The Investment Portfolio

Game
BSc III A
Investments Ms. Samra Chaudhry

Abdullah Majeed, Mohammed Balawal Arif, Afifa Shamim,

Shahryaar Khawaja, Mohammed Ali Gill, Farheen Hassan,
Sana Zafar

Weekly ROR of Portfolios

Week

Week

Index

Index

1
2Active

Passive

-7.92
4.65
4.65
3.31
6.49
Passive 5.87Variance Index
2
1)
9.47 ( X1- M9.48

3 (X2)
4.69 (X3)
4
-9.68
-12.8
12.88
4.65
4.65
53.64419861
-7.92
5
-1.033
2.97
3.06
5.87
6.49
15.25511741
3.31
6 9.47 1.3384
0.019
7.48 4.84
27.93947021
4.69
7 -12.8 0.1842.9
3.22
0.25
82.52305301
-9.68
8 2.97 -0.913.06 -0.21
-1.56
0.191161328
-1.033
9 4.84 0.721
3.022
0.019 0.089
3.741052272
1.3384
0.608102076
0.184029
103.22 0.9240.25
4.4
0.95
0.098734208
-0.91
11-0.21 1.822-1.5
9.3
2.34
0.0896
3.022
1.733909568
0.721
M1=
M2=
M3=
Mean
4.4 -0.59578
0.95 2.89087
2.309731248
0.924
2.69645
5
35.845660128
9.3
2.34
1.822
Sum
19.38901901
(X1)

1
2
3
4
5
6
7
8
9
10
11

Active

Variance
Passive
( X1- M3)2

0.322789
0.424915
18.07827
324.6535
5.054156
0.142994
3.992583
29.46476
26.30197
0.669361
16.66154
42.57669

8.766443
23.04785
33.53357
1.46608
1.879142
2.789508
2.071245
10.17088
1.776404
0.54639
0.423564
8.647108

M1)2

Standard
Deviations
Weekly (X)

Active

42.576

4.403296

Total Risk for

11 Week
Period
(X) * 11
14.60408

Index

19.389

6.525082

21.64125

Passive

8.647

2.940597

9.752856

Portfolio

VARIANCE ( X1-

Variance
Active
( X1- M2)2

Wealth at the end of 11 weeks (W11 ) for each portfolio. The example for active
portfolio is given below using above weekly returns data.

W11 = 10 million Rs(1+0.0465)(1+0.0587)(1+0.094). (1+0.044)(1+0.093)

(W 11W 0) /W 0

Portfolio

Realized ROR

Variance

Passive

15.78%

8.647108

Standard
Deviation
9.752856

Index

8.45286

19.38902

21.64125

Active

24.78%

42.57669

14.60408

(X1)

Active
(X2)

Index
( X1- M1)

Active
( X1- M2)

Passive
( X1- M3)

4.65

Passiv
e
(X3)
4.65

-7.92

-7.32422

1.953545

3.31

5.87

6.49

3.90578

4.69

9.47

7.48

5.28578

4
5

-9.68
-1.033

-12.8
2.97

2.9
3.06

-9.08422
-0.43722

1.3384

4.84

0.019

1.93418

3.22

0.25

0.779809

8
9
10

0.18402
9
-0.91
0.721
0.924

-0.21
0.0896
4.4

-1.5
3.022
0.95

-0.31422
1.31678
1.51978

11

1.822

9.3

2.34

2.41778

1.75912
7
2.97912
7
6.57912
7
-15.6909
0.07912
7
1.94912
7
0.32912
7
-3.10087
-2.80127
1.50912
7
6.40912
7

Mean

0.5957
8

2.8908
73

2.6964
55

Week

Index

COV active, M
-12.8842
11.63581
34.77582

COV passive, M
-14.3081934
14.81675219
25.28476649

3.793545
4.783545
0.203545
0.363545
-2.67746
-2.44646
-4.19646
0.325545
-1.74646
-0.35646

