AAF040-6: Financial Markets and Portfolio Management - Assignment Help

Assignment Task:

Task:

Unit learning outcomes

1. A deep and systematic understanding of the structure and role of financial markets, the role of intermediaries, and determine optimal portfolio selection balancing risks and return.
2. Manifest the ability to review, critique and evaluate knowledge of financial markets and portfolio selection in order to meet the required return and minimise the risk

Section 1: Please start your analysis by selecting four companies from the London Stock Exchange that could be used to construct the portfolio. For the selected companies please you are required to:
a) Comment on the share price performance of the selected companies by including key statistics such as average share price, average return and highest/lowest price.
(Hint: Daily returns can be annualised by multiplying it by (1+R)^(252/no of observations), while daily standard deviations can be annualised by multiplying them by the square root of 360.)

b) Calculate the covariance and correlation between the stocks. Comment on your results.

(10 marks)
c) Assume Capital Assets Pricing Model (CAPM) holds and FTSE All-shares is the market portfolio; calculate the beta
for each company stock selected and comment on your calculated beta and its impact on the portfolio.

(10 marks)
d) Use CAPM to estimate the mean return of each stock and analyze whether they are over- or underpriced. What action would you suggest?

(10 marks)
Section 2: Based on your analysis of the selected companies’ stocks in Section 1, construct Portfolio A that comprises of two company stocks from the four. This portfolio’s annual return should meet the client’s 10% expected return. You are required to:

a) Critically explain to your client the two stocks are worth investing compared to others (Use the statistics that you calculated in section 1 to justify your selection). (15 marks)
b) Using excel solver identify the portfolio mix that represents the minimum-variance portfolio. What is the risk and return of this portfolio? Explain the meaning of minimum-variance portfolio. Show graphically the combinations of risk and return for portfolios comprising the two stocks (i.e. the efficient frontier).

(10 marks)
c) According to your client’s required annual return rate, 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. (15 marks)
d) Estimate the Sharpe ratio and Jensen’s Alpha of Portfolio A. Explain and comment on these performance measures to your client.

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