Hamdard University

Term Report
Portfolio Management
Markowitz Portfolio Theory
Two-Asset Portfolio Risk

Faculty: Sir. Sharique Farid

Prepared by: Ahmad Amirali 2201055

In the name of ALLAH, The Most Merciful, the Most Kind

Acknowledgement
I am very grateful to my prestigious Professor Mr. Sharique Farid who gave me this
opportunity to make this Portfolio Management Report on Markowitz Portfolio Theory which
enhances my ability in understanding Risk and Returns in corporate world and making report on
them.
I would also like to pay my thanks to my fellow colleagues, friends and teachers who provide me
all the necessary help and information on Portfolio assignment and its functions.

Portfolio Management | Two-Asset Portfolio Risk Term Report

CONTENTS

Page NO.
1. Portfolio Management Introduction
Two-Asset Portfolio Risk
Portfolio Variances

2. Two-Asset Portfolio Risk Project Details

Assets Allocation
Weights, Correlation, TRs
Graphs

3. Results using of each two-Asset classes

Comments

Portfolio Management | Two-Asset Portfolio Risk Term Report

Introduction
Optimizing a portfolio is a major area in finance. The objective is to maximize the yield and
simultaneously minimize the risk. One way of optimizing a portfolio was suggested by Harry Markowitz
(1927- ) who published the article Portfolio selection in Journal of Finance 1952. In 1990 he received the
Nobel Memorial Prize in Economic Sciences due to his contributions to portfolio theory. There have been
extensions and developments made on Markowitz model and it are still a widely used model.
My purpose is to explain Markowitz Two-Asset Risk theory in an understandable and correct way.

Two-Asset Portfolio Risk

By Combining Two Securities risk we manage to calculate the optimal return in future from these two
assets and hence minimize the threat of loss by making the wrong investment decisions.
The Markowitz Two asset portfolio risk can be calculated through Portfolio Variances.

Portfolio Variances
The measurement of how the actual returns of a group of securities making up a portfolio fluctuate.
Portfolio variance is calculated by multiplying the squared weight of each security by its corresponding
variance and adding two times the weighted average weight multiplied by the covariance/correlation of all
individual security pairs.
Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low
or negative correlation, such as stocks and bonds. This type of diversification is used to reduce risk.
The Formlulae of the Portfolio Risk is:

p w12 12 w22 22 2w1w2 1 2Corr1,2

Portfolio Management | Two-Asset Portfolio Risk Term Report

The Two-Asset Portfolio Risk Project

In order to understand more deeply, I took 5 Assets/companies securities from diversified sectors from
our corporate world.
HUBC
PPL
FFC
LUCK
MCB

Hub Power Company Limited

Pakistan Petroleum Ltd
Fauji Fertilizer Co.
Lucky Cement Co.
Muslim Commercial Bank Ltd

Through n(n-1)/n, we have 10 sample portfolio of each Two-asset class.

HUBC
FFC
PPL
MCB

HUBC
PPL
PPL
LUCK

HUBC
LUCK
FFC
LUCK

HUBC
MCB
FFC
MCB

PPL
FFC
LUCK
MCB

The Weights of each Two-Asset Cass are as follows:

