To understand the key concepts, approaches, evidence and modelsof modern financial theory and practice.

Data:

You will draw the necessary data for this coursework from databases such as Yahoo Finance, FAME, and Thomson Reuters Datastream.

There are five firms from the FTSE100 index components – Aviva PLC, BAE Systems PLC, Unilever PLC, Worldpay Group PLC, Astrazeneca PLC. Download adjusted monthly closing stock prices for each one of your five firms over the most recent period of five years (your price series should be from June 2012 to June 2017 so that you can then obtain 60 monthly return observations in total for each stock). Also, download adjusted monthly closing price levels for the iShares Core FTSE 100 UCITS ETF(ISF) as a proxy for the UK market portfolio over the same 5-year period (you can find its information via Yahoo here).

In order to determine the risk-free rate, download the 3-month UK Treasury Bills monthly rates: open the Bank of England website, then select Statistics, Interest and Exchange Rates Data, Wholesale interest and discount rates, Treasury Bills (3 month) Sterling, End month – IUMAJNB – Monthly.

Description:

A wealthy Asian investor is considering the strategic decision of investing in a portfolio of five FTSE100 firms. This investor is diversified in terms of exposure to different sectors in the Asia region, but not diversified in terms of international geographical exposure.

You are employed by a leading financial institution and have been asked to advise this client. You will prepare an investment report in Microsoft Word for her containing all your work, results and arguments. All the relevant tables and figures should be contained and discussed in the main body of the report, not in some appendix. The report, which includes all of the following five sections, should not exceed 4,000 words in total apart from references and appendices.

• At the end of February 2017, there were 882 ETFs listed on the London Stock Exchange alone. While most ETFs are passive products built to track indices, the number of actively managed ETFs has grown to 173 in the US at the end of 2016. In the age of ETF, your client would like you to discuss the investment opportunities in exchange-traded funds (ETF) in terms of its advantages and disadvantages comparing with traditional passive and active mutual funds. Do not perform your own empirical analysis and testing but use the international and the UK empirical evidence and relevant theories from the literature and the news articles.

Relevant Reading: Lecture 1.(25 marks)

• Use your sample data to form the following four portfolios: equal-weighted portfolio (EWP);market-value-weighted portfolio (VWP);global minimum-variance portfolio (GMVP);and optimal risky portfolio (P). According to the five stocks and risk-free rate, build and draw the optimalcapital allocation line, the minimum-variance frontier and the efficient frontier in a graph (type: scatter with smooth lines) of expected returns against standard deviations.Further, mark the positions ofthefive stocks and four portfolios in that graph. Explain and discuss your results.

Table: Four portfolios’ weights, returns, standard deviations, and Sharpe ratios.

Figure:One graph includes the optimal capital allocation line,the minimum-variance frontier,the efficient frontier, the five stocks and four portfolios.

Relevant Reading:Lectures 2 & 5 and Labs 2 to 5& 7.(25 marks)

• Determine the proportion of the overall optimal complete portfolio (C) in the UK financial market that should be held in the optimal risky portfolio (P) of the five stocks along with the proportion that should be held in the risk-free asset. Assume that your client has the same coefficient of risk aversion as yours and that you should determine this by using the Charles Schwab Investor Profile Questionnaire. Transform the questionnaire risk tolerance scores “X” (0 to 40) into risk aversion index“A” (2 to 4) by using the following transformation: A=4 – X/20. Thus, a risk tolerance score of 30 becomes a risk aversion index of 2.5 (=4 –30/20). Finally, draw a graph (type: scatter with smooth lines) to illustrate the relevant indifference curve, capital allocation line, optimal risky portfolio (P), and optimal complete portfolio (C).Explain and discuss your results.

Table: Portfolio C’s weights, returns, and standard deviations.

Figure: One graph includes indifference curve, capital allocation line, optimal risky portfolio (P), and optimal complete portfolio (C).

Relevant Reading: Lecture 3 and Lab 4. (15 marks)

• On the basis of the single-factor market model CAPM, estimate the beta coefficients for each one of the chosen five stocks. You are free to use whatever method you prefer in estimating the market model parameters (e.g. scatterplot trendline, intercept and slope functions, or regression analysis). Discuss if the beta values you have estimated are sensible given the industry nature of the business activities of each firm. Finally, discuss the relationship depicted in a scatterplot (type: scatter) between expected returns (use theaverage annualised returns here)and beta coefficients for the five stocks.

Table: Alpha & beta coefficients, and expected returns for the five stocks.

Figure: One scatterplot of expected returns against beta coefficients for the five stocks.

Relevant Reading: Lectures 6 & 8 and Lab 6. (15 marks)

• Evaluate in absolute and relative terms the investment performance of each one of the four portfolios that created in Section 2 (EWP, VWP, GMVP and P) with the FTSE 100benchmark (the iShares Core FTSE 100 UCITS ETF)over the five-year sample period:

(i) Compare the performance of the four portfolios in terms of return, standard deviation, beta, Sharpe ratio, Treynor measure, Jensen’s alpha, information ratio, and M² measure.All metric components (e.g., average return and standard deviation) should be annualised as appropriate.

(ii) Which portfolio would be the best for your client to invest in? Which portfolio do you consider the worst choice to your client? Justify and explain your recommendations.

(iii) Compare the best and worst portfolios to your client graphically by using wealth indices.

Table: Performance statistics for the four portfolios with the FTSE 100 benchmark.

Figure: Wealth indices (i.e. cumulative return) for the best and worst portfolios to your client.

Relevant Reading: Lecture 7 and Labs 2 & 7.(20 marks)

Coursework Excel File

• You should submit the relevant excel file electronically
• The calculations and data analysis should be performed using Microsoft Excel in a single workbook with multiple worksheets.
• The excel file should contain the data used along with the relevant analysis, results, and section titles.
• Failure to submit this file will cost your marks and may mean that you fail the coursework.