Project Investment Analysis
Table of
Contents
Introduction:
The world economy
is large which is sum up
of all nations’ economy. It is growing and an
important part of the world. In economy, there are various segments of factors which
play an important role in defining and pushing the economy to grow. One of them
is financial markets. The economy
runs on demand, supply,and these two factors affected by the investment,
spending and money creation. Financial markets help
in channeling
the fund one
individual to another and helps in money creation. Financial markets play a
vital role in the economy as it provides a
platformfor
the individuals and organization to find
sources of fund and to make the investment.
The financial market consists of capital
market and money market.(Giordano,
2014)
The capital market has markets for stocks, bonds, hedge
funds, mutual funds etc. Firms or companies access this financial market to get
capital. The accessibility and liquidness of international financial market allow companies to get capital at very low cost
and grow. The global financial market
provides cheap access to capital to the organizations and opportunities to the investor to earn some returns on their ideal money. These
activities help in the growing economy of
any nation.While dealing with investment and
leverage in the global financial market, there isa certain risk
involved in it. These are Default risk, liquidity risk, systematic
risk, forex risk,andanother financial related risk.(Giordano,
2014)
These risk
resulted in some innovative and hybrid financial product to come into
existence. Their primary roles become to mitigate the risk involved the financial transaction done in the
financial markets.
Portfolio section and efficient frontier field of
portfolio management. The portfolio selection is based on the risk and
return concept. The portfolio selection is about selecting the different
financial assets and combining them to make a portfolio of securities. In other
words, it is a process wherein investors or portfolio managers choose
securities based on their risk and return profile. In selection, the investor has to consider the risk and return of
the particular securities of assets class.
The portfolio selection is used as a tool to diversify the portfolio and
reduce the risk of the entire portfolio of the securities(Bodnar, 2009) .
The second
concept in the financial market and especially in the profile management is the efficient frontier. The different types
of securities and their combination gives different level of returns to the
investors. The efficient frontiers represent the best possible selection of
securities and when they are combined
into the portfolio gives the maximum returns to the investors. The efficient
portfolio is the base of the modern portfolio theory which was coined by the
Harry Markowitz during 1952. He has given a theory of modern portfolio
selection model and coined the efficient frontier. He has awarded with the Nobel
Prize for this contribution to the modern portfolio theories(David H. Bailey, 2013) .
As per the
theory and Harry Markowitz, in
the efficient frontier represent the securities and can be combined as to make
to the portfolio. There is at least one portfolio on the efficient
frontier which can be constructed form the all available investment which can give the expected
returns with the risk.
Figure 1:
Efficient frontier
The
Markowitz has developed the idea of the optimal
portfolio which states that it is possible to have different portfolios with
different level of risk and returns. This means
each investor has to determine the risk
profile and then allocate the resources to diversify the portfolios.
The below
illustration shows the optimal portfolio concept as per the Harry Markowitz
modern portfolio theory.
In the chart, we can see the one curve which is the
efficient frontier and all securities lying on this line represent the optimal
portfolios for the investors. The optimal portfolio is somewhere on the curve
line. It also states that there is no portfolios are possible above the
efficient frontier or above the curve(Butler, 2018) .
The above
chart is created by plotting the risk and returns of the selected securities to
determine the optimal portfolio for the investors. This can be used by the
investor to decide the portfolio for the investment.
The objective of the study:
The
objective of the project is to understand different aspect of the portfolio
selection and efficient frontier through the data analysis. We will be doing
the stock return and risk analysis based on the selected data form the
UAE stock exchanges and Kuwait stock exchanges. Below are the key aim of the
project
·
Descriptive statistics
·
Correlation analysis
·
Create an efficient
frontier according to Markowitz
The project
will cover the financial market concept of portfolio selection, efficient
frontier and how these concepts are important for the investment decisions in
the financial market.
Purpose and Scope of study:
The main purpose of the study to highlight the
importance of portfolio selection and the importance
of the efficient frontier concept in
creating the optimal portfolio for investment. The Portfolio selection is the
critical process while constructing the portfolio and it helps the investor to fin the
optimal portfolio to get the maximum returns with low risk. In this project, we
will be looking at portfolio selection and how risk and returns play a key role
in determining the optimal portfolio for the investors.
