(30% of final marks)
Suppose you are working in an Investment Bank, a client with limited investment knowledge requests you to create a portfolio with a minimum required annual return of 20%. The client claims he is a risk-averse investor and his initial investment is £100,000. Please propose an investment plan for your client based on his expectation and the following requirements.
This project requires you to use 2 years daily adjusted-close prices (from 01 March 2013 to 27 February 2015) of real listed company stocks. The data can be obtained from Yahoo Finance. Please use MS Excel to perform the calculations.
The risk-free asset is assumed with an annual rate of return of 4%.
Section 1: Choose five different companies’ stocks that potentially can be used to construct a portfolio. You are required to:
- a) Discuss why you chose the five stocks and analyse key information about each company’s background (size, financial position, dividend and market share). (5 marks)
- b) Using the data extracted for the companies, calculate the mean return and the standard deviations of each company stock. (10 marks)
- c) Calculate the covariance and correlation between the stocks. (10 marks)
Section 2: Based on your analysis of the five companies’ stocks in Section 1, construct Portfolio A that comprises of two companies’ stocks from the five. This portfolio should meet the client’s 20% annual return requirement and you are required to:
- Explain to your client why you selected the two stocks. (5 marks)
- b) Show the different combinations of risk and return for portfolios comprising the two stocks. (10 marks)
- Based on the efficient frontier, find the portfolio mix that represents the minimum variance portfolio. What is the risk and return of the minimum variance portfolio? (10 marks)
- According to your client’s required annual rate of return, find the portfolio that suits him best, this should be Portfolio A. Decide the weighting of each stock in the portfolio; show the portfolio mean return and the standard deviation. (10 marks)
- Estimate the Sharpe ratio of Portfolio A and explain the use of Sharpe ratio to you client. (10 marks)
Section 3: Since the client is risk-averse, construct Portfolio B by combining one risk-free asset with the two company stocks (risky assets) that you selected for Portfolio A.
- Decide the weighting of the risk-free asset and each company stock in Portfolio B; explain why you considered this portfolio suits the client. (10 marks)
- Assume FTSE 100 is the market portfolio, use Capital Market Line to estimate the expected return and calculate the standard deviation of Portfolio B. (10 marks)
- Calculate the mean returns and risks of FTSE 100 and S&P500 respectively, compare your Portfolio A’s mean return and risk with those of FTSE100 and S&P500, can you beat the markets? (10 marks)
Remember, your client is not an expert in Finance theory, therefore, please interpret and comment on your technical analysis results so he would be able to understand. You need to provide a report with 2000 words (appendix and reference list are not included). Please include your key Excel output as an appendix.
Total 100 marks
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