Risk and Return Analysis for Efficient Portfolio Selection Essay

Risk and Return Analysis for Efficient Portfolio Selection Essay

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RISK AND RETURN ANALYSIS FOR EFFICIENT PORTFOLIO SELECTION

Keywords: Efficient allocation, Risk and return, Return on investment, Expectations, Investment

1. INTRODUCTION

All investment decisions necessitate consideration of the required return, the expected return, and the estimated risk. Markowitz (1952; 77) states the process of selecting a portfolio may be divided into two stages. The first stage starts with observation and experience and ends with beliefs about the future performances of available securities. The second stage starts with the relevant beliefs about future performances and ends with the choice of portfolio.

The risk to which a company is exposed can be classified into two distinct categories, business and financial risk. According to Rajwade (2000; 303) risk is the uncertainty of outcome, arising from circumstances outside the control of the business, and leading to destabilization of cash flows. Correia et al. (2011; 3-3) states the term risk in financial management, indicates that there is an expectation that there actual outcome of a project may differ from expected outcome.

Risk is the measure of uncertainty about whether an investment will earn its expected rate of return. Risk may also be viewed as uncertainty about future outcomes or the probability of an unfavourable outcome. Risk is present whenever investors are not certain about the outcome an investment will produce.

Return refers to the sum of cash dividends, interest and capital appreciation or loss resulting from an investment. Return on an investment is the financial outcome for the investor. Holding period return (HPR) or holding period yield (HPY) may be used to measure Historical returns

2. PROBLEM STATEMENT

Investors desire an ...


... middle of paper ...


...incurred by them.

4.3 Statistical analysis / User requirements analysis
The data will be obtained will be analysed through statistical modelling. The method of analysis will be structured as following:

 Linear programming formulation and prediction: β as a risk measure
 Fund Selection under uncertainty: Variance and Standard deviation

References

1. Correia C. et al (2011), Financial Management 7th Edition, Juta and Company, Lansdowne, Cape Town.

2. Ho W.J, Tsai C., Tzeng G., and Fang S., 2011. Combined DEMATEL technique with a novel MCDM model for exploring portfolio selection based on CAPM, http://www.elsevier.com/locate/eswa. Date of access: 1 May 2014.

3. Markowitz H.M, Portfolio selection, Journal of Finance 7 (1952) 77.

4. Rajwade A.V. (2000), Foreign Exchange International Finance Risk Management 3rd Edition, Academy of Business Studies, New Delhi



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