Literature reviews
The
Portfolio selection or security selection process which was coined by the Harry
Markowitz is widely used by the investors and hers has been lots of studies done by the other researches in the
same field to give more contribution to the modern portfolio theory. This
section will investigate the result and other researches which has been done by
the others.
A study was
done by the Huiling
Wu (2012) which was an investigation paper on the non-self-financing
portfolio optimization which was done
under the framework multi mean and variance. He also used stochastic cash flow
to explain the relationship between the portfolio optimization and mean-variance
of the portfolio. He analyses the
opportunity of optimal osculation and strategies as well as an efficient frontier in close-end form(H Wu, 2012 ) .
In this
paper, they develop a certainty area for the effective wilderness accepting the
benefit comes back
to be network circularly
formed circulated. Their outcomes expand the discoveries of Bodnar and
Schmid (2009) to the non-typical circulated resource returns. So as to address
the over
optimism of the example effective outskirts reported in Siegel and
Woodgate (2007), the fair estimator of the proficient boondocks is recommended.
Additionally, they havedeterminedanaccurate by and large F - test for the
proficient wilderness in curved models(Taras Bodnar, 2009) .
Edwin J.
Elton, Martin J. Gruber,andManfred W. Padberg has shown the alternative
assumption with regards to the variance and co-variances of the equity stock
returns and suggested that simple ranking method can be used to the selection
of optimal portfolio. They also stated the few advantages of the simple such as
this is very unique to the stock return method and it is easily understood by
the portfolio managers(EJ Elton, 2017) .
A research about the
Sharpe ration and efficient frontier has been done by the David Bailey and
Marcos Lopez. They have evaluated the probability of estimated Sharpe ratio
which exceeds the set threshold in a given abnormal return of the stock. They
showed that probabilistic Sharpe ration has a numberof vital application which
can allowestablishingthe
length for the track record of the stock and this can be used to reject the
hypothesis(David H. Bailey, 2013) .
Rachel
Pownall and KeesKoedijk has developed a portfolio selection model. This model
was allocating the financial assets by maximizing the returns which were
subject to certain constrains such as expected maximum loss should meet
the VAR limits. These VAR limits were set by the risk managers(Rachel Pownall, 2001) .
Data and methodology
Data collection:
Data can be gathered utilizing
two strategies, Primary and Secondary information accumulation techniques. Primary
information or data is the information gathered by us by utilizing overviews,
meets and direct perceptions that assist the analyst to have a more prominent
control and have a productive use ofdata. Secondary information or data is information
that is essentially have been assembled and recorded by another person and be
reused more often than not in an alternate setting. These sorts of information
accumulation advantage the researchers due to its minimal cost and simple
access to the data. Secondary information and data gathered in this examination
will support the objective of the study which is based on the portfolio
selection and efficient frontier.
The secondary information is
been collected about eh
stocks of the UAE and Kuwait financial market and form he
stock exchanges of these two countries. We have gathered the required stock
price movement data to analyses
risk and returns profile of the
stocks.
Descriptive Analysis
of Data Collected
The data extracted from websites
are quantitative data. The examination needs a deductive strategy to infer the
importance of the appropriate results and the estimation of the information collected.
This sort of examination utilized textualanalysis and clarification to discover
the crossing points and connections between the appropriate responses and the
exploration goals. This is the most proper examination strategy to break down
non-numerical information. While the
quantitative information gathered from different websites, articles and
journals about the topic will be used to support the objective of the project.
