Portfolio Analysis Case Solution & Answer

Portfolio Analysis Case Study

“Beat the market”

The beat the market refers to the phenomenon of earning the returns on the investment that tend to exceed the Standard & Poor’s 500 index’s performance. Commonly referred to Standard & Poor’s 500 index, it is one of the most popular and widely known benchmark of overall stock market performance of US. Additionally, the Standard & Poor’s 500 index is reasonably representative of the markets and economy of US.Some investors in the market consider that their portfolio could beat the market when the returns more than the annual average of 7 percent to 10 percent of the stock market. The speculators and investors always lookout for the investment that would beat the market.

Barriers to beat the market

If is often said that beating the market is difficult task to be perform and that even most professional investors are not able to do it in consistent manner. There are some barriers which makes beating the market harder which hinders the portfolio to beat the market. Particularly, the fees of investment is one of the most considerable barrier to beat the market. A certain percentage of the trading capital of the investor goes to investment fees, which the investor would have to make up for in return for the purpose of equaling the performance of market. If the investor trade more, he would have to pay more fees and therefore, he would need to make higher returns on the investment. Therefore, the investor need to look for the index funds with the 0.05 percent to 0.2 percent ultra-low fees per year.

In addition to this, another barrier due to which the investor fails to beat the market is taxes. Whenever the investor tends to make payment of taxes on the returns on his investment, he would tend to lose the major percentage of the profit. Even though, the investor could choose the tax efficient ETF, but the active trader’s and hedge fund’s high capital gains on the greater turn tend to lead to more substantial tax bills(AMADEO, 2020).

Optimal ways to beat the market

One of the most effective way of outperforming the market is to take on more and more risk. The simple measure of the risk on the basis of the past volatility refereed to Beta could be used for the purpose of building the balanced portfolio as well as to measure whether active money managers were just taking on extra risk or actually beating the market (Fox, 2002). Choosing the low stock beta as it is less risky component of the portfolio is the optimal way to beta the market.

Furthermore, another way of outperforming the market is employing a Dynamic Asset Allocation program which involves shifting a mix of portfolio between the safe asset and the risky asset so that the expected return of the portfolio would tend to fall between the expected returns on the two assets including safe asset and risky asset. It has been indicated by the historical simulations that the Dynamic Asset Allocation strategy with the use of the one-year treasury bill and levered S&P 500 and with the specified minimum return of 15 percent annually would beat the S$P 500 in 58.9 percent from 1928 to 1983, as well as achieved a 10.4 percent compound annual return versus 9.1 percent for the unlevered S&P 500.Moreover, the investor could stipulate any minimum return that does not exceed the safe asset’s return; the higher the minimum return, the lower the portfolio proportion allocated to the risky asset and vice versa(Ferguson, 1986)…………………………………


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