HUBC
PPL

0
1

0.05
0.95

0.1
0.9

0.15
0.85

0.2
0.8

0.25
0.75

0.3
0.7

0.35
0.65

0.4
0.6

0.45
0.55

0.5
0.5

0.55
0.45

0.6
0.4

0.65
0.35

0.7
0.3

0.75
0.25

0.8
0.2

0.85
0.15

0.9
0.1

0.95
0.05

1
0

HUBC
FFC

1
0

0.95
0.05

0.9
0.1

0.85
0.15

0.8
0.2

0.75
0.25

0.7
0.3

0.65
0.35

0.6
0.4

0.55
0.45

0.5
0.5

0.45
0.55

0.4
0.6

0.35
0.65

0.3
0.7

0.25
0.75

0.2
0.8

0.15
0.85

0.1
0.9

0.05
0.95

0
1

HUBC
LUCK

0
1

0.05
0.95

0.1
0.9

0.15
0.85

0.2
0.8

0.25
0.75

0.3
0.7

0.35
0.65

0.4
0.6

0.45
0.55

0.5
0.5

0.55
0.45

0.6
0.4

0.65
0.35

0.7
0.3

0.75
0.25

0.8
0.2

0.85
0.15

0.9
0.1

0.95
0.05

1
0

HUBC
MCB

1
0

0.95
0.05

0.9
0.1

0.85
0.15

0.8
0.2

0.75
0.25

0.7
0.3

0.65
0.35

0.6
0.4

0.55
0.45

0.5
0.5

0.45
0.55

0.4
0.6

0.35
0.65

0.3
0.7

0.25
0.75

0.2
0.8

0.15
0.85

0.1
0.9

0.05
0.95

0
1

PPL
FFC

0
1

0.05
0.95

0.1
0.9

0.15
0.85

0.2
0.8

0.25
0.75

0.3
0.7

0.35
0.65

0.4
0.6

0.45
0.55

0.5
0.5

0.55
0.45

0.6
0.4

0.65
0.35

0.7
0.3

0.75
0.25

0.8
0.2

0.85
0.15

0.9
0.1

0.95
0.05

1
0

PPL
LUCK

1
0

0.95
0.05

0.9
0.1

0.85
0.15

0.8
0.2

0.75
0.25

0.7
0.3

0.65
0.35

0.6
0.4

0.55
0.45

0.5
0.5

0.45
0.55

0.4
0.6

0.35
0.65

0.3
0.7

0.25
0.75

0.2
0.8

0.15
0.85

0.1
0.9

0.05
0.95

0
1

PPL
MCB

0
1

0.05
0.95

0.1
0.9

0.15
0.85

0.2
0.8

0.25
0.75

0.3
0.7

0.35
0.65

0.4
0.6

0.45
0.55

0.5
0.5

0.55
0.45

0.6
0.4

0.65
0.35

0.7
0.3

0.75
0.25

0.8
0.2

0.85
0.15

0.9
0.1

0.95
0.05

1
0

FFC
LUCK

1
0

0.95
0.05

0.9
0.1

0.85
0.15

0.8
0.2

0.75
0.25

0.7
0.3

0.65
0.35

0.6
0.4

0.55
0.45

0.5
0.5

0.45
0.55

0.4
0.6

0.35
0.65

0.3
0.7

0.25
0.75

0.2
0.8

0.15
0.85

0.1
0.9

0.05
0.95

0
1

FFC
MCB

0
1

0.05
0.95

0.1
0.9

0.15
0.85

0.2
0.8

0.25
0.75

0.3
0.7

0.35
0.65

0.4
0.6

0.45
0.55

0.5
0.5

0.55
0.45

0.6
0.4

0.65
0.35

0.7
0.3

0.75
0.25

0.8
0.2

0.85
0.15

0.9
0.1

0.95
0.05

1
0

LUCK
MCB

1
0

0.95
0.05

0.9
0.1

0.85
0.15

0.8
0.2

0.75
0.25

0.7
0.3

0.65
0.35

0.6
0.4

0.55
0.45

0.5
0.5

0.45
0.55

0.4
0.6

0.35
0.65

0.3
0.7

0.25
0.75

0.2
0.8

0.15
0.85

0.1
0.9

0.05
0.95

0
1

The Total Returns of each asset class are as follows:

HUBC
PPL
FFC
LUCK
MCB

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

Portfolio Management | Two-Asset Portfolio Risk Term Report

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

0.58
5.04
0.69
1.69
2.12

The Correlation between each Two-Asset class is as follows:

HUBC
PPL

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

HUBC
FFC

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

HUBC
LUCK

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

HUBC
MCB

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

(0.02)

PPL
FFC

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

0.18

PPL
LUCK

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

0.51

PPL
MCB

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

0.88

FFC
LUCK

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

0.28

FFC
MCB

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

0.13

LUCK
MCB

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

0.55

The Standard Deviation between each Asset class is as follows:

HUBC
PPL
FFC
LUCK
MCB

1.25
5.02
1.53
2.26
2.25

Portfolio Management | Two-Asset Portfolio Risk Term Report

Results using of each Two-Asset classes

Portfolio Return
1
ST.Dev

5.04
5.02

4.82
4.78

4.60
4.54

4.37
4.30

4.15
4.06

3.93
3.82

3.70
3.58

3.48
3.35

3.26
3.12

3.03
2.89

2.81
2.66

2.59
2.45

2.36
2.23

1.92
1.84

1.69
1.66

1.47
1.51

1.25
1.38

1.02
1.29

0.80
1.24

0.58
1.25

0.68
1.45

0.69
1.49

0.69
1.53

In this case there are no

gains from diversification.

