Financial Markets and Portfolio Management AAF040-6


Submission Deadline Marks and Feedback
Before 10am on: 20 working days after deadline (L4, 5 and 7)
15 working days after deadline (L6)
10 working days after deadline (block delivery)

Unit title & code Financial Markets and Portfolio Management AAF040-6
Assignment number and title 2 Individual Written Report
Assignment type WR-I
Weighting of assignment 60%
Size or length of assessment 3000 Words
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
What am I required to do in this assignment?
Suppose you are working in an Investment Bank, a client with limited investment knowledge asks you to create a portfolio with a minimum required annual return of 10%. The client claims he is a risk-averse investor and his initial investment is £100,000. Please propose an investment plan for your client based on his expectation and the following requirements.

This project requires you to use 3 years (02/12/2017 to 02/12/2020) daily adjusted-closing prices of real UK listed company stocks. The data can be obtained from Thomson Reuters Eikon or other sources. Please use MS Excel to perform the calculations (Include all the calculations in Excel and written part in Word document. Please note that the Excel will be used ONLY to check the calculations and you must discuss all the important calculation in word document. Marks will be deducted if the calculated numbers are not discussed in the word document. You are required to submit both the files).

The risk-free asset is assumed with an annual rate of return of 2%.

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:

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 252.) (15 marks) Calculate the covariance and correlation between the stocks. Comment on your results. (10 marks) 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) 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:

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) 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) 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) Estimate the Sharpe ratio and Jensen’s Alpha of Portfolio A. Explain and comment on these performance measures to your client. (15 marks)

What do I need to do to pass? (Threshold Expectations from UIF)
In order to pass Assessment 2 you will need to: Use real world cases and financial data to demonstrate the ability to solve the complicated problem of generating optimal portfolios that achieve both a reduced risk and a required return Demonstrate a clear application of your skills to the contemporary financial environment and make sound and informed judgments and decisions. Collect data of financial assets from Reuters Eikon or Datastream and critically evaluate the performance of financial assets based on financial analysis and statistical techniques, explaining the implication of these variables.
How do I produce high quality work that merits a good grade?
How does this assignment relate to what we are doing in scheduled sessions?
During weeks 4-6, we have explored important concepts in portfolio management which you will use to complete this assessment. In specific, you will use your understanding of important stock indicators, calculation of variance, covariance and correlation among selected stocks, calculation of CAPM and its implication for investment, creation of various portfolio mix and identification of minimum-variance portfolio and portfolio performance analysis.

How will my assignment be marked?

Your assignment will be marked according to the threshold expectations and the criteria on the following page.

You can use them to evaluate your own work and consider your grade before you submit.

Pass – 40-49% Pass – 50-59% Commendation – 60-69% Distinction– 70%+
Sec 1 (A) 15% Some correct calculations. Explanation is weak and lack of details. A few calculation errors. Brief comment on the calculated numbers. Accurate calculation. Very good discussion on the calculated numbers. Accurate calculations and all required indicators are provided. Outstanding discussion on the calculated numbers.
Sec 1 (B) 10% Some correct calculations. Explanation is weak and lack of details. A few calculation errors. Brief comment on the calculated numbers. Accurate calculation. Very good discussion on the calculated numbers. Accurate calculations and all required indicators are provided. Outstanding discussion on the calculated numbers.
Sec 1 (C) 10% Some of the beta calculations are correct, interpretation is very basic, shows very limited understanding of the Beta and its impact on portfolio. A few errors in calculations, interpretation is reasonably good, and shows good understanding of the beta and its impact on the portfolio. Calculation is accurate, interpretation shows very good understanding of the beta and its impact on the portfolio. Calculation is accurate, clearly show all the procedures. Interpretation is exceptionally good. Limitations are well discussed, shows extra research.
Sec 1 (D) 10% Some correct calculations are performed. Limited discussion on whether the stocks are over or under priced. Weak actions are suggested. A few errors in calculations. Good discussion on whether the stocks are over or under priced. Good actions are suggested. Correct calculations. Very Good discussion on whether the stocks are over or under priced. Actions are suggested. Correct calculations. Outstanding discussion on whether the stocks are over or under priced. Actions are suggested.
Sec 2 (A) 15% Very basic explanation on the selection of 2 companies. Some of the numbers are used from section 1 to justify selection. However, the important numbers are not discussed. The selection may be incorrect. Reasonably good explanation on the selection of 2 companies. Some of the important numbers are used from section 1 to justify selection. Very good explanation on the selection of 2 companies. A number of the important numbers are used from section 1 to justify selection. Outstanding explanation on the selection of 2 companies. All the relevant numbers are used from section 1 to justify selection. Selected companies are also compared with excluded companies to justify the selection.
Sec 2 (B) 10% Some correct calculations of portfolio return and variance. Minimum-variance portfolio is identified but some of the information is not reported. Efficient frontier is shown graphically but contained some errors. Limited discussion on the meaning of the minimum-variance portfolio. A few errors in calculations of portfolio return and variance. Minimum-variance portfolio is identified and reasonably discussed. Efficient frontier is shown graphically. Reasonable discussion on the minimum-variance portfolio. Correct calculations of portfolio return and variance. Minimum-variance portfolio is identified and discussed well. Efficient frontier is shown graphically. Very good discussion on the minimum-variance portfolio. Correct calculations of portfolio return and variance. Minimum-variance portfolio is identified and discussion is outstanding. Efficient frontier is shown graphically. Outstanding discussion on the minimum-variance portfolio.
Sec 2 (C) 15% Correct selection of the portfolio. However, no justification for the selection of the portfolio. Some information on weights, portfolio mean return and standard deviation are provided. Some correct calculations. Correct selection of the portfolio. Limited justification for the selection of the portfolio. Some information on weights, portfolio mean return and standard deviation are provided. Few errors in calculations. Correct selection of the portfolio. Good justification for the selection of the portfolio. Information on weights, portfolio mean return and standard deviation are provided. Correct calculations. Correct selection of the portfolio. Outstanding justification for the selection of the portfolio. Information on weights, portfolio mean return and standard deviation are provided. Correct calculations.
Sec 2 (D) 15% Some correct calculations of Sharpe Ratio and Jensen’s Alpha. Very basic and descriptive explanation of performance measures. No comment on the calculated numbers. A few errors in calculations of Sharpe Ratio and Jensen’s Alpha. Reasonable explanation and comment on the performance measures. Correct calculations of Sharpe Ratio and Jensen’s Alpha. Good explanation and comment on the performance measures. Correct calculations of Sharpe Ratio and Jensen’s Alpha. Outstanding comment and explanation of performance measures.

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