CAPITAL MARKETS, INVESTMENTS and FINANCE
Guidance on exceeding the word limit can be found in Section 7 of the module handbook.
The group coursework assessment requires you to write up a report based on four tasks. In the report, you need to analyse given stock data and to make some suggestions on portfolio composition. Your answer for each question should be supported by your group data analysis. The report’s format requires a professional setting with title, contents, page numbers, sections-subsections and references. Each member of your group is expected to contribute equally to the whole project.
You have price information on 10 stocks, FTSE All Share Index, and risk-free rate (UK T-bill rate) from 01/2007 to 12/2011. All of the data information can be found in the excel spread sheet “Group_work” which will be uploaded on the Blackboard. You are required to finish the following 4 tasks with your group members and write a report based on the 4 tasks.
Task 1: Individual stocks (25%)
i) Calculate each stock’s average monthly return, its return variance and standard deviations throughout the period 01/2007 to 12/2011.
ii) Using the price information of the FTSE All Share Index as a proxy for market portfolio, calculate each stock’s beta value throughout the period 01/2007 to 12/2011.
iii) Explain why some stocks have beta values greater than 1 while others are below 1 (you may do some research on firm backgrounds and their business).
Task 2: Portfolio Analysis (25%)
i) Construct three types of portfolios. Portfolio A consists of any of 3 stocks, Portfolio B consists of any of 6 stocks, and Portfolio C consists of 10 stocks. Assuming that each stock has equal weight in the portfolio, calculate Portfolio A, B, and Cs’ average monthly returns, return variances and standard deviations, and beta values.
ii) Which of the Portfolios A, B, and C, has the highest return standard deviation? Does this portfolio have the highest average monthly return? Can you explain why?
iii) In terms of portfolio beta, which portfolio is the most risky one?
iv)Will the three portfolios have a same ranking, if you rank their betas and return variances respectively? Can you provide economic reasons why the two rankings should be (in)consistent with each other?
Task 3: Comparing individual stock and portfolio (25%)
i) Is Portfolio B’s average monthly return higher than any of 6 individual stocks’ average monthly return? Why?
ii) Is Portfolio B’s return standard deviation higher than any of 6 individual stocks’ return standard deviation? Why?
iii) Is Portfolio B’s beta value higher than any of 6 individual stocks’ betas? Why?
iv) Should investors invest their money in individual stock or in portfolio? Please provide justifications for your answer.
Task 4: Choose your own portfolio (25%)
i) Construct your own portfolio which includes a different number of stocks from Portfolio A, B, and C.
ii) Can you justify why you choose such a portfolio?
iii) Are there any stocks which you should not include in your portfolio? Can you provide your justifications? (You may draw performance graphs of one stock against the market portfolio).
iv) Can you find out which portfolios (i.e. Portfolio A, B, C and your own portfolio) or stocks (i.e. 10 sample stocks) perform badly or good in the period of 2009 to 2011.
Note: In the report, you should briefly describe how you obtain numeric results. To save the number of words, you are encouraged to use graphs and tables to illustrate your ideas if necessary. You can also use the Excel software to help get results. You may need to select a group leader who can allocate the 4 tasks among group members and can co-ordinate different tasks.
Marks of the four tasks are equally weighted. The following factors will be taken into account when the lecturer marks your report.
1. Numerical accuracy
You are required to show the procedures to get the results.
You need to obtain correct numerical results for each task.
You need to show the marker that you understand the difference between stock and portfolio performance. Your arguments and conclusions should be supported by the numerical answers. You need to discuss whether your results are consistent or inconsistent with portfolio theories.
3. Clarity and structure
Your arguments should be organised in a clear and logical way. Your final mark will reflect whether you have the depth of knowledge in the report. Attention should be drawn to the University’s policy on plagiarism.
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