Return
6.00

The possible portfolios lie

on a parabola that has no
turning point between
HUBC and PPL

PPL

5.00
4.00
Min Variance
Point

3.00

2.14
2.03

Return

2.00
1.00

HUBC

0.00
0.00

1.00

2.00

3.00

4.00

5.00

6.00

Comments: In this case, as in every case involving a riskless and a risky asset, the relationship is linear.
This is easily seen. If asset 1 is riskless, the asset 2 will also be riskless, since both have zero or no
correlation
Portfolio Return
2
ST.Dev

0.58
1.25

0.58
1.23

0.59
1.21

0.59
1.19

0.60
1.18

0.61
1.18

0.61
1.17

0.62
1.17

0.62
1.18

0.63
1.19

0.63
1.21

0.64
1.22

0.65
1.25

0.65
1.27

0.66
1.30

0.66
1.33

0.67
1.37

0.67
1.41

Return
0.70

FFC

0.68
0.66
0.64
Return

0.62

Min Variance
Point

0.60
0.58

HUBC

0.56
0.00

0.50

1.00

1.50

2.00

Comments: In this case, as in case involving a riskless and a risky asset, the relationship is non-linear,
means as the risk increase the more the return will be earn. There is positive correlation and from the
point where (0.64, 1.22) the company is at efficient frontier.

Portfolio Management | Two-Asset Portfolio Risk Term Report

Portfolio Return
3
ST.Dev

1.69
2.26

1.64
2.18

1.58
2.11

1.52
2.03

1.47
1.96

1.41
1.89

1.36
1.82

1.30
1.75

1.25
1.69

1.19
1.62

1.13
1.56

1.08
1.51

1.02
1.46

0.97
1.41

0.91
1.37

0.86
1.33

0.80
1.30

0.74
1.28

0.69
1.26

0.63
1.25

0.58
1.25

In this case there are no

gains from diversification.

Return
1.80

The possible portfolios lie

on a parabola that has no
turning point between
HUBC and LUCK

LUCK

1.60
1.40
1.20
1.00

Return

0.80
0.60

Min Variance
Point

0.40

HUBC

0.20
0.00
0.00

0.50

1.00

1.50

2.00

2.50

Comments: Again in this portfolio, there is a little correlation between two-assets as on point (0.8, 1.30)
there is a little slop in the line it means both the assets have little correlation or no correlation.

Portfolio Return
4
ST.Dev

0.58
1.25

0.65
1.19

0.73
1.14

0.81
1.11

0.89
1.09

0.96
1.08

1.04
1.10

1.12
1.12

1.19
1.16

1.27
1.21

1.35
1.28

1.43
1.35

1.50
1.43

1.58
1.52

Efficient frontier
(Investor Prefer)

2.00

MCB

1.50
1.00

Min Variance
Point

0.50

Return

Max
Variance
Frontier

0.00
0.50

1.00

1.50

2.00

1.81
1.81

1.89
1.92

1.97
2.03

That is, in this case there

are gains from
diversification.
The possible portfolios lie
on a parabola that has a
turning point
between HUBC and MCB

HUBC

0.00

1.73
1.71

There exists some

portfolio of MCB and
HUBC. The MCB has higher
expected return and lower
variance then HUBC.

Return
2.50

1.66
1.61

2.50

Comments: Portfolio options with benefits from diversification. In this portfolio, there is a positive
correlation between two-assets as from point (1.04, 1.10) there is an efficient frontier and below it there is
a global min risk point.
Portfolio Management | Two-Asset Portfolio Risk Term Report

2.04
2.14

2.12
2.25

Portfolio Return
5
ST.Dev

0.69
1.53

0.91
1.52

1.13
1.55

1.34
1.62

1.56
1.72

1.78
1.85

2.00
2.00

2.22
2.17

2.43
2.35

2.65
2.55

2.87
2.75

3.09
2.96

3.30
3.18

3.52
3.40

3.74
3.63

6.00

4.39
4.31

4.61
4.55

4.83
4.78

5.04
5.02

The possible portfolios lie

on a parabola that has no
turning point between PPL
and FFC

PPL

5.00
4.00

Return

Min Variance
Point

2.00

4.17
4.08

In this case there are no

gains from diversification.

Return

3.00

3.96
3.85

1.00
FFC

0.00
0.00

1.00

2.00

3.00

4.00

5.00

6.00

Comments: In this case, as in every case involving a riskless and a risky asset, the relationship is linear.
This is easily seen. If asset 1 is riskless, the asset 2 will also be riskless, since both have zero or no
correlation.

Portfolio Return
6
ST.Dev

5.04
5.02

4.88
4.83

4.71
4.64

4.54
4.45

4.37
4.27

4.21
4.08

4.04
3.91

3.87
3.73

3.70
3.56

3.54
3.40

3.37
3.24

3.20
3.09

3.03
2.95

2.86
2.81

2.70
2.69

2.53
2.58

2.36
2.48

2.19
2.40

6.00

The possible portfolios lie

on a parabola that has no
turning point between PPL
and LUCK

PPL

5.00
4.00
3.00

Return

2.00
Min Variance
Point

LUCK

0.00
0.00

1.00

2.00

3.00

4.00

1.86
2.29

In this case there are no

gains from diversification.