Result and Analysis
Descriptive statistics
UAE:
|
ABU
DHABI COML.BANK
|
ABU
DHABI ISLAMIC BANK
|
BANK
OF SHARJAH
|
|||
|
|
|
|
|
|
|
|
Mean
|
0.00040557
|
Mean
|
0.000254921
|
Mean
|
1.90613E-05
|
|
Standard Error
|
0.000410693
|
Standard Error
|
0.000336842
|
Standard Error
|
0.000395011
|
|
Median
|
0
|
Median
|
0
|
Median
|
0
|
|
Mode
|
0
|
Mode
|
0
|
Mode
|
0
|
|
Standard Deviation
|
0.022670111
|
Standard Deviation
|
0.018593582
|
Standard Deviation
|
0.021804462
|
|
Sample Variance
|
0.000513934
|
Sample Variance
|
0.000345721
|
Sample Variance
|
0.000475435
|
|
Kurtosis
|
5.261936409
|
Kurtosis
|
7.729597393
|
Kurtosis
|
4.497643384
|
|
Skewness
|
0.284855137
|
Skewness
|
-0.070523356
|
Skewness
|
0.217117227
|
|
Range
|
0.25
|
Range
|
0.235692654
|
Range
|
0.213449275
|
|
Minimum
|
-0.1
|
Minimum
|
-0.1003861
|
Minimum
|
-0.101449275
|
|
Maximum
|
0.15
|
Maximum
|
0.135306554
|
Maximum
|
0.112
|
|
Sum
|
1.235771067
|
Sum
|
0.776745544
|
Sum
|
0.058079776
|
|
Count
|
3047
|
Count
|
3047
|
Count
|
3047
|
Above is
the descriptive analyses of the selected stock from the UAE stock exchange. We
have listed the above three stock which shows the mean, standard error, range,
skewness, sum minimum, maximum.
Kuwait:
|
AL
Ahli Bank price
|
|
Ahli united bank price
|
|
GULF
bank price
|
|
|
|
|
|
|
|
Mean
|
-0.000337994
|
Mean
|
-9.13676E-05
|
Mean
|
|
Standard Error
|
0.000468884
|
Standard Error
|
0.000491437
|
Standard Error
|
|
Median
|
0
|
Median
|
0
|
Median
|
|
Mode
|
0
|
Mode
|
0
|
Mode
|
|
Standard Deviation
|
0.02588645
|
Standard Deviation
|
0.027131621
|
Standard Deviation
|
|
Sample Variance
|
0.000670108
|
Sample Variance
|
0.000736125
|
Sample Variance
|
|
Kurtosis
|
730.8151066
|
Kurtosis
|
605.6320929
|
Kurtosis
|
|
Skewness
|
-18.7743091
|
Skewness
|
-16.30533337
|
Skewness
|
|
Range
|
1.129032258
|
Range
|
1.117647059
|
Range
|
|
Minimum
|
-1
|
Minimum
|
-1
|
Minimum
|
|
Maximum
|
0.129032258
|
Maximum
|
0.117647059
|
Maximum
|
|
Sum
|
-1.030206699
|
Sum
|
-0.278488538
|
Sum
|
|
Count
|
3048
|
Count
|
3048
|
Count
|
Above is
the descriptive analyses
of the selected stock from the Kuwait stock exchange. We have listed the above
three stock which shows the mean, standard error, range, skewness, sum minimum, maximum.
Correlation Analysis:
|
|
ABU DHABI COML.BANK
|
ABU DHABI ISLAMIC BANK
|
BANK OF SHARJAH
|
COMMERCIAL BANK INTL.
|
DUBAI ISLAMIC BANK
|
FIRST ABU DHABI BANK
|
|
ABU DHABI COML.BANK
|
1.000
|
0.434
|
0.160
|
0.091
|
0.489
|
0.471
|
|
ABU DHABI ISLAMIC BANK
|
0.434
|
1.000
|
0.154
|
0.059
|
0.460
|
0.388
|
|
BANK OF SHARJAH
|
0.160
|
0.154
|
1.000
|
0.037
|
0.188
|
0.136
|
|
COMMERCIAL BANK INTL.
|
0.091
|
0.059
|
0.037
|
1.000
|
0.104
|
0.079
|
|
DUBAI ISLAMIC BANK
|
0.489
|
0.460
|
0.188
|
0.104
|
1.000
|
0.414
|
|
FIRST ABU DHABI BANK
|
0.471
|
0.388
|
0.136
|
0.079
|
0.414
|
1.000
|
Above table
shows the correlation among the six selected stock form he
UAE stock exchanges. The tables show the
relationship among the stock which is considered while creating the portfolio
of the stock. Each correlation is very important while choosing the stock which
determines the risk of the portfolio.
If the stockis
positively correlated then they will behave in a similar fashion which means if
one stock is going up them other stock will also rise and if any stock prices are decreasing then they will also
fall. We see that all bank stock are more correlated which is almost 40% than the
other two banks which is a bank of
Sharjah and commercial bank international.
