Individual Assignment 2: Portfolio Analysis (Assessment Weight: 15%)
Individual Assignment (approximately 1,000 words should be enough, plus workings and diagrams)
Please do not submit spreadsheets. All relevant workings and analysis should be included in a word or pdf document.
You are required to construct an investment portfolio containing investments in 5 Australian companies, chosen from stocks listed in the S&P/ASX 200. Moreover, you are required to graph two estimated efficient frontiers for your portfolio.
To complete your graphs, you are required to determine estimated expected returns, standard deviations and correlations of the 5 stocks in your portfolio. In order to complete this task, you should download the ASX 200 components file: ASX200 components .xls download and select 5 stocks from the list, with a view to building a reasonably well-diversified portfolio.
Then, go to http://au.finance.yahoo.com/ (Links to an external site.)to find these stocks selected. When you search for a certain stock, make sure to use the code and add ".AX" at the end as some stocks are cross-listing on multiple exchanges internationally. (For example, to find Newcrest Mining Ltd shares, search "NCM.AX"). For each company, go to ‘Historical Data’ and obtain monthly data covering the most recent 24 months up to and including the end of February 2021 (eg., February XXXXXXXXXXdata). Your first adj. closing price will be February 28, 2019.
For each month, use the Adjusted Close prices to estimate the monthly rate of return.
You will have a sample (size 24) of monthly returns for each of your 5 companies, covering the same two-year period.
(Ensure your sample of 5 stocks is not identical to that of any other group. Do not just select the largest companies. There are 2,535,650,040 available combinations, so this should be easy for you to achieve. An identical portfolio between two groups is likely evidence of inappropriate collusion, and will lead to an investigation).
(a) Using the Solver function in Microsoft Excel, determine the optimal weights for each stock in your portfolio across an appropriate set of monthly expected returns and graph
(i) the unrestricted efficient frontier.
(ii) the restricted efficient frontier.
(b) Explain the sense in which your frontiers can be described as ‘efficient", and the difference (if any) between your restricted and unrestricted efficient frontiers. Which is the more efficient? (15%)
(c) Suppose you are able to borrow or lend limitless amounts at a certain rate of interest. Illustrate and explain the implications for the efficient frontier, and also for portfolio selection decisions where investors have the same information but differing degrees of risk aversion. No calculations are necessary for this section. (10%)
(d) Suppose the rate of interest on borrowing is higher than the rate of interest at which you can lend. Illustrate and explain the implications for the efficient frontier, and also for portfolio selection decisions where investors have the same information but differing degrees of risk aversion. No calculations are necessary for this section. (15%)
(e) With reference to your research
(i) Suggest one additional way in which your frontiers could be made more efficient. (5%)
(ii) Identify one key limitation of your analysis. (5%)