FIN 223 Investment Analysis
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FIN 223 Investment Analysis
Group Report
Due Date: 5.00 pm Monday 09 Oct 2023
Weight: 30%
Word Limit: 2500 words (plus appendices & references)
Background
The spreadsheet Group Report Data.xlsx contains monthly returns on ten Australian industry indices from January 2017 to July 2023. The industry abbreviations are in the table below.
Investor utility is represented by: U = E(R) – ½Aσ2. There are two investors with different risk aversion coefficients (A). Angela has a risk aversion coefficient of 6 and Boris has a risk aversion coefficient of 2. Investors are able to short-sell each industry throughout the report. Investors are unable to borrow or lend at the risk-free rate except for part 5 of the report. Please use sample variance and standard deviation, rather than population variance and standard deviation. The expected returns per month to be used throughout the report are in the following table.
|
Industry |
Abbreviation |
Expected Return |
|
Consumer Discretionary |
COND |
0.84% |
|
Consumer Staples |
CONS |
0.81% |
|
Energy |
ENGY |
0.88% |
|
Health Care |
HC |
0.91% |
|
Industrials |
INDU |
0.74% |
|
Information Technology |
IT |
0.95% |
|
Materials |
MATL |
0.94% |
|
Telecom |
TELE |
0.65% |
|
Utilities |
UTIL |
0.79% |
|
Financials |
FIN |
0.72% |
|
Real Estate |
RE |
0.74% |
Requirements
Marks will be awarded for the clarity of your discussion, the structure of your report and how you present your findings. Your report will need to address the following four points.
You are required to use all of the historical data to estimate the covariance matrix so that you can construct the optimal risky portfolios for each investor. Your report needs to address the following points:
1. Calculate the expected utility for both investors if they invested solely in each industry. Which industries does each investor prefer? What are the reasons for their preference? (15 marks)
2. Consider the MATL and CONS industries. What is the optimal portfolio for both Boris and Angela that contains these two industries? Discuss what happens to each investor’s utility and portfolio risk for this portfolio compared holding these two industries individually. Will you always reach this conclusion or is specific to these two portfolios? (15 marks)
3. Calculate the optimal portfolio for both investors that consists of the following five industries: MATL, CONS, TELE, RE and HC. How does this compare to the one industry and two industry portfolios in terms of diversification benefits? (15 marks)
4. Calculate the optimal portfolio for both investors that consists of all eleven industries. Compare this to the other portfolios in terms of diversification benefits. What do you observe? Contrast the differences in what you observe between the two investors. (15 marks)
5. Now consider the case where both Boris and Angela can invest in a risk-free asset. The risk- free rate is 0.5% per month. Compare the diversification benefit between the five industry optimal portfolio in part 3 and the eleven industry optimal portfolio in part 4. How does the existence of the risk-free rate affect your conclusion regarding diversification benefits? Are diversification benefits increased or reduced if the investors can borrow or lend at the risk- free rate? (20 marks)
6. Your report should conclude with a summary of your findings regarding differences in the benefits of diversification across investors, industries and portfolio size. (10 marks)
Marks will be awarded for the clarity of your discussion, the structure of your assignment, how you present your findings (10 marks).
Your report will need to present the weights for each portfolio as well as the returns , standard deviation and utility for each portfolio. Please set the initial weights to be equal weights when conducting your optimisation (i.e. weights = 9.09% for eleven industry portfolio).
Please use graphs and/or tables to support your discussion. Please use 12pt font with 2cm margins and include all references in a bibliography. Excel spreadsheets need to be submitted via the link on Moodle. Written assignments should be submitted via Turnitin on Moodle.
2023-09-12