Financial Portfolio Analysis

Performance Analysis

The first data obtained from the first portfolio is the variance-covariance (VCV) analysis. From this an assumption was made that risk factor returns are always normally distributed when they are joint together and that the change in portfolio value is linearly dependent on all risk factor returns. (Hedge Funds Consistency Index, 2010)

The measurement of how the actual returns of a group of securities making up a portfolio fluctuate. Portfolio variance looks at the standard deviation of each security in the portfolio as well as how those individual securities correlate with the others in the portfolio. In other words, portfolio variance looks at the covariance or correlation coefficient for the securities in the portfolio. Generally, the lower the correlation between securities in a portfolio, the lower the portfolio variance is (Investopedia.Com, 2010).

Covariance measures of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely (Investors.Com, 2010).

One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable (Investors.Com, 2010).

Portfolio 1

Standard Deviation: 0.00968197

Portfolio 1

From the first portfolio we are able to observe that CIMB Group has an inverse relationship with Dutch Lady as these two have a negative covariance of -0.00000379. For an investor which prefers a diversified portfolio, they may then choose to invest in these two assets as it will be less risky. Because covariance numbers cover a wide range, the covariance is normalized into the correlation coefficient, which measures the degree of correlation, ranging from -1 for a perfectly negative correlation to +1 for a perfectly positive correlation. An...