Statement

Diversification in asset class can reduce the risk and also can generate defined return

based on the inventor’s risk perception. Client’s objective to get post retirement cash

flow, financing and refinancing of mortgage loan is successfully implemented here.

Risk and return is related get high importance in portfolio construction. From

Markowitz’s concept of the mean –variance relationship and along with modern

creation of synthetic fund, the risk aversion nature of investors gets importance. The

return of the portfolio decreases with the diversification but portfolios from efficient

frontiers satisfy the need of investors.

www.parthasen.net

Portfolio Distribution Table

Portfolio distribution table is useful for knowing the details of the allocated amount of fund. Like allocation price, numbers and yield of stocks and quality of bond. This distribution table is useful for the next step of implementation. In the allocation table the weight is calculated and here this weight is transformed in to investment amount and then the numbers of stocks. This number is useful for trading the assets. Portfolio managers can send this table to the traders to buy and sell the stocks

Here allocation: $100000

Asset Allocation

Asset is allocated in Ford (individual stock), Russell 1000 index (large cap), Russell midcap index, Russell 2000 index (small cap), LVS (fixed income bond), FBIDX (fixed income fund), Nomura ADR (international development), POT (commodity), REY (real estate) and in T-Bills (cash). Allocation in these six different assets is mainly due to the reason of well diversification. Well diversification is the basic objective of portfolio construction. These different assets have different beta values, some of them are aggressive and some are counter assets with negative beta values. This beta or financial elasticity is helpful for the risk diversification. Along with beta; return and standard deviation are most useful to construct mean-variance and efficient frontier. Sharp ratio is useful in the allocation for the value showing the excess return with the risk in it. Here in the asset allocation calculation most of the assets are with positive sharp ratio and even for the portfolio also. Commodity is most acceptable for the higher sharp ratio. In this allocation the consideration of weight of any asset is determining factor of the portfolio. This weight or relative investment percentage is important determining factor for return and risk of portfolio. Here allocation is kept under constraint of 5% for the individual asset and 20% for fund.

http://www.emeraldinsight.com/journals.htm?articleid=845712http://papers.ssrn.com/sol3/AbstractNotFound.cfm

Implementation

a) Under Fixed Income asset, Las Vegas Sand Corp or LVS is selected and as a fund FBIDX is considered here. FBIDX or Fidelity US Bond Index Fund is triple star rated fund with good performance. LVS data is available from 2004. Other Bond FBIDX is considered here with 20 years of monthly long time series data.

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=lvshttp://www.reuters.com/finance/stocks/financialHighlights?symbol=LVS.Nhttp://www.dailyfinance.com/financials/las-vegas-sands-corp/lvs/nys/key-ratioshttp://portfolios.morningstar.com/fund/summary?t=FBIDX&region=USA&culture=en-ushttp://fundresearch.fidelity.com/mutual-funds/composition/315911107

  Comparison My portfolio Vs. Index

  My portfolio Index

Modified Duration 4.44 5.24

Convexity 2.2 -10

Quality 3 star 3 star

More on Behance.net/stochasticanalytic

YTM of the LVS is 5.412% with maturity on 2/15/2015 and yield is 0767%. Return and risk of LVS is higher due to B2 rating. But FBIDX is index fund with perpetual maturity period and has 2.91% yields. Modified duration of LVS is lower 3.388 than the FBIDX fund (4.7). But convexity is entirely different for LVS and FBIDX. LVS has positive convexity but FBIDX has negative convexity. This difference in convexity has reduced the overall convexity of the portfolio. Due this difference in sign in convexity the impact of interest rate is different over LVS and FBIDX.

If the portfolio based on fixed income LVS and FBIDX is put in comparison with Barclays’ Bond index then main difference is in convexity. Index has negative .convexity of 10 but my portfolio has positive convexity of 2.2. Duration is also higher for the index.

http://performance.morningstar.com/fund/ratings-risk.action?t=FBIDX&region=USA&culture=en-US

In future, interest rate may go up by 25 basis points or 7% hence my portfolio price will go up by 30% and Index can go up by 36%. But this change in interest has positive effect on duration for my fund but negative on index. Credit rating is improved and debt is also reduced recently. Improvement in margin, efficiency in this quarter is positive and improvement if revenue due to the growth is prospective.

