Factor Investing and Alternative Risk Premia - MyAssignmenthelp.com

Question: Discuss about the Factor Investing and Alternative Risk Premia. Answer: Introduction: Optimal portfolio of risky assets is a combination of the investment that has been drafted for lowering the overall risk from total investments in the portfolio. Generation of the overall Optimal portfolio is mainly helpful in reducing the risk from investment and generating a constant return. Optimal portfolio directly evaluates the correlation between stocks and identifies adequate weight for investment, which could be used in generating higher revenue from investment. Barone-Adesi and Carcano (2015) mentioned that use of overall optimal portfolio directly allows the investment to reduce the risk by investing in different weights only on assets for generating higher revenue and declining the risk from investment. On the other hand, Berndt, Bilolo and Meynhardt (2015) argued that optimal portfolio does not ensure that investments in the market is risk free and cannot be affected by the volatile capital market. Hence, it could be assumed that with the help of optimal portfolio invest ors able to use combination of different assets that could directly generate returns from investment. Furthermore, the use of risk free asset in the portfolio could eventually allow the organisation to increase the return, while reducing its risk factor. The inclusion of the risk free asset directly allows the portfolio to generate return comprising of reduced risk. Moreover, the risk free asset does not react to the volatile capital market, which directly helps in maintaining constant returns from the portfolio that includes risk free asset. Risk free asset also allows the investor to directly reduce the risk from high risk assets and generate a constant return. Hence, in the portfolio depicted in the Excel sheet use of risk free asset could eventually help in reducing the risk from investment. The use of risk free portfolio in the portfolio would eventually help in improving Sharpe ratio, as the overall risk free rate of 8% will be included in the return that is provided from the portfolio. This would eventually help in reducing any kind of risk from investment and generate higher return, which could form an adequate portfolio (Bruder, Kostyuchyk and Roncalli 2016). From the overall evaluation in the portfolio it could be identified that the return is relatively 17.22%, while the standard deviation is 5.32% for the portfolio. Hence, the use of risk free asset in the current portfolio could eventually help in increasing the return, while declining the standard deviation. This could eventually help in strengthening the portfolio returns and improve ability of the portfolio to generate higher returns with low risk. Bodie (2013) mentioned that increment the overall return generation capacity of the portfolio with lower risk can only be achieved by including risk free asset. Therefore, it could be understood that use of risk free asset in the portfolio could eventually allow the investor to reduce the risk further and generate higher returns. Furthermore, the organisation using optimal portfolio with risk free asset could eventually help in identifying the adequate weight of the portfolio assets which could reduce risk from investment. Reference: Barone-Adesi, G. and Carcano, N. eds., 2015.Modern Multi-Factor Analysis of Bond Portfolios: Critical Implications for Hedging and Investing. Springer. Berndt, T., Bilolo, C. and Meynhardt, T., 2015. Investing in Legitimacy: A Performance Analysis of Public Value Stock Portfolios. Bodie, Z., 2013.Investments. McGraw-Hill. Bruder, B., Kostyuchyk, N. and Roncalli, T., 2016. Risk Parity Portfolios with Skewness Risk: An Application to Factor Investing and Alternative Risk Premia.