FINN40515 Advanced Financial Theory
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FINN40515
Advanced Financial Theory
Group Coursework
1.1 Problem Specification
Assume that your CW group is a talented investment Analytics team in an investment institution. Considering your members’ attitudes to risk and wealth preferences in the context of assumed expectations of the investment bank, decide on a utility function that would best quantify the utility of the team.
Initially, you will form two-fund portfolios (2 in total, risky-risky, and risky-riskless) with an initial screening of a pool of 15 financial assets (stock, corporation bonds, and government bills). Consider an initial wealth of w0 with the investments having random outcomes (returns) x,and y. You must test and establish the probability distribution functions of the random variables and determine the investor’s preference ordering of the 15 assets (common stock, corporation bonds, t-bills), eventually selecting top 2, or set up two portfolios as a two fund-separation problem.
Additionally, you must consider carefully your team’s chosen utility function which is faced with a riskless asset with return and s risky assets, that have the multivariate normal distribution. Here you may focus on a selection of a three-asset portfolio drawn again from the pool of 15 (of your choice). Show mathematically and empirically that when you act to maximize the expected utility of your portfolio's final wealth, you will hold the risky assets in the same proportion as the tangency portfolio and that the more risk averse you are the smaller the amount of initial wealth, w0, invested in the risky assets will be.
As a group, you must discuss and rationalise your choice of the utility function, and maximise the expected utility of the final wealth — your group’s initial wealth is ω0 > 0.
Your group members must discuss and decide to select a number of financial assets (not less than 15) whose prices are accessible online i.e., Yahoo finance, and/or Bloomberg via the school Bloomberg terminals.
Your selection must be properly discussed and rationalised. Make good use of decision-making concepts on choices under risk that you have learned in this module. Considering dynamic forms of portfolio management, theorise on an optimal insurance that would protect the downside of the entire portfolio or that of individual assets in the three-fund portfolio.
You must also solve the capital allocation problem and establish the tangency portfolio. This should be followed with interpretations.
REQUIRED:
a) Given the problem specification above, your group must come up with a draft paper title within the problem domain (solve the problem). You do not need to seek approval of the title with the module leader; however, you should consult with your group members.
b) The draft paper must include (i) a theoretical framework, (ii) the empirical analysis and results. You must decide among your group members on dividing and assigning tasks. You do not need to seek approval from the module leader, instead, you are expected to use peer consultations.
c) While you have flexibility within the problem specification, it is recommended that you explore the problem with the intent to uncover new research value. It must be solved mathematically first — part of the theoretical framework.
d) You must use software application(s) of your choice (Excel, Stata/EViews) and/or programming with R and/or VBA.
e) Once you download the asset data, you must test the probability distribution by using tools in (d) — part of the empirical testing and analysis.
f) You must establish and discuss the tangency portfolio, using the data you would have downloaded and worked on — part of the empirical testing and analysis.
g) You must establish the asset selection framework and the portfolio insurance that is most relevant to your approach — part of the theoretical framework.
h) Mathematical notation must be compliant with the core textbook.
i) Although a bibliography is included in this document, you must create a reference list with literature of your choice that is best utilised in your draft paper. You must use in-text citations properly and consistently throughout the draft paper.
j) The format of the draft paper is that of an article in finance and/or economics. Please refer to the articles in the bibliography below for ideas.
k) Work count should be 7-thousand words (± 5%). This does not count the bibliography, tables, graphs, title, summary, introduction, and conclusion.
l) You should form a group with up to 4 students in each. Students who have not managed to find a group will be assigned to one by the module leader.
1.2 Marking Rubric
1.2.1 Standard assessment
|
# |
Assessment elements |
Marking weight |
|
1 |
Draft paper/report title |
5% |
|
2 |
Theoretical framework |
35% |
|
3 |
Empirical testing and analysis |
25% |
|
4 |
Mathematical notation |
10% |
|
5 |
In-text citations; references |
15% |
|
6 |
Format of the draft paper |
10 % |
|
|
|
|
|
|
EXAMINER’S TOTAL |
100% |
|
# |
Peer input of each group member |
Peer’s score: lowest—1 Highest —5 |
|
1 |
Draft paper/report title |
1 to 5 |
|
2 |
Theoretical framework |
1 to 5 |
|
3 |
Empirical testing and analysis |
1 to 5 |
|
4 |
Mathematical notation |
1 to 5 |
|
5 |
In-text citations; references |
1 to 5 |
|
6 |
Format of the draft paper |
1 to 5 |
|
|
|
|
|
|
PEER’S TOTAL |
6 to 30 |
|
|
FINAL MARK: |
EXAMINER’S TOTAL * PEER TOTAL /30 |
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2024-01-10