25503: Investment Analysis - Market Portfolio - Portfolio Analysis - Stock Prices - Finance Assignment Help

Assignment Task:

To perform the asset allocation you decide to construct a minimum variance portfolio according to the theory you learned in 25503 Investment Analysis. You recall the 11% expected return target imposed by your boss and note that there was no mention of short-selling constraints. In order to construct this portfolio you will need to perform the following tasks/answer the following questions: 

Question 1. 
(a)  Transform the stock prices into simple weekly returns (you do not need to report these in your submission). 
(b) Using the returns data, estimate (and report) the vector of expected returns for the seven stocks, as well as the variance-covariance matrix of these returns. This information should be annualised. 
(c) Which stocks are dominated by others? Explain. 
(d) Compute and report the parameters A, B, C and ?. 
(e) Construct and plot the MVS (with short sales allowed) for expected (annual) returns ranging between -10% and 30%. Your figure should also indicate the positions of the seven stocks. 
(f) Identify the global minimum variance portfolio (MVP). That is, report the portfolio weights (in the seven stocks), expected return, and standard deviation of the MVP. 
(g) Determine and report the portfolio weights for the efficient portfolio with an 11% expected return.

Your boss now informs you that the 11% target return portfolio you have constructed is not as ‘efficient’ as it might be as you have forgotten all about the risk-free asset... oopsy daisy! You quickly do some research and determine that the appropriate risk-free rate to use is 0.75% per annum. Perform the following tasks to adjust your portfolio weights. All figures should be annualized.
 
Question2. 
(a)  Construct and plot the MVS (with short sales allowed) for the seven stocks plus the risk-free asset. Illustrate its tangency property graphically by plotting the risky-security-only MVS from 1.(e) on the same set of axes. The figure should contain two MVSs (a bullet and a line), seven points representing each of the seven stocks a point representing the tangency portfolio. 
(b) Report the tangency portfolio’s weights, expected return, and standard deviation of returns. 
(c) Determine and report the new portfolio weights in the seven stocks plus the risk-free asset for the new efficient portfolio with an 11% expected return. 
(d) Calculate and report the reduction in risk of the 11% returning efficient portfolio that can be achieved by adding the risk-free asset to the portfolio of seven stocks

Your portfolio analysis skills have impressed your manager. However, she is concerned about the need to short sell some of the assets in the currently proposed portfolios. Many of the firm’s clients do not like, and some do not allow, short selling in their portfolios. Therefore, your boss wants you to investigate the effect a no-short-sales constraint will have on the MVS without a risk-free asset and any subsequent investment decisions. To do this you are asked to perform the following tasks. Remember to annualize all figures. 
 
Question3. 
(a)  Construct and plot the risky-asset-only MVS with no short sales allowed for the seven stocks. Recall you will need Solver to do this. (Note: Solver can sometimes give slightly different solutions depending on the initial conditions. If your solution is unexpected try different initial condition values. Marginal differences are acceptable). Plot the MVS for the unconstrained problem—found in 1.(e)—on the same set of axes. 
(b) List in a table the portfolio weights for all the data points used in constructing your no-short-sales-allowed graph. 
(c) Identify and report the range of expected returns for which the short sales constraint is not binding. Report the range to the nearest whole number. 
(d) Determine and tabulate the new portfolio weights for the efficient portfolio with an 11% expected return under the no-short-sales constraint. 
(e) Discuss the compositions of the portfolios at the end-points of the MVS with no short sales. Report the weights in a table.

The company is now considering adding an index tracking fund to their investment offerings and your boss wants you to investigate the different methods of constructing such a tracking portfolio. To do this you should perform the following preliminary analysis: 

Question4. 
(a) Using the S&P/ASX 200 index as a proxy for the market portfolio (MP), estimate and report the betas of the seven stocks. 
(b) Decompose the total risk (variance) of each asset into its systematic and unsystematic components, i.e., report all three values (variance, systematic risk, unsystematic risk) along with the diversification ratio (R2) for each stock and the index. 
(c) Assuming risk-free borrowing and lending at rF = 0.75% per annum, plot the capital market line (CML), and indicate the positions of the seven stocks as well as the MP. Again, use the S&P/ASX 200 index as a proxy for the MP. 
(d) Plot the security market line (SML), and indicate the positions of the seven stocks as well as that of the MP. Based on this graph, which stocks are overvalued, and which stocks are undervalued?

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