Return

1.00

2.03
2.33

5.00

6.00

Comments: Again in this portfolio, there is a little correlation between two-assets as on point (2.03, 2.33)
there is a little slop in the line it means both the assets have little correlation or no correlation
Portfolio Management | Two-Asset Portfolio Risk Term Report

1.69
2.26

Portfolio Return
7
ST.Dev

2.12
2.25

2.27
2.36

2.41
2.48

2.56
2.60

2.71
2.72

2.85
2.85

3.00
2.99

3.14
3.12

3.29
3.26

3.44
3.40

3.58
3.54

3.73
3.68

3.87
3.83

4.02
3.97

4.17
4.12

4.31
4.27

4.46
4.42

4.61
4.57

4.75
4.72

4.90
4.87

5.04
5.02

Note: That diversification

when the correlation
between the securities is
one is ineffective.

Return
6.00
PPL

5.00
Min Variance
Point

4.00
3.00

Return

2.00

MCB

1.00
0.00
0.00

1.00

2.00

3.00

4.00

5.00

6.00

Comments: In this case, as in every case involving a riskless and a risky asset, having the Correlation of
0.88 the Risk between Two-Assets is linear. It shows perfectly positive correlation between two assets.
Portfolio Return
8
ST.Dev

0.69
1.53

0.74
1.49

0.79
1.46

0.84
1.44

0.89
1.42

0.94
1.42

0.99
1.42

1.04
1.44

1.09
1.46

1.14
1.49

1.19
1.53

1.24
1.58

1.29
1.64

1.34
1.70

LUCK

Efficient frontier
(Investor Prefer)

1.60
1.40
1.20
1.00
0.80

Min Variance
Point

0.60

FFC

0.40

Max
Variance
Frontier

Return

0.00
0.50

1.00

1.50

2.00

1.49
1.92

1.54
2.00

1.59
2.08

1.64
2.17

That is, in this case there

are gains from
diversification.
The possible portfolios lie
on a parabola that has a
turning point
between LUCK and FFC

0.20
0.00

1.44
1.84

There exists some

portfolio of LUCK and FFC.
The LUCK has higher
expected return and lower
variance then FFC.

Return
1.80

1.39
1.77

2.50

Comments: Portfolio options with benefits from diversification. In this portfolio, there is a positive
correlation between two-assets as from point (1.09, 1.46) there is an efficient frontier and below it there is
a global min risk point.
Portfolio Management | Two-Asset Portfolio Risk Term Report

10

1.69
2.26

Portfolio Return
9
ST.Dev

2.12
2.25

2.05
2.15

1.98
2.05

1.91
1.95

1.83
1.86

1.76
1.78

1.69
1.70

1.62
1.62

1.55
1.55

1.48
1.49

1.41
1.44

1.33
1.40

1.26
1.37

1.19
1.35

1.12
1.34

2.50
MCB

Efficient frontier
(Investor Prefer)

Min Variance
Point

0.50

Return

Min
Variance
Frontier

FFC

0.50

1.00

1.50

2.00

0.83
1.43

0.76
1.47

0.69
1.53

The possible portfolios lie

on a parabola that has a
turning point
between MCB and FFC

0.00
0.00

0.91
1.39

That is, in this case there

are gains from
diversification.

1.50
1.00

0.98
1.36

There exists some

portfolio of MCB and FFC.
The MCB has higher
expected return and lower
variance then FFC.

Return
2.00

1.05
1.34

2.50

Comments: Portfolio options with benefits from diversification. In this portfolio, there is a positive
correlation between two-assets as from point (1.48, 1.49) there is an efficient frontier and below it there is
a global min risk point.
Portfolio Return
10
ST.Dev

1.69
2.26

1.71
2.21

1.73
2.17

1.76
2.13

1.78
2.09

1.80
2.06

1.84
2.01

1.86
2.00

1.88
1.99

1.91
1.98

1.93
1.98

1.95
1.99

1.97
2.01

Return

Efficient frontier
(Investor Prefer)

2.50

1.82
2.03

MCB

Min
Variance
Frontier

2.00
LUCK

1.50

Return

Min Variance
Point

1.00

1.99
2.03

2.01
2.05

2.03
2.08

2.06
2.12

2.08
2.16

2.10
2.20

There exists some

portfolio of LUCK and FFC.
The MCB has higher
expected return and lower
variance then LUCK.
That is, in this case there
are gains from
diversification.
The possible portfolios lie
on a parabola that has a
turning point
between LUCK and MCB

0.50
0.00
1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

Portfolio Management | Two-Asset Portfolio Risk Term Report

11

2.12
2.25