Kuwait stocks –correlation:
|
AL Ahli Bank price
|
Ahli united
bank price
|
GULF bank price
|
KUWAIT FINANCE HOUSE
|
KUWAIT INTL.BANK
|
NATIONAL BANK OF KUWAIT
|
|
|
AL Ahli Bank price
|
1.000
|
0.529
|
0.510
|
(0.018)
|
0.002
|
0.002
|
|
Ahli united
bank price
|
0.529
|
1.000
|
0.508
|
0.007
|
(0.012)
|
0.004
|
|
GULF bank price
|
0.510
|
0.508
|
1.000
|
(0.028)
|
(0.017)
|
0.023
|
|
KUWAIT FINANCE HOUSE
|
(0.018)
|
0.007
|
(0.028)
|
1.000
|
0.307
|
(0.365)
|
|
KUWAIT INTL.BANK
|
0.002
|
(0.012)
|
(0.017)
|
0.307
|
1.000
|
(0.260)
|
|
NATIONAL BANK OF KUWAIT
|
0.002
|
0.004
|
0.023
|
(0.365)
|
(0.260)
|
1.000
|
In case of
Stocks form he Kuwait stock exchanges, we also have
done the
similar correlation of the stock with each other and found than
each stock has a different correlation
with each other.
If we look
at the Al Ahil Bank which has lo correlations with the
Kuwait international bank, and National bank of Kuwait. It has only 0.02% of the
correlation. It also has a negative
correlation with the Kuwait finance house. In the portfolio selection process, a
stock which is less correlated gives more
exposure and diversification to the portfolio as these stock do not move in the
same direction when the market falls.
This gives more advantages to the investors
in terms of returns.
Efficient frontier
|
INDIVUAL ASSET
|
|||
|
|
return
|
standard deviation
|
return/standard deviation
|
|
KUWAIT
FINANCE HOUSE
|
0.02%
|
0.018565
|
0.011850256
|
|
BURGAN
BANK
|
0.057%
|
0.036507
|
0.015613444
|
|
BOUBYAN
PETROCHEM.
|
0.027%
|
0.026532
|
0.010176391
|
|
ACICO
INDUSTRIES
|
0.094%
|
0.242073
|
0.003883126
|
|
ALKOUT
INDL.PROJECTS
|
0.458%
|
0.057479
|
0.079681275
|
|
NATIONAL
BANK OF KUWAIT
|
0.03%
|
0.018864
|
0.013782867
|
|
KUWAIT
INTL.BANK
|
0.00%
|
0.021603
|
-0.001851595
|
|
HILAL
CEMENT
|
-0.002%
|
0.041017
|
-0.000487603
|
|
GULF bank
price
|
-0.055%
|
0.027488
|
-0.020008731
|
|
Ahli
united bank price
|
-0.034%
|
0.027132
|
-0.012531328
|
Portfolio:
|
PORTFOLIO
|
||||
|
|
MIN WEGIHTS
|
MAX RETURN
|
MIN STAND
|
MAX SR
|
|
CONSTRAINING VARABLE
|
NONE
|
AT STAN DEV <=
|
at return=
|
NONE
|
|
VALUE OF CONSTRAINT
|
N/A
|
0.018565
|
0.458%
|
N/A
|
|
|
portfolio weights
|
|||
|
KUWAIT FINANCE HOUSE
|
10.00%
|
0.00%
|
0.00%
|
0.00%
|
|
BURGAN BANK
|
10.00%
|
0.00%
|
0.00%
|
4.91%
|
|
BOUBYAN PETROCHEM.
|
10.00%
|
0.00%
|
0.00%
|
0.00%
|
|
ACICO INDUSTRIES
|
10.00%
|
0.00%
|
0.00%
|
4.29%
|
|
ALKOUT INDL.PROJECTS
|
10.00%
|
88.06%
|
100.00%
|
59.81%
|
|
NATIONAL BANK OF KUWAIT
|
10.00%
|
11.94%
|
0.00%
|
21.29%
|
|
KUWAIT INTL.BANK
|
10.00%
|
0.00%
|
0.00%
|
3.13%
|
|
HILAL CEMENT
|
10.00%
|
0.00%
|
0.00%
|
6.58%
|
|
GULF bank price
|
10.00%
|
0.00%
|
0.00%
|
0.00%
|
|
Ahli united bank price
|
10.00%
|
0.00%
|
0.00%
|
0.00%
|
|
sum weights
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
|
return portfolio
|
0.000589
|
0.004064008
|
0.00458
|
0.002860316
|
|
standard deviation portfolio
|
0.026271442
|
0.018565016
|
0.021603243
|
0.012538908
|
|
return/stnd
|
0.022419782
|
0.218906795
|
0.21200523
|
0.228115222
|
Efficient portfolio:
Below is
the efficient frontier of the selected assets based on the given weights to the
stock in the portfolios.
