It is very important for a company to identify the associated risks, understand the causes of risks and find out the way to minimize the risks and how these can affect the required return by investors in order to achieve its objectives.
The objective of this report is to consider and calculate the return and risks characteristics of the two investment funds managed by Thompson Asset Management. Information through standard deviation, correlation, beta calculation, Sharp ratio, Treynor ratio Jensen's Alpha, Tracking Error and Information Ratio have been obtained to prepare the report.
Table of Contents
Introduction:
Executive Summary:
Return and risk characteristics of ProIndex fund
Risk and return features of ProValue fund and compare with S&P 400
Different level of investment in the ProValue fund:
Active Vs Passive Investment
Active investment
The benefits of active investment
The drawbacks of Active Investment
Passive Investment:
The benefits of passive investment
The drawbacks of Passive Investment
Objectives and Topics
The objective of this report is to evaluate and calculate the return and risk characteristics of two specific investment funds managed by Thompson Asset Management, utilizing performance measures such as standard deviation, beta, Sharpe ratio, and Information Ratio to assess their market risk and performance.
- Calculation of holding period returns for investment funds.
- Risk measurement using standard deviation and systematic risk (beta).
- Comparative analysis of risk-adjusted returns (Sharpe, Treynor, and Jensen's Alpha).
- Portfolio optimization and weight allocation using variance-covariance matrices.
- Critical comparison of active versus passive investment strategies.
Excerpt from the Book
Active investment
The purpose of active investment is to outperform a given bond or equity market that is frequently represented by index. Moreover, beating the return of defined benchmark or a particular market index is the purpose of an actively managed fund as well (The Guardian, 2012). The investor who follows active investment strategy chooses individual securities to buy and sell normally based on fundamental research. However, responding to the changing market conditions is the single best possible character of active investment strategy. (Bodie, Kane, and Marcus, 2011)
At this moment, ProValue funds is being managed by Thompson based on active investment strategy as the company planning to invest $20m in additional companies where the company was already considering the purchase of two mid-cap stocks ATO and CNO that the analyst had recommended.
As ProValue is based on active investment strategy it can have the following risks and benefits.
Summary of Chapters
Introduction: This section defines the importance of risk management in investment and outlines the metrics used in the report to evaluate the two managed funds.
Executive Summary: This chapter provides a high-level overview of the performance findings for both the ProIndex and ProValue funds alongside a summary of the investment strategy debate.
Return and risk characteristics of ProIndex fund: This section details the return and systematic risk assessment of the ProIndex fund compared to the S&P 500 benchmark.
Risk and return features of ProValue fund and compare with S&P 400: This analysis focuses on calculating the return and risk metrics for the ProValue fund, specifically highlighting issues regarding portfolio additions and their impact on return calculations.
Different level of investment in the ProValue fund: This chapter discusses portfolio optimization, historical statistics, and the use of the Excel Solver tool to determine efficient weights for 11 stocks.
Active Vs Passive Investment: This chapter explores the ongoing debate between active and passive management, outlining the specific benefits and drawbacks of each approach.
Active investment: This sub-chapter focuses on the purpose of active strategies, including the potential for outperformance and the requirement for depth research.
The benefits of active investment: This sub-chapter lists the advantages of active strategies, such as research insights and defensive repositioning capabilities.
The drawbacks of Active Investment: This sub-chapter addresses the challenges of active management, primarily focusing on high expenses and the lack of guaranteed outperformance.
Passive Investment: This sub-chapter describes the passive strategy, defined by the goal of replicating broad market index performance.
The benefits of passive investment: This sub-chapter highlights the core benefits of passive investing, specifically diversification, simplicity, and low operating costs.
The drawbacks of Passive Investment: This sub-chapter discusses the limitations of passive strategies, including total market risk and lack of flexibility during market declines.
Keywords
Portfolio Management, Return, Risk, Standard Deviation, Beta, Sharpe Ratio, Jensen's Alpha, Tracking Error, Information Ratio, Active Investment, Passive Investment, Asset Allocation, Systematic Risk, Market Benchmark, Diversification.
Frequently Asked Questions
What is the primary focus of this report?
The report focuses on evaluating the risk and return characteristics of two specific funds, ProIndex and ProValue, managed by Thompson Asset Management.
What are the central themes discussed in the analysis?
The central themes include financial performance measurement, systematic risk calculation, portfolio optimization, and the comparison between active and passive investment strategies.
What is the main research goal of the work?
The primary goal is to assess whether the risk taken by the managed funds is adequately compensated by their achieved returns relative to their respective market benchmarks.
Which scientific methods are employed for the evaluation?
The report uses statistical methods including standard deviation, correlation analysis, beta calculation, the Capital Asset Pricing Model (CAPM) for Jensen's Alpha, and optimization via variance-covariance matrices.
What is covered in the main body of the document?
The main body covers the detailed performance calculations for ProIndex and ProValue, portfolio optimization exercises, and a critical analysis of active versus passive investment management.
Which keywords best characterize this work?
The work is best characterized by terms like Portfolio Management, Risk-Adjusted Return, Active vs. Passive Investment, and Asset Allocation.
How does the author calculate daily holding period returns?
The author uses the formula: HPR = (End value / beginning value) - 1, ensuring adjustments for additional security purchases during the period.
Why is the Information Ratio significant for the ProValue fund?
The Information Ratio of 2.4617 is considered exceptional, indicating that the fund effectively compensates for the associated risks through its active management strategy.
What role does the Excel Solver tool play in this report?
The Solver tool is used to optimize portfolio variance given specific constraints, such as a desired return range and non-negative weights for stock assets.
- Citation du texte
- Md Kamrul Islam (Auteur), 2015, Portfolio Management. Return and risk evaluation, Munich, GRIN Verlag, https://www.grin.com/document/461501
