.76%

SMWH

441.50

2.45%

1.33%

-4.47%

3.61%

3.84%

CAN

322.20

1.18%

-1.04%

2.20%

-2.46%

2.83%

DRX

407.90

0.44%

-3.86%

6.65%

1.05%

5.61%

NTEA

117.00

-0.94%

-2.50%

-0.88%

0.89%

1.77%

T514

110.50

-0.36%

-0.18%

-0.55%

0.46%

0.36%

T18

112.50

-0.44%

-0.18%

-0.81%

0.45%

0.81%

FTSE100

5,695.30

1.18%

2.94%

1.26%

-0.71%

0.97%

During week two 7 assets were down and the remaining 8 assets were up. Stock BWNG, which gave the highest return during last week, gave the highest negative return of 5.02%. The stock NXT was a great performer of this week with 6.61% returns. Both bonds and all three utility stocks were in negative zone during this week.

Week three was the worst week for this portfolio. Out of the total 15 assets, 11 were in negative zone and only 4 assets were in positive zone. The stock DRX gave the highest positive return of 6.65% during this week.

Week four saw some recovery from the bad performance of week three. Only 5 stocks were in downturn, whereas the remaining 10 were in upturn. The stock MKS gave the highest return of 6.00%. Both bonds gave positive returns in this week. The stocks SGC, SGE, SGP, HFD and CNA gave negative returns during this week.

The last week five was a great week for all the assets, when they all gave positive returns. 7 assets gave returns above 5% during this week. SGC stock gave the highest return of 10.11% and BWNG stock gave the second highest return of 9.77% during this week.

If we look at the overall return of each asset during all five weeks then only 3 assets (NTEA stock and T514 and T18 bonds) have given overall negative returns during the five weeks. All the other assets have positive returns. Some of the stocks gave more than 15% returns in these five weeks. The stock SGC gave the highest return of 19.15% in these five weeks. Stocks NXT, BWNG and MKS gave returns of 15.12%, 15.64% and 15.03% respectively in these five weeks.

Portfolio Performance Vs Benchmark:

The overall performance of the portfolio during these five weeks was better than the overall performance of the benchmark FTSE 100 index. In week one the FTSE 100 gave only 1.18% return but the portfolio gave a significantly higher 2.11% return. During weeks two and three the FTSE 100 gave a higher return than the portfolio. In week three, the portfolio gave a negative return of -0.50%, whereas the FTSE 100 gave a 1.26% return. Weeks four and five were again good for the portfolio. The portfolio was in a positive zone during week four and gave a 0.29% return as compared to a -0.71% return of the FTSE 100. The portfolio gave the highest return of 4.89% of all weeks during week five. The FTSE 100 return was 0.97% during the same week.

W1

W2

W3

W4

W5

Portfolio Weekly Return

2.11%

0.34%

-0.50%

0.29%

4.89%

FTSE 100

1.18%

2.94%

1.26%

-0.71%

0.97%

The overall return of the portfolio during these five weeks was 7.17% as compared to the FTSE 100's 5.74%. After converting these returns to annual returns, the portfolio has 74.77% annual returns and the FTSE 100 has 59.88% annual returns. The average weekly return of the portfolio is 1.43% as compared to 1.13% for the FTSE 100.

Portfolio

FTSE 100

Overall Return

7.17%

5.74%

Annual Return

74.77%

59.88%

Average Weekly Return

1.43%

1.13%

The weekly returns of the portfolio and the FTSE 100 are also presented in the graph given below.

Conclusion:

The portfolio has outperformed the FTSE 100 in overall returns during the five week period. The portfolio and the FTSE 100 followed a dissimilar trend. The portfolio return decreased in week two but the FTSE 100 return increased during that period. In week three both the FTSE 100 and the portfolio followed the same trend. In week four both the FTSE 100 and the portfolio followed opposite trends. The return of the portfolio increased in week four whereas the return of the FTSE 100 decreased in week four. Week five produced the same trend for both the FTSE 100 and the portfolio.

The portfolio was constructed with an aim of at least 18.10% returns, whereas it has given drastically higher annual returns of 74.77%, which is more than the annual returns of 59.88% which the benchmark FTSE 100 gave.

