The valuation and selection of risky assets - the Markowitz approach

Abstract

Investing in shares is the most common form of long term investment . We always desire the highest rate of return for any investment we make . The forever growing world of financial markets has ignited the desire in students and economists to study and analyse the behaviour of such markets . The ultimate goal is to maximise profits by carefully selecting your investments and foreseeing risks

This thesis will examine and identify the optimal investments in the FTSE100 . The optimal portfolio will be established through the Markowitz approach . This thesis will collect

data from previous years regarding stock growth in the UK (FTSE100 . Through the collection and analysis of past historical data , this thesis will conclude which asset has the greatest return for the given level of risk using Microsoft Excel

Table of contents

List of tables .3

CHAPTER 1

Introduction .4 Methodology .5

CHAPTER 2

The stock market .7

CHAPTER 3

Portfolio selection .9

The Markowitz approach .11

Risk and Return .17

Isomean and Isovariance .27

CHAPTER 4

Optimising portfolios .28

Using Solver to create optimal portfolio .30

CHAPTER 5

Alternatives to Markowitz .31

Conclusion .33Appendix .33List of references .40

List of tables and figures

Figure 1 - HYPERLINK "http /www .moneyextra .com /features /024744 .features .html " \t "_top www .moneyextra .com /features /024744 .features .html

Figure 2 - Microsoft Excel

Figure 3 - Efficient frontier

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Figure5- HYPERLINK "http /uk .finance .yahoo .com /q /ta ?s BAY .L t 6m l on z l q l

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a c BA .L 5EFTSE

Table 1 - FTSE 100 (09 /01 /2008-06 /02 /2008 , Data obtained using Thompson DataStream

Table 2 - Expected returns (09 /01 /2008-06 /02 /2008

Introduction

The aim of this thesis is to examine and conclude which of the investment assets , have the greater rate of return over a period of time . This thesis will collect data from the previous 3 years regarding how stock prices vary of 20 companies in the UK (FTSE100 . Through collection and analysis of past historical data , this thesis will conclude which assets have the greatest return for the lowest level of risk . The data will be analysed using the Markowitz model of modern portfolios

Investment can be defined in many different ways but most commonly it is considered as a way of using money , which one may or may not have , for the purpose of making more money . Within the financial world of economics , the meaning of investment carries several in-depth but closely related distinctions - `the accumulation of some kind of asset in the hope of getting a future return from it

Potential investors...