FIN7018: Portfolio Management and Analysis - Management Assignment Help

Assignment Task

Learning outcomes and pass attainment level:

1. Evaluate assets prices using various pricing/valuation models and demonstrate critical understanding on the models.

2. Apply modern portfolio theories to construct efficient portfolios and determine the optimal portfolio. 3. Competently collect, analyse data with appropriate techniques for effective decision-making and propose practical/innovative investment plan in local and international markets.

Requirements

Suppose you are working for an UK investment company, a client with limited investment knowledge asked you to create an equity investment portfolio with a minimum required annual return of 20%. The client claims he is risk-averse, his initial investment fund is £100,000. Please propose an investment plan for your client based on his expectation and the following requirements. In this report, you need to present the calculated results and provide comments on the results.

This project requires you to use 4 years (from 01 June 2018 to 01 June 2022) daily adjusted-closing prices of real listed company stocks. The data can be obtained from Yahoo Finance. Please use MS Excel for the calculations.

The risk-free asset is assumed with an annual rate of return of 4%.

Section 1

Your manager recommended the two company stocks - Taylor Wimpey and JD Sports, both are listed on London Stock Exchange. You need to choose other four companies in the UK stock markets that can be potentially included in the investment portfolio. You are required to:

1. Critically analyse the key information of the six selected companies (products, industry, size, financial position, dividend policy and market share etc.) and explain the reasons that why the six company stocks are worth investment.
2. Using the data extracted for the six companies, calculate the holding period yield (HPY) for each single year, the annual holding period return (HPR), the geometric mean (GM) return and the standard deviations of each company stock.

Now you need to use the recent 2 years (from 01 June 2020 to 01 June 2022) daily adjusted-closing prices of the six companies for the following questions.

3. Please calculate the daily return and risk over the two years and estimate the covariance and correlation between the stocks, comment on your results.
4. Assume Capital Assets Pricing Model (CAPM) holds and FTSE100 is the market portfolio; calculate the beta for each company stock selected and explain the meaning of beta.
5. Use CAPM to estimate the expected return of each stock and determine whether they are over- or under-priced. What action would you suggest?

Section 2

Based on your analysis of the six companies’ stocks in Section 1, construct Portfolio A that comprises of two company stocks from the six. This portfolio should meet the client’s expected return of 20% per annum.

You are required to:

1. Explain to your client the two stocks are worth investing compared to others.
2. Show graphically the combinations of risk and return for portfolios comprising the two stocks (i.e. the efficient frontier).
3. Identify the portfolio mix that represents the minimum-variance portfolio. What is the risk and return this portfolio? Explain the meaning of minimum-variance portfolio.
4. According to your client’s required annual return rate, suggest the portfolio that suits him best and name it as Portfolio A. For this purpose, you need to decide the weighting of each stock in the portfolio; calculate the portfolio mean return and the standard deviation.
5. With 95% confidence level, calculate the Value-at-Risk of the portfolio (in £). Explain the results to your client.
6. With investor’s required return 20% per annual, use the short-fall approach to estimate the optimal portfolio. Comment on your results.
7. Estimate the Sharpe ratio of Portfolio A and explain the use of Sharpe ratio to you client.

Section 3

Since the client is risk-averse, please construct Portfolio B by combining one risk-free asset with the two company stocks (risky assets) that you selected for Portfolio A.

1. Decide the weighting of the risk-free asset and each company stock in Portfolio B, calculate the risk and expected return of the portfolio. Explain the reasons that you consider this portfolio suits the client.
2. If the client considers investing 60% of his fund in FTSE100 index tracking fund and 40% in risk free assets (annual return rate 4%), this is named as Portfolio C. please estimate the expected return and calculate the standard deviation of Portfolio C and compare it with Portfolio B. According to your estimation, which one is outperforming the other?
3. Calculate the mean returns and risks of S&P500 and FTSE100 respectively, use Trynor’s and Sharpe measure to compare and rank the performance of your Portfolio A, B, C and S&P500 and FTSE100, can you beat the markets? If the markets cannot be beaten, what would you suggest the client to invest?
4. Complete your proposal with a proper conclusion and discuss the limitations.

Remember, your client is not an expert in Portfolio theory, therefore, please interpret and comment on your technical analysis results in the way he can understand. The proposal should contain a proper introduction and conclusion.

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