Posted: September 17th, 2017

Individual Coursework

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 15%. The client claims he is a risk-averse investor and his initial investment is £500,000. Please propose an investment plan for your client based on his expectation and the following requirements.

This project requires you to use 4 years daily adjusted-close prices (from 01 Jan 2011 to 31^{st} Dec 2014) of real listed company stocks. These companies could be any companies listed on the stock exchanges around the world. The data can be obtained from the website of Yahoo Finance. Please use MS Excel to perform the calculations.

The risk-free asset is assumed with an annual rate of return of 5%.

Section 1: Choose five different companies’ stocks that potentially can be used to construct a portfolio and make sure that the annual rate of return for some companies is less than 15% and larger than 15% for other companies. You are required to:

- a) Briefly introduce each company’s background, such as financial position, explain why you chose these five stocks.
- b) Using the data extracted for the companies, calculate the mean return and the standard deviations of each company stock over the sample period, and briefly discuss the results.

- c) Calculate the covariance and correlation for each pair of stocks over the sample period and briefly discuss the results.

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 15% annual return requirement and take into account that your client is risk-averse investor. You are required to:

- Show the different combinations of risk and return for portfolios comprising these two stocks, and plot a graph showing the relationship between return and risk of various portfolios.
- Identify the minimum variance portfolio. What is the risk and return of this minimum variance portfolio? Does this minimum variance portfolio meet the requirement of your client?
- Estimate the Sharpe ratio for minimum variance portfolio, and various portfolios and explain the use of Sharpe ratio to you client.
- Identify the tangency portfolio based on two stocks you selected from the five stocks and what is the expected return and the risk of this tangency portfolio? Does this tangency portfolio meet the requirement of your client?
- Identify the Portfolio A and decide the weighting of each company stock in Portfolio A and explain why you select this portfolio to your client.

Section 3: construct Portfolio B by combining one risk-free asset with Portfolio A (consisting of two company stocks (risky assets)) and make sure that the annual rate of return for Portfolio B is 25%.

- Decide the weighting of the risk-free asset and each company stock in Portfolio B and what is the standard deviation of Portfolio B?

- Explain how to construct Portfolio B given that the annual rate of return of Portfolio A is less than the annual rate of return for Portfolio B?
- 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?

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).

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