FINC3017 Investments and Portfolio Management Assignment 1: Asset Allocation and Portfolio Construction

Due: 11:59PM, 3 April 2022

Word limit: 1500, excluding tables and figures

Objective

You are hired as an investment consultant by a hedge fund that focuses on the following six US stocks: Apple (ticker AAPL), Ford Motors (ticker F), Walter Disney (ticker DIS), Ralph Lauren (ticker RL), Microsoft (ticker MSFT), and Citigroup (ticker C). Your task is to submit a professional report for your manager which addresses the following investment issues. Your analysis is based on implementing the Markowitz approach and monthly returns of the six stocks over the sample period from January 2010 to December 2021, as contained in the spreadsheet ‘Assignment1_data’.

1. Come up with a name for the fund and clearly state it at the beginning of the report
2. Discuss the risk return characteristics of the six stocks. Generate a table that reports mean, standard deviation, skewness, maximum drawdown, Sharpe ratio, and variance and covariance matrix of these six stocks. You also need to prepare a cumulative return plot.
3. Plot and describe the investment opportunity set and efficient frontier of the six stocks with and without the risk-free asset. Clearly identify the weight of each stock in the tangency portfolio as well as the expected return and standard deviation of the tangency portfolio. Assume the risk-free rate is 1% per annum.
4. Investor Tom George wants to invest only in Apple because many stock analysts recommended it. You explain to the investor that he will be better off if he creates a portfolio of the six stocks rather than investing in only Apple.
5. There are two individual investors, Kendall Lee and Morgan Number who are interested

in investing in this fund. Both investors’ utility is represented by:

𝑈 = 𝐸(𝑅)

− 1 𝐴σ² .

2

Kendall has a risk aversion coefficient (𝐴) of 6 and Morgan has a risk aversion coefficient

of 10. Suppose each investor has $1 million USD to invest, calculate the portfolio allocation (in dollar amount) to the six stocks and risk-free asset you would recommend to the two investors to maximise their utilities and summarise the expected returns, standard deviations, and Sharpe ratios of these recommended portfolios. Are these portfolios still attainable if investors are not allowed to take short positions?

• Another investor Amy Zhao is also interested in the fund. However, she is worried about the fact that parameters are all estimated from historical data. Provide a response to Amy’s concern.

Additional Information

• Express returns, standard deviations, and Sharpe ratios in annual term.
• If using Solver, please set the initial weights to be equal weights when conducting each optimisation.

• Address the requirements of each question clearly. In preparing your report, it is recommended you consider how charts, tables, subheadings, and dot points can be used to enhance the way you present your findings.
• The data provided in this report is adapted from real stock market data. You should only use the data provided to you in completing this report (you are not required to gather any additional data). Further, ignore any potential transaction costs, fees, and taxes in determining your responses.
• Reports will be checked by Turnitin and actions will be taken if academic dishonesty or plagiarism is suspected.

Marking

Marks will be awarded for correct quantitative analysis, the clarity of your discussion, the structure of your report, and how you present your findings (the report, tables, and figures should be professionally formatted).

Submission

You need to prepare two files for submission in Canvas.

1. a written report that contains your results and discussions. Submit your report as a pdf document via the ‘Report 1’ link in Canvas
2. your workings. Submit your workings as an Excel spreadsheet via ‘Report 1 – Supporting workings’ link in Canvas (or code if using an alternative optimization program). Your workings will not be directly graded.

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