Appendix 1:

Variance/Covariance Matrix

Population Variance/Covariance Matrix

 

SGC

BBA

SGE

NXT

SGP

BWNG

MKS

SPD

HFD

SMWH

CAN

DRX

NTEA

SGC

0.00030

0.00011

0.00010

0.00010

0.00005

0.00008

0.00010

0.00012

0.00011

0.00008

0.00008

0.00007

0.00000

BBA

0.00011

0.00027

0.00011

0.00011

0.00006

0.00008

0.00011

0.00011

0.00010

0.00009

0.00008

0.00006

-0.00003

SGE

0.00010

0.00011

0.00022

0.00009

0.00007

0.00008

0.00011

0.00011

0.00008

0.00006

0.00007

0.00007

0.00000

NXT

0.00010

0.00011

0.00009

0.00026

0.00010

0.00009

0.00016

0.00016

0.00008

0.00008

0.00008

0.00006

-0.00004

SGP

0.00005

0.00006

0.00007

0.00010

0.00103

0.00006

0.00009

0.00007

0.00006

0.00008

0.00003

0.00006

0.00004

BWNG

0.00008

0.00008

0.00008

0.00009

0.00006

0.00032

0.00009

0.00012

0.00010

0.00008

0.00004

0.00004

-0.00001

MKS

0.00010

0.00011

0.00011

0.00016

0.00009

0.00009

0.00025

0.00016

0.00007

0.00008

0.00009

0.00007

-0.00002

SPD

0.00012

0.00011

0.00011

0.00016

0.00007

0.00012

0.00016

0.00051

0.00010

0.00009

0.00008

0.00005

0.00005

HFD

0.00011

0.00010

0.00008

0.00008

0.00006

0.00010

0.00007

0.00010

0.00029

0.00007

0.00007

0.00005

-0.00002

SMWH

0.00008

0.00009

0.00006

0.00008

0.00008

0.00008

0.00008

0.00009

0.00007

0.00020

0.00005

0.00004

-0.00003

CAN

0.00008

0.00008

0.00007

0.00008

0.00003

0.00004

0.00009

0.00008

0.00007

0.00005

0.00016

0.00007

-0.00001

DRX

0.00007

0.00006

0.00007

0.00006

0.00006

0.00004

0.00007

0.00005

0.00005

0.00004

0.00007

0.00025

-0.00002

NTEA

0.00000

-0.00003

0.00000

-0.00004

0.00004

-0.00001

-0.00002

0.00005

-0.00002

-0.00003

-0.00001

-0.00002

0.00033

FTSE100

0.00011

0.00010

0.00010

0.00010

0.00006

0.00006

0.00011

0.00012

0.00008

0.00007

0.00008

0.00007

-0.00002

Appendix 2:

Table for Variance, Standard Deviation, Mean Return, Coefficient of Variation, Covariance and Beta

 

Statistical Data

 

SGC

BBA

SGE

NXT

SGP

BWNG

MKS

SPD

HFD

SMWH

CAN

DRX

NTEA

Variance

0.0003

0.0003

0.0002

0.0003

0.0010

0.0003

0.0003

0.0005

0.0003

0.0002

0.0002

0.0003

0.0003

Standard Deviation

0.0173

0.0164

0.0147

0.0160

0.0322

0.0180

0.0159

0.0227

0.0171

0.0141

0.0129

0.0159

0.0181

Mean Return

0.05%

0.05%

0.04%

-0.01%

0.42%

0.06%

-0.02%

0.24%

-0.08%

-0.02%

0.04%

0.04%

0.03%

Coefficient of Variation

36.53

36.07

41.96

195.19

7.74

30.56

74.74

9.45

21.29

78.84

29.56

40.54

60.20

Covariance

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0001

0.0000

Beta

0.8825

0.8380

0.8368

0.8311

0.5396

0.4743

0.9040

0.9901

0.6492

0.6106

0.6340

0.6274

-0.2048

Appendix 3:

Covariance Matrix for the Efficient Portfolio

Border-Multiplied Covariance Matrix for the Efficient Portfolio with mean return of 18%

Weights

0.0503

0.0792

0.1000

0.0540

0.0300

0.0971

0.0304

0.0300

0.0890

0.1000

0.1000

0.1000

Weights

 

SGC

BBA

SGE

NXT

SGP

BWNG

MKS

SPD

HFD

SMWH

CAN

DRX

0.0503

SGC

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0792

BBA

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.1000

SGE

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0540

NXT

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0300

SGP

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0971

BWNG

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0304

MKS

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0300

SPD

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.0890

HFD

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.1000

SMWH

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.1000

CAN

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.1000

DRX

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.1000

NTEA

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.00000

0.96

 

0.00000

0.00001

0.00001

0.00000

0.00000

0.00001

0.00000

0.00000

0.00001

0.00001

0.00001

0.00001

Appendix 4:

Assumptions

Stocks with more than GBP 100 million Net Income have been sort listed.

Stocks with Price to Earnings multiple less than Sector's P/E multiple have been sort listed.

Stocks with Net Margin higher than Sector's Net Margin have been sort listed.

The tax rate is taken as 35% to calculate Free Cash Flows.

All data has been taken from Annual Report, YahooFinance, GoogleFinance and Reuters.

Minimum 3% fund has to be allocated in each equity.

Maximum 10% fund can be allocated in each equity.

96% fund is allocated to equities and 4% to bonds.

Minimum expected annual return has to be 18%.

