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Portfolio Analysis

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FINANCE PORTFOLIO ANALYSIS
FINAL WORK

DESCRIPTIVE ANALYSIS AND APPLICATION OF THE PORTFOLIO THEORY

Abstract

The main objective of the work is to construct, through application of the Portfolio theory, an efficient frontier which represents a set of portfolios with optimum risk-return ratio for ten companies from Mexican IPC. The sample used in this work is composed of the most representative companies in this index. A descriptive analysis of the behavior of the stocks included in this study is carried out using the binomial risk-return, which significantly contributes in selecting the most suitable stocks to be included in the portfolio. The work is concluded with finding an optimal portfolio for a risk adverse investor.
The main conclusions from study are the poor performance of the construction sector, which holds the lowest returns, the highest risk and negative performance ratios, and the usefulness of the theory of portfolios to get a set of portfolios with higher returns and lower risk than the general Mexican IPC index that represents the market. The importance of diversification of assets is also noted.

Keywords: Portfolio theory, Efficient Frontier, Risk-Return, Minimum Variance, Portfolio

Contents 1. Introduction 6 1.1 Introduction 6 1.2 Goals 7 1.3 Methodology 7 1.4 Structure 9 2. Theoretical Framework 11 2.1 Risk and Return 11 2.1.1 Portfolio’s Expected Return 12 2.1.2 Portfolio Risk (Standard Deviation) 13 2.2 Diversification 14 2.3 Covariance 16 2.4 Systematic and Unsystematic Risk 18 2.5 Relation between Risk and Return 18 2.6 Other Concepts 19 2.7 Efficiency of capital markets 20 2.8 Markowitz Model (Modern Portfolio Theory) 20 2.8.1 Formulation of the model 22 2.8.2 Development of the model 23 2.8.3 Choosing the optimal portfolio. 25 2.9 Limitations of Markowitz model 26 2.10...

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