Construction of a Portfolio Of Three UAE Shares (Dubai Financial Market, Ajman Bank, And Dubai Islamic Bank)
The focus of the report is on the tools used for diversification, the benefits of portfolio management, the analysis of the management and the performance of the portfolio management. The above mentioned UAE shares are listed on the UAE stock exchange hence they have wealth that has to be managed. The management is mostly geared at compensation of one portfolio by another; the technique explains a risk management tool. In most cases, different assets are put together and managed from one point. The style has a benefit in that once a given portfolio gives a negative result, then the other one that has given positive results counters it.
Benefits of Portfolio Diversification
Portfolio Diversification is a risk control technique that puts together a variety of investments within a given portfolio. The benefits of the method give information that will explain a portfolio of various kinds of investment, will yield a higher return and express lower risks than any individual investment within the pool. The technique strives to reduce the risk events in the portfolio. The event can be explained when one portfolio yields a negative result, the other ones neutralize the loss. The following are the benefits of portfolio diversification.
Balancing of Investments
Most investors have the tendency of adding more funds to the winning investment. If one adds funds to the winning asset, then they are likely to be at the top in the market. For instance, if one had added funds to real estate during its top year, then one could have lost during the following year. The money reinvested would have been used in evaluating and analyzing the assets that performed poorly during that year. Balancing ways from winners to losers has been found to be effective. The method also improves the risk-adjusted in the year especially after-tax returns.
Comparison of Investments on the Basis of Risk Adjustment
When giving judgment on the risk adjustment basis, a sole class of assets cannot match the performance of the result of a professionally diversified portfolio. Calculating each investment's Sharpe ratio, gives a comparison of investments on the basis of risk adjustment.
The Technique Corrects Human Bias
Looking at the value of diversification gives the most difficult lesson of investing reason being that it is not intuitive. The fact is that we all use the past to predict the future, but in investing it is hard to make the predictions, most of us depending on the risk tolerance we always add on the winners. The action may not be a good idea especially when the investment is quite uncertain. Diversification will enable neutralizing the risk magnitude to a greater height.
It Enables Asset Choices
Widely diversifying holdings gives an easy task to spread the assets in wider ranges, they are bonds, stocks, minerals, and oil. When we evaluate each of the assets, we find out that they all have their strengths and weaknesses on profits and risks. Maintaining the areas of each holding will help in creating a stable portfolio with increased value in future.
Reducing the Risk of Losing Capital When Investing
Diversification translates the spread of capital across various investments that reduce the total risk. In this case investments made perform differently from one another due to factors like interest rates, current market conditions and currency markets. In the case of the UAE banks, investing in shares and bonds can be beneficial. Smooth and more consistent investment can be achieved by diversifying investments. The following ways can be used to realize diversification. Firstly, diversification defines the spread of risks across the different class of assets, such as fixed interest, cash, the UAE and international shares and property. Another way is within classes of assets such as the purchase of shares across different sectors.
Exchange of Traded Funds
Investing in exchange of traded funds is another benefit. They are open ended investments providing a wide exposure to a portfolio of investment that can make up a specific index such as S&P/ ASX 100 index. The benefit gives a wide view of identifying performing investments and non-performing ones hence make an action plan.
Minimization of Coefficient of Variance as an Investment Strategy
The investment strategy are to minimize the coefficient of variation and beat market. The strategy means evaluating the investment risk that identifies risk as a standard deviation giving data that point to the returns expected. The coefficient is used to measure the volatility of the expected return on an investment. A lower coefficient of variation will indicate a higher return with less risk. The coefficient of variation can be illustrated below.
Coefficient of Variation (CV) = standard deviation
It is useful in calculating the ratio standard deviation represented by the mean, used to compute the degree of variation from a single series of data with the other. It allows investors to determine how much volatility is available in their risks. When the ratio is lower, then the returns are higher.
