BUSN6002: Asset and Portfolio Return Analysis Assessment

Assignment Overview 

You just joined a new upstart firm that is focused on managing investments and particularly excess returns. Your goal is to find out whether you can use any of the models you know (CAPM and FF-3 factor) to predict those excess returns. You have managed to secure a few clients that are interested in investing. Specifically, you have two clients: Gus Fring and Hector Salamanca. Gus is interested in having a portfolio of assets (say 5 assets), while Hector is interested in individual assets (1 asset). Both clients want you to pick the assets to be used.

You must write a short report of max 500 words, where you briefly explain the results, how good (or ineffective) the models are at predicting excess returns of your clients’ demands, and which one you would prefer out of those used. Have a professional tone in your report, you are “talking” to your clients and delivering them a report regarding a forecasting approach. Be clear, organized and professional. The presentation will have an impact on your grade.

Extra credit: Examine in the literature what other approach you could employ to predict those excess returns (also known as equity premium). Examine on Google Scholar and provide a small paragraph on that approach (100 words).

Important NOTE:

You will submit both a report (word file) and an Excel file showing your work. If no Excel is submitted the report will get a max of 20/100 marks.

Include only relevant calculations in Excel. Make sure your Excel submission is easy to read and clear. Random and irrelevant calculations will be marked negatively. If there are no functions included in the Excel submission then there will be a significant negative impact on the mark (we need to verify the calculations). If there are parts that we do not understand you will be asked to clarify at any moment during the grading process. Be available within a maximum 48-hour span. After that, it will be at the discretion of the grader to decide how to penalise. Just be alert for an email.

Assessment Summary

Objective:

The assessment requires students to analyze excess returns for individual and portfolio assets using models such as CAPM and the Fama-French 3-factor (FF-3) model. The focus is on predicting the effectiveness of these models for investment decision-making for two clients:

• Gus Fring: Interested in a portfolio of 5 assets.

• Hector Salamanca: Interested in a single asset.

Requirements:

1. Select appropriate assets for both clients.

2. Apply CAPM and FF-3 models to forecast excess returns.

3. Prepare a short professional report (max 500 words) detailing:

   • Results of the predictions.

   • Effectiveness of the models.

   • Preferred model based on findings.

4. Submit an accompanying Excel file with relevant calculations and functions.

5. Extra credit (optional): Identify an alternative equity premium prediction method from academic literature (exclude asset pricing models, ~100 words).

Key Points to Cover in Report:

• Asset selection rationale.

• Methodology: CAPM and FF-3 application.

• Analysis of predictive performance.

• Professional, client-focused presentation.

• Clarity and organization of results.

Step-by-Step Approach by Academic Mentor

1. Understanding the Problem:

The mentor guided the student to first carefully read the brief, identifying client requirements and assessment deliverables. The importance of Excel calculations and report clarity was emphasized.

2. Asset Selection:

• For Gus, the student selected 5 diversified assets to form a portfolio.

• For Hector, a single asset was selected based on historical return patterns and volatility.
  The mentor stressed documenting the rationale for asset selection for transparency.

3. Model Application:

• CAPM: Student calculated expected excess returns using beta, risk-free rate, and market return.

• FF-3 Factor Model: The student included size and value factors along with market excess returns.
  The mentor guided the student to cross-check calculations, ensure correct Excel functions were used, and maintain readability.

4. Analysis of Results:

• The mentor encouraged the student to compare predicted returns with historical data.

• Discussion focused on model effectiveness, noting which model better explained the variations in excess returns for each client.

5. Report Preparation:

• The mentor advised writing in a professional, client-oriented tone, avoiding technical jargon where possible.

• Report structure included: introduction, methodology, results, interpretation, and conclusion.

• Extra credit paragraph: The mentor directed the student to search Google Scholar for an alternative equity premium approach and summarize it succinctly.

6. Excel Submission:

• The mentor emphasized including only relevant calculations.

• Clear labeling of inputs, formulas, and outputs was ensured for grading transparency.

Outcome Achieved

• Report: A concise, professional report (under 500 words) explaining asset selection, model predictions, and preferred forecasting approach.

• Excel File: Well-organized spreadsheet containing all necessary calculations using functions, easy to read, and transparent.

• Extra Credit: Optional 100-word paragraph summarizing an alternative academic approach to predict excess returns.

Learning Objectives Covered:

• Apply CAPM and FF-3 factor models to real investment scenarios.

• Compare and evaluate predictive performance of financial models.

• Communicate financial analysis professionally to clients.

• Demonstrate practical skills in Excel for financial calculations.

• Explore alternative academic approaches for predicting equity premium.

Access Your Assignment Solutions Safely & Effectively

Looking for guidance on your academic assignments? You can download our sample solution to get insights, structure ideas, and understand how to approach your work effectively. Important: This sample is for reference only. Submitting it as your own may result in plagiarism penalties.

Want a worry-free option? Our team of professional academic writers can craft a fresh, plagiarism-free assignment solution tailored specifically to your requirements. Enjoy benefits like:

• Unique, 100% original content written to your brief

• Clear, organized, and professional presentation

• Step-by-step guidance for complex topics

• On-time delivery, ready for submission

Take control of your academic success today:

Download Sample Solution         Order Fresh Assignment