Portfolio theory is based on the notion that investors who are rational diversify their risks by taking higher risks whenever any investment is promising higher returns. Investors will choose a set of portfolios that are efficient and consistent with their risk taking attitude. The modern portfolio theory takes investors as risk averse and hence they will not go out risking their money on assets that do not promise compensation of the same. To reduce such risks, investors by diversification of their portfolio of assets especially with assets that are not correlated.
Hence portfolio is the way in which investors diversify or allocate their assets in such a manner that minimizes the risk that is involved and at the same time maximizing their returns (Ivkovic).
Having $1,000,000 to invest in a portfolio of shares of ASX listed companies will need such diversification to minimize the risk and at the same time maximizing returns. ASX is the major capital and stock exchange market in Australia which was established as early as in 1860s (http://www.
allbusiness.com). ASX For easier settlement, the best way to keep the portfolio in the form of broker sponsored where the investor is only given a holder identification number instead of a certificate. This is an easier way of transferring stocks whenever an investor wants to sell them. The table below shows the portfolios I would hold given the $1,000,000:
|COMPANY NAME||CLOSING PRICE($)||NUMBER HELD||INVESTMENT($)|
I should rank the portfolio in the following order of preference: CWLTH BANK, TELSTRA, WOOLSWORTH, BHP BLT and RIO TINTO.
This is based on the expected returns and the risk that is involved once we commit this money in this investment. The remaining $200,000 will be invested in the treasury bonds and the government bonds where we are guaranteed of constant and fixed amount of incomes on interests. This will diversify the risk of putting all the money in the stock market that is subject to collapse (http://www.riskglossary.com/).
BHP BILLITON LIMITED is a company that primarily deals with mineral exploration (their production and processing) and also exploration of hydrocarbon. These shares are lowly priced and this shows that there is some prospects of rise in share price especially after the case involving the company and Fortescue Metals Group over a railway line. Much money and effort had been directed in the case and it now seems that the company will return to profitability and hence minimizing the risk of going under and at the same time the value of dividends will rise. The company is doing good and this is evidenced by the rising final dividends from 33.6303c last year to 46.9021c to this year (http://www.asx.com.au). This means that the returns are worth taking the risk of putting the money in such a company.
TELSTRA CORPORATION LIMITED (TLS) is in the telecommunications industry where it provides telecommunications and information consultancy. The company offers a range of products from pay television, internet and mobile phone services. The company is a promising in terms of growth especially now that they are about to launch a ADSL2+ Broadband. This tells us the company is able to keep up with the current technological growth and at the same time increasing the shareholders’ value. The value of dividends seems to a constant value of 14c over the two years. The there is no increase in the value, an investor to this company is guaranteed a steady flow of income each year and hence the risk of investing in such a company will be rewarded (http://www.riskglossary.com).
COMMONWEALTH BANK OF AUSTRALIA (CBA) offers banking and financial related services. The banking industry takes a long time to grow and once it becomes stable, it also takes long to collapse. CBA is a big bank with strong base and it dividends are increasing over time from 149c to 153c. Whatever is making them to rise; whether it is inflation or not, it is a sign of positive growth of the bank. The recent agreements to buy the HBOS Australia Pty Ltd’s Bank of Western Australia Ltd and St Andrew’s Australia Pty Ltd to the bank is a sign of bank’s growth. The bank will at the same time redeem the preference shares issued to the group (HBOSA) as part of payment deal (http://www.asx.com.au).
WOOLWORTHS LIMITED (WOW) is a multinational company that prides itself with merchandising through the retail chain stores all over the world especially food as their main merchandise. A multinational company comes with lot of goodies, in particular, the diversification of the devaluation of currency risk. Its dividends are also rising over time (http://www.asx.com.au).
RIO TINTO LIMITED (RIO) is in the metal production business. Such metals as borates, titanium dioxide iron ore, aluminum and coal. Though the dividends are not constant, they have been high for the last two years. This shows that the industry is seasonal in its operation. This is a good company that will act as an indicator or a signaling agent to show how the economy is at any particular time (http://www.asx.com.au). The company is about to be acquired by HBP Billiton through merger. This is aimed at diversification of the company’s operations and to ensure security for its shareholders.
The above portfolios of share though not the best are efficient in the risk that is involved in stock market. For one to succeed in this form of investment, information gathering is very important. Current information regarding these companies is very important in order to know the best time of acquiring new shares and when it is the right time to lay off others (Ivkovic).
Available from: http://www.allbusiness.com/glossaries/portfolio-theory/4945139-1.html, accessed on 11th October 2008.
Ivkovic, I. The Markowitz Portfolio Theory: Available from: Concept of Expected Risk and Expected Rates of Return: available from:
http://investment.suite101.com/article.cfm/the_markowitz_portfolio_theory , accessed on 11th October 2008.
RIO TINTO LIMITED (RIO): Available from: http://www.asx.com.au/asx/research/CompanyInfoSearchResults.jsp?searchBy=asx, accessed on 11th October 2008.
Creating an Investment Portfolio: Available from: http://www.360financialliteracy.org/Life+Stages/Retirement/Articles/Investments/Creating+an+investment+portfolio.htm, accessed on 11th October 2008.
Available from: http://www.riskglossary.com/link/portfolio_theory.htm , accessed on 11th October 2008.
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