We see that
the assets which lies on the line can be included in the portfolio to
have an optimal portfolio. Below are the details of the each stock’s returns
and their standard deviation.
|
|
Risk
|
Return
|
|
KUWAIT
FINANCE HOUSE
|
1.86%
|
0.02%
|
|
BURGAN
BANK
|
3.651%
|
0.057%
|
|
BOUBYAN
PETROCHEM.
|
2.653%
|
0.027%
|
|
ALKOUT
INDL.PROJECTS
|
5.748%
|
0.458%
|
|
NATIONAL
BANK OF KUWAIT
|
1.89%
|
0.03%
|
|
KUWAIT
INTL.BANK
|
2.16%
|
0.00%
|
|
HILAL
CEMENT
|
4.102%
|
-0.002%
|
|
GULF bank
price
|
2.749%
|
-0.055%
|
|
Ahli united bank price
|
2.71%
|
-0.034%
|
|
ACICO
INDUSTRIES
|
24.207%
|
0.094%
|
We have
selected the ten
stocks to create a portfolio which could give the maximum possible returns.
Comment/discuss the results
The
portfolio selection and efficient frontier play a key role in creatingan
optimal portfolio which can give the
highest returns at the lowest possible risk. The Project is based on the creating efferent
frontier graph of the selected stock form he tow stock exchanges and calculating the correlation,
variances and understanding the tradeoff between the risk and returns.
We have
calculated the descriptive statists of each
stock in excel and fount that each stock has different retunes, risk based on
the business and industry they are. We also found that few stockshave
more correlation between them as compared tot eh others and some
stock as a negative correlation between them. It is not
possible to fine the perfectly correlated stocks either positive or negative
due to the fact that the market is not
perfect. Efficient frontier works on the assumption that each investor has the
same information and financial market is perfect.
In our
analysis of the stock, we found that the portfolio which we have created has
returns of 0.06 %
when each stock was equally allocated and 0.41% when only two selected stock
were included in the portfolio. We have also considered
only one security in the portfolio where we had 0.46 % of the return. The risk of the portfolio
was higher than the individual stock and returns was also less than individual stocks. We concluded
that the select stock which was used to
create the portfolio and efficient frontier. Stocks have no good track records and not a good investment option.
References
Amelie Hüttner, J.-F. M. (2018). Portfolio selection
based on graphs: Does it align with Markowitz-optimal portfolios? Dependence
Modeling, 63-87.
Bodnar, T. a. (2009). Econometrical analysis of the
sample efficient frontier. European journal of Finance, 317-335.
Butler, A. (2018). The Optimization Machine: A
General Framework for Portfolio Choice” . Portfoilo Optimization: Simple
versus Optimal Methods, 3-8.
David H. Bailey, M. L. (2013). The Sharpe Ratio
Efficient Frontier. Journal of Risk, 36.
EJ Elton, M. G. (2017). Simple criteria for optimal
portfolio selection: tracing out the efficient frontier. The Journal of
Finance.
Giordano, L. a. (2014). Financial Architecture and
the Source of Growth: International Evidence on Technological Change. CONSOB,
Italian SEC.
H Wu, Z. L. (2012 ). Multi-period mean–variance
portfolio selection with regime switching and a stochastic cash flow. Insurance:
Mathematics and Economics.
HuiPeng, M. (2008). A Mean-Variance Model for
Optimal Portfolio Selection with Transaction Costs. IFAC Proceedings
Volumes, 1627-1632.
Rachel Pownall, K. K. (2001). Optimal portfolio
selection in a Value-at-Risk framework. Journal of Banking & Finance,
50-62.
Siegel, A. F. (2007). Performance of portfolios
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Taras Bodnar, A. G. (2009). Construction and
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Statist. Soc., 193-207.
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