Application Of The Portfolio Theorem In The Study Of How An Investor Can Exploit Interrelationships Between Projects To Adjust To The Risk-Return Characteristics

Abstract

In many scenarios, investment decisions turns out to be far riskier than originally envisaged. largenumber of projects flop because managers have no idea before hand. Investmentdecision-making literally means stepping into the unknown effectively translating

intomistakes. This does not mean that managers can do nothing about proj ect failures. This studyis therefore to examine how project risk can be assessed and controlled within the mastermindtobacco product holdings.

Thevarious forms of risks are defined and the main statistical methods for measuring project risk withinsingle period and multi-period frameworks are described. These fall conveniently into methodsintended to describe risk and methods incorporating project riskiness within the net presentvalue formula.

1.1 Background of the study

The concept of risk in investment has been in existence. Attempts have been prompted to defineand estimate risks both in capital assets and stocks. One such model was developedby Harry Markowitz. -~-~

Themodel derives expected returns for a portfolio of assets-and a measure of the expected riskwhich is the standard deviation of the expected rate of return.

Thoughcritics argue its limitation on the basis of it's over reliance on historical data available,it's still preferred-within investment circles.

Thestudy envisages on these concepts of Harry Markowitz viva viz the 3 products withinMastermind Tobacco setting. '.

1.2 Objectives of the study

1. To examine how project risk can be assessed and controlled using 3 products of the Mastermind Tobacco holding.

11. To investigate consistency in the returns of each product.

111. To give suggestions on effective risk management strategies

1.3 Significance of the Study

1. To assist the company in knowing the risk-return characteristics of each of the products of Mastermind Tobacco company.

11. To advice the company on how to exploit interrelationships between its various products to adjust to the risk-return characteristics of the whole enterprise .

1.4 Methodology

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The researcher employed a case study that involved collecting monthly cigarette sales data for a period of one year from Mastermind Tobacco (K) Ltd sales records The data collected was organized using fables and analyzed by application of statistical techniques of data analysis; measures of dispersion and correlation analysis.

1. Investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.

11. Investors maximize one-period expected utility and their utility curves demonstrate diminishing marginal utility of wealth.

111. Investors estimate the risk of a portfolio on the basis of the variability of expected returns.

IV. Investors base decisions solely on expected return and risk, so their utility curves are a function of the expected return and the expected variance (or standard deviation) of returns only.

v. For a given risk level, investors prefer higher return to lower returns. Similarly for a given level of expected return investors prefer less risk to more risk