US Bond Index fund: FBIDX

This fund has no frond load where as industry average is 4.06%. Even this fund has lower expense ratio of 71, which is lower than 443 of category average. Most comfortable part for including this fund in portfolio is this fund has lower risk than the Barclays’s index. Standard deviation of Barclays is 4.18, higher than FBIDX of 3.92. Return of FBIDX is also 2.92, higher than the index. Hence sharp ratio of FBIDX is 2.41 .Individual bond analysis of LVS:Las Vegas Sand Corporation has operation in casino, resort, exhibition centre and in resort property. These operations are distributed in the three different region like United States, Macau of People republic of China and Singapore. Recently LVS has planned to develop integrated resort properties.

http://finance.yahoo.com/q/pr?s=fbidx

Capital structure of LVS is better than the industry average. If capital structure is measured through long term debt to equity then industry average is 1.35. LVS has lower ratio of 1.23 then industry average. LVS has reduced this long term loan from 2007 to 2011. This reduction has positive impact on rating. Reduction is debt decreases the default risk and cost of capital. Other ratios like total debt to equity and total debt to asset are in good condition in comparison to industry average. LVS is in bad position from liquidity parameter. Cash flow from operation to debt, free cash flow to sales and also acid test, quick test ratio values are below industry average. This liquidity crunch may increase the business risk and as well as can reduce the ratings or quality of bond. But excess cash position decreases the management efficiency and margin. As LVS has comparable margin position hence low liquidity is right now not a cause of concern. Interest rate coverage ratio is 5, which is far better than industry average of 2. Revenue growth is improving from 2007 to 2011 and reached at 50% in this year which 10 times better than the industry average. This growth of business is positive for investors as after financial crisis the quick recovery will impact on financial statement and also in stock market. Hence considering the LVS bond can help to get good return in future.

Rating of LVS has changed in recent time due to the increase in credit worthiness. b) Under Emerging and Developed International asset type, Nomura Holding International is considered in this portfolio because of the growth prospect through the recent acquisition of Megalos and through well diversification in business sectors. Main business concentration of Nomura in is in Japan.

http://finance.yahoo.com/q?s=NMR

c) For cash type, U.S Treasury bills instrument is used for the purpose. d) Under Real Estate and Commodities, Real Estate Stock Rayonier is considered here and Potash Corporation of Saskatchewan stock is considered as commodity asset. Recent increase in real estate demand after prolong time in downturn zone can result a good return for the investors. And demand of potash is expected to go up due to increase in corps production.e) Under domestic equities, Ford is considered as individual stock and Russell 2000, Russell 1000, Russell midcap is considered as fund. Price is based on Thompson Reuter price.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrateshttp://finance.yahoo.com/q/hp?s=RYN&a=01&b=17&c=1994&d=02&e=31&f=2011&g=mhttp://finance.yahoo.com/q?s=POT

Individual Stock Analysis

Ford has market share of 18% in US, market capitalization of 56.97 billion and positive revenue growth after global slowdown. This recovery after financial crisis in 2008 is significant to inventors to return the confidence. This can be emphasized from valuation ratios like price to earnings ratio, price to cash flow ratio and price to book value ratio. At this juncture all these three ratios are well ahead of industry. Even price earning growth is more than industry average. Ford has good credit rating of B2 and better than the industry average of B3. If other ratios are analyzed in depth for same purpose then the profit margin of Ford is remarkably well in comparison to the Auto .

industry average. Ford has good gross and net margin. Efficiency of asset management is also better than the industry standard as return on asset 30 times better than the accepted standard. Company has more debt burden in recent time but debt is reducing continuously over the time and expected to go back to a comfortable position soon. Ford’s earning per share is improving year on year. Hence consideration of this stock is fundamentally acceptable.Ford’s recent good performance is reflected in cash flow statement and increasing margin is also supporting to this. 93% change in EPS has increased the confidence level of investors and certainly reflected in stock market. Stock performance is better than industry and index in most of the parameters. Fords foray in the small cars and opening up new factories in the emerging nations can drive more growth in the near future. Hence this stock is aggressive with 2.37 betas and should be in the portfolio.

Assumptions

CDs are invested @ 0.6% APY.Assume children attend college at age 18 and go to a four year institutionAssuming yearly saving is not more than $15000Home value is assessed using Case-Shiller Index. Bond convexity of FBIDX is considered -10, same as index.College currently costs $16,140(state). These amounts include room and board as well as books. $7,605 is for state tuition only. Average annual costs of education increase at a 6.1% rate for state schools. Minimum annual income will increase by the rate of inflation. Inflation rate over the last 75 years averages 3.2%. Weighted return for your portfolio exceeds the nominal IRR by at 50 basis points.Beta of Russell 3000The historical data has covered the period 11/30/1990 to 3/31/2011.http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----