COV M, M
53.6442
15.25512
27.93947

142.5393
-0.0346
3.769962
0.256656
0.974356
-3.68866
2.293541
15.49586
COV

active, M

-1.84904756
-0.15894914
-5.17867991
-1.90776763
1.31861009
0.428671145
-2.65422738
-0.86182977

= (-7.92+0.59)(4.65-2.89) +.. (1.822+0.59) (9.3 -2.89) / 10

Then beta of active portfolio = COV

COV

M, M

82.52305
0.191161
3.741052
0.608102
0.098734
1.73391
2.309731
5.84566

active, M

=2.786883

= (-7.92+0.59) (-7.92+0.59)+.(1.822+0.59)(1.822+0.59)/10
Then beta of market portfolio = COV

COV

/ VAR

passive, M

M, M

/ VAR

= 1.00

= (-7.92+0.59)(4.65-2.69)+.(1.822+0.59)(2.34-2.69)/10

Then beta of passive portfolio = COV

passive, M

/ VAR

= 0.77038

3 Portfolio Performance Evaluation Methods Applied to the 3 portfolios

The three months T-Bills return equates to 9.9276%, but as we have an 11 weeks
portfolio the T-bills rate that we would be using would be equal to (9.9276/52)*11 =
2.1%. This is the rate of return that we will use as our risk free rate.

1. Sharpe Ratio = (Realized ROR

Active

- Rf)/SD

Active

= (24.78 - 2.1) / 14.604

= 1.55% (Ranked 1)
Sharpe Ratio = (Realized ROR

- Rf)/SD

passive

passive

= (15.78 2.1)/ 9.752

= 1.40% (Ranked 2)
Sharpe Ratio = (Realized ROR

index

- Rf)/SD

index

= (8.452 2.1)/ 21.645

= 0.29% (Ranked 3)

2. Treynor Ratio = (Realized ROR

- Rf)/Beta

Active

Active

= (24.78 - 2.1) / 2.786

= 8.14% (Ranked 2)
Treynor Ratio = (Realized ROR

- Rf)/Beta

passive

passive

= (15.78 - 2.1) / .77

= 17.7% (Ranked 1)
Treynor Ratio = (Realized ROR

index

- Rf)/Beta

index

= (8.452 - 2.1) / 1
= 6.532% (Ranked 3)

3. Excess return from SML = actual ROR

Suppose

= 24.78 - 19.753

active

expected ROR

Active

= 5.027% (Ranked 2)

Expected ROR

Active

= Rf + (RM - Rf ) beta

Active

= 2.1 + (8.45 - 2.1)* 2.78

= 19.753%
This means active portfolio has beaten by the market on a risk adjusted basis
because according to SML active portfolio based on it beta risk should have
earned 19.753% in 11 weeks but it actually earned 24.78%, this is implying
that it is undervalued meaning for a given risk the active portfolio is giving
more returns.

Excess return from SML = actual ROR

Suppose

Passive

expected ROR

Passive

= 15.78 - 6.9895
= 8.7905% (Ranked 1)

Expected ROR

Passive

= Rf + (RM - Rf ) beta

Passive

= 2.1 + (8.45 - 2.1)* 0.77

= 6.9895%
This means passive portfolio has beaten by the market on a risk adjusted
basis because according to SML passive portfolio based on it beta risk should
have earned 6.9895% in 11 weeks but it actually earned 15.78%, this is
implying that it is undervalued meaning for a given risk the passive portfolio
is giving more returns.

Excess return from SML = actual ROR

Suppose

= 8.45 8.45

index

expected ROR

Index

= 0% (Ranked 3)

Expected ROR

Index

= Rf + (RM - Rf ) beta

Index

= 2.1 + (8.45 - 2.1)* 1

= 8.45%
Since we are finding the return from the market, the expected return of the
market is equal to what the portfolio is giving; hence the excess return is
zero.

THE SECURITY MARKET LINE

SECURITY MARKET LINE

30.00
25.00
20.00
15.00
Security
Market Line
Expected
Returns

Index

Passive

Active

Risk Free rate

10.00
5.00
0.00
0.000

0.500

1.000

1.500
Beta

2.000

2.500

3.000