For example, let me calculate the expected return of a portfolio of two assets:
Asset X, 40% and asset Y, 60%
Expected returns on each asset
E(r X) = 14.5
E(r Y) = 10.5
Thus expected return is
(0.4 x 0.145) + (0.6 x 0.145) = 0.121
We find out that risk management helps in making the returns higher, The risk incurred is directly proportional to the expected returns. Most companies will lay the strategy of the coefficient of variation because it is the most effective and can give the expected results that have the low variance of the returns.
The strategy will make the companies beat the market by registering higher returns. The coefficient of variation can be minimized through the following ways. Investing in many businesses such as bonds, shares, and real estate assets can help in minimizing the coefficient of variation. The coefficient of variation is useful especially when comparing variation differences in experiments. The CV has an inverse relationship with the mean sample.
Description of the Trend of Stock Prices, Volatility of Returns and Summary of Statistics
The trend of the prices can be traced to the period between March 2009 to February 2015 in the three financial institutions. The markets are Dubai Financial Market, Dubai Islamic Bank, and Ajman Bank. In the Dubai financial market we find out that the lowest price was $ 0.75 while the highest was $ 4.25 over that period. The trend was systematic until March 2014 when the prices started falling again.
When we look at the Dubai Islamic Bank, the lowest price was $1.2 while the highest was at $8.5. The result means that the stock in the financial institution is stronger as compared to the result in the Dubai Financial Market. The trend for Dubai Islamic Bank is systematic in increase during the period.
Finally, for Ajman Bank the highest price is $ 3.5 while the lowest is $ 1. The trend is constant at the first dates until November 2012 when it rose, but after March 2014 it started failing again. The graph trend for the three markets reached their peak on March 2014, during this period the markets resulted in the highest prices. This means that the stock in both markets was earning significantly hence increase of the prices. In this period, the markets would use the earnings to invest in other businesses that were not performing well or indicated the signs of improvement.
In a nutshell, the returns for the three markets were 7.96%, 27.82% and 20.30% for Dubai Financial Market, Dubai Islamic Bank, and Ajman Bank respectively. The trend can be interpreted from the stock prices for the three markets. When we describe the trend of correlations of return, Dubai Financial Market had a greater coefficient variance while Dubai Islamic Bank had the lowest at 105.92 and 24.12 respectively. The Dubai Islamic Bank had performed well compared to the other financial institutions.
From the results, we can explain the tools of management in the from the spreadsheet. The average daily expected return is 0.006%, the percentage is lower than the actual one. The difference can be explained by the lower expectations that a security is going to rise due to the risks involved.
The standard deviation explains the low numbers in a given set are spread from one another. A lower standard deviation shows that the numbers are likely to be the same giving a systematic line on a graph. The lower the standard deviation is, the higher the expected returns are. On the other hand, the variance explains the spread in numbers, how the numbers are related to a given set a lower variance means that the numbers are relatively close to each other hence the lower the variance is, the higher the returns are.
Sharpe ratio is another tool used to measure the adjusted risks in the returns. It explains the average on returns in excess of the risk-free rate. Higher Sharpe ratio means that the returns are going to be better. From the results, the Sharpe ratio is 0.0221, the result that explains low returns.
Performance indicator can be explained by the following. Performance indicator shows how a business can be charged and how well they can perform in a given period. Key indicators include unit sales during the period between 1/1/2015 to 16/4/2015, and the sales increased significantly, the trend explains that the companies had improved in sales.
Another performance indicator is the return on investments. When the return on investments is higher it shows that the performance of a company has improved. During the period, there was an increase in the performance of the companies. The result may be due to increased investments and production of more securities.
The market share of the businesses increased over the period, the tool shows that the business was doing better in the market. Better result in the market attracted more investors and hence increased the market share. Low coefficient variance shows that the returns are going to be better; most of the companies strive to keep the CV lower.
In accessing the performance of the portfolio, it shows that the goals have been achieved over the stipulated period. The result was because of the indicators achieved given by the company's performance.
From the above results and explanations, we can conclude that the businesses in average performed well. The results have been well over the period, as an indicator of performance.