Appendix 5:

Price Movement of Equity Assets of the Portfolio

Date

SGC

BBA

SGE

NXT

SGP

BWNG

MKS

SPD

HFD

SMWH

CAN

DRX

NTEA

FTSE100

15-03-2011

197.40

202.00

263.00

1,905.00

1,361.00

252.50

331.90

184.10

370.60

441.50

322.20

407.90

117.00

5,695.30

W0

16-03-2011

197.10

198.20

258.70

1,893.00

1,382.00

262.10

331.21

181.70

357.90

440.30

317.50

409.50

117.00

5,598.20

17-03-2011

200.60

201.70

260.30

1,952.00

1,435.00

263.00

335.10

181.00

364.50

446.00

318.40

409.90

113.75

5,696.10

18-03-2011

202.90

200.00

260.50

1,940.00

1,509.00

268.30

334.80

180.00

362.00

451.10

328.50

420.00

113.75

5,718.10

21-03-2011

204.90

203.70

267.60

1,944.00

1,525.00

274.10

342.00

187.10

368.20

459.40

327.80

415.40

113.50

5,786.10

22-03-2011

205.20

203.80

268.50

1,937.00

1,482.00

278.70

342.20

182.60

366.60

452.30

326.00

409.70

115.90

5,762.70

W1

23-03-2011

205.20

202.00

269.30

1,965.00

1,510.00

273.10

345.50

188.10

370.00

449.60

317.60

392.20

113.50

5,795.90

24-03-2011

208.00

203.50

272.70

2,043.00

1,506.00

272.10

358.10

190.30

386.70

455.10

323.00

371.90

113.50

5,880.90

25-03-2011

209.90

204.40

272.00

2,019.00

1,501.00

274.60

351.10

196.10

386.00

450.90

321.80

387.40

113.50

5,900.80

28-03-2011

210.40

205.90

275.00

2,024.00

1,500.00

269.00

353.30

190.40

382.00

454.00

323.00

397.10

113.50

5,904.50

29-03-2011

214.00

205.00

279.50

2,065.00

1,477.00

264.70

351.30

190.70

375.20

458.30

322.60

393.90

113.00

5,932.20

W2

30-03-2011

214.50

204.80

280.20

2,011.00

1,474.00

266.90

340.70

194.70

359.30

445.00

330.70

395.10

112.50

5,948.30

31-03-2011

215.40

197.80

278.10

1,980.00

1,458.00

253.70

336.70

181.50

348.20

433.80

325.30

396.50

112.00

5,908.80

01-04-2011

216.00

204.00

280.80

2,000.00

1,460.00

253.00

338.90

183.70

350.80

439.90

330.20

407.00

113.75

6,009.90

04-04-2011

217.60

202.00

277.80

2,046.00

1,486.00

259.70

342.30

186.30

353.86

439.80

331.60

415.30

112.00

6,017.00

05-04-2011

214.40

204.10

279.90

2,031.00

1,467.00

260.70

340.20

190.00

356.47

437.80

329.70

420.10

112.00

6,007.10

W3

06-04-2011

215.70

203.70

275.80

2,096.00

1,481.00

269.00

360.60

188.80

368.60

442.90

323.80

419.40

112.00

6,041.10

07-04-2011

213.00

204.10

275.00

2,052.00

1,435.00

263.00

356.90

183.20

350.00

442.30

319.60

413.20

112.00

6,007.40

08-04-2011

212.80

205.40

275.80

2,070.00

1,435.00

266.00

359.60

193.20

356.20

449.10

320.30

420.70

112.47

6,055.80

11-04-2011

212.80

205.00

275.00

2,087.00

1,412.00

267.00

359.50

194.00

355.00

450.80

324.80

421.60

113.00

6,053.40

12-04-2011

213.60

205.50

268.30

2,098.00

1,362.00

266.00

360.60

192.10

355.00

453.60

321.60

424.50

113.00

5,964.50

W4

13-04-2011

217.70

201.00

275.40

2,149.00

1,432.00

280.00

367.20

193.60

357.80

450.70

327.10

432.00

113.95

6,010.40

14-04-2011

228.80

202.60

275.00

2,161.00

1,466.00

280.20

370.80

196.30

370.10

475.10

328.50

434.00

112.00

5,963.80

15-04-2011

229.80

203.10

278.00

2,205.00

1,458.00

286.40

374.50

198.00

370.00

470.90

329.30

442.20

115.00

5,996.00

18-04-2011

225.90

202.20

274.60

2,180.00

1,458.00

284.10

370.80

196.60

371.00

470.70

320.20

435.80

112.00

5,870.10

19-04-2011

227.20

204.30

276.70

2,169.00

1,464.00

287.50

376.50

196.00

370.90

470.00

326.40

440.10

114.00

5,896.90

20-04-2011

235.20

207.70

282.90

2,193.00

1,474.00

292.00

381.80

198.90

379.00

471.00

330.69

448.30

115.00

6,022.30

W5

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