MAN00143M Stock Investment and Trading 2024

Important information

A penalty of five marks will be deducted for late submissions that are made within the first hour after the deadline. Submissions that are more than one hour late but within the first 24 hours of the deadline will incur a penalty of ten marks. After the first 24 hours have passed, ten marks will be deducted for every 24 hours (or part thereof) that the submission is late for a total of 5 days. After 5 days it is treated as a non-submission  and given a mark of zero. The consequences of non-submission are serious and can include de-registration from the University.

If you are unable to complete your open assessment by the submission date indicated above because of Exceptional Circumstances you can apply for an extension. If unforeseeable and exceptional circumstances do occur, you must seek support and provide evidence as soon as possible at the time of the occurrence. Applications must be made before the deadline to be considered.

Full details of the Exceptional Circumstances Policy and claim form can be found here:  

https://www.york.ac.uk/students/studying/progress/exceptional-circumstances

If you submit your open assessment on time but feel that your performance has been affected by Exceptional Circumstances you may submit an Exceptional Circumstances  Affecting Assessment claim form by 7 days from the published assessment submission deadline. If you do not submit by the deadline indicated without good reason your claim will not be considered.

Please take proper precautions to safeguard your work and remember to make backup copies of your data. The University provides all its students with storage space on the University server and you should save and back up any work in progress on this server on a regular basis. Computer failure and theft of your equipment or storage media are not considered exceptional circumstances and extensions cannot be granted for work lost for these reasons.

The University has guidance on the use of AI in assessments available here. This details appropriate and inappropriate use of digital tools. Inappropriate use will    be considered academic misconduct, and penalised accordingly

Word count requirements

The word count for this assignment is 2,000 words.

You must state on the front of your assignment the number of words used and this will be checked.

The main text for this assignment must be word-processed in Arial, font 12, double spacing, minimum 2cm margins all around.

You must observe the word count specified in this assignment brief. The School has a policy of accepting variations to the recommended word count of plus or minus 10%.

What does this mean for you?

Markers will mark your work up to the word count maximum plus 10% and then will stop marking; therefore all words which are in excess of the word count plus 10% will not be  marked.

Where your word count is more than 10% below that specified, it is likely that this will result in a lack of analytical depth or relevant content, which will be reflected in the mark assigned.

What is in the word count?

The word count includes:

-         the main text, including in-text reference citations and quotations. The word count does not include:

-      Appendices. These may be used to include supporting data, which may be too detailed or complex to include as a Table. They are not a device to incorporate material, which would otherwise cause you to exceed the word limit.

-       Title page

-       Contents page

-      Abstract/executive summary

-       Tables, figures, legends

-       Reference lists

-      Acknowledgements

Assignment:

Section A

Answer the following question.

This question refers to the seven stocks you have been allocated. You will need to consider the monthly return on each stock over the last ten years, as well as the monthly return on the FTSE 100 index (our proxy for the market portfolio) over the last ten years. You may take the risk-free rate to be the current yield of the 0 ¼% Treasury Gilt 2025 (once you have appropriately converted it into monthly return).

You should use Refinitiv and Excel to produce your answer.

a)  Plot the mean-variance frontier for these seven stocks.

b)  Plot  the  capital  allocation  line  (CAL),  and  identify  the  optimal  risky  portfolio according to your calculations.

For parts c) and d), as well as your calculations you should describe how each measure defines the risk that an investor faces and how it adjusts portfolio performance for the level of that risk.

c)  Calculate the Treynor measures of the optimal risky portfolio and the FTSE 100. d)  Calculate the Jensen measure of the optimal risky portfolio.

40 Marks

Section B

Answer THREE of the following questions.

1. Alastair James and his partner Sonja Mueller are finance professionals and live in a large rented apartment in Canary Wharf, London. You visit them as their financial advisor because they are planning to buy their first apartment. Three statements that Mr James made to you in your recent interview stuck in your mind:

a) “I have researched London property prices extensively on the Internet and over a five year timescale I believe this is a great time to buy.”

b) “I only bought the thirty year gilts in my portfolio six months ago and they are down almost 10%, so I am waiting until I can get my money back.”

c) “After eight years working there I know Credit Suisse are an excellent employer. The shares they give us as part of our bonuses are very unlikely to perform poorly in the long term so I am keeping all of them in my SIPP.”

Several behavioural finance terms occur to you as you remember his words, including familiarity, the reference point, overconfidence, representativeness and the illusion of  knowledge. Explain each of these terms with reference to what he told you.

20 marks

2. Define each of the following terms in Technical Analysis. Where appropriate provide a separate chart or diagram illustrating each one. What price movement does each imply?

a) Resistance and support lines

b) Double top

c) Buy signal due to a moving average breakout

d) Heavy short interest

20 marks

3. You estimate that a passive portfolio, a risky portfolio that mimics the FTSE 250 stock index, yields an expected rate of return of 5% with a standard deviation of 20%. You manage an active portfolio with expected return 8% and standard deviation 25%. The risk-free rate is 3%.

a)  Calculate the slopes of the CML and your fund’s CAL. Draw either line on an expected return–standard deviation diagram.

b)  Characterise in one or two short paragraphs the advantage of your fund over the passive fund. State clearly the assumptions on which your assessment is based.

At the moment, your client holds 70% of her invested wealth in your fund and the remaining 30% on the risk-free account. Yet she ponders whether to switch the 70% that is invested in your fund to the passive portfolio.

c)  Explain to your client the disadvantage of the switch.

d)  Show him the maximum fee you could charge (as a percentage of the investment in your fund, deducted at the end of the year) that would leave him at least as well off investing in your fund as in the passive one. ( Hint: The fee will lower the slope of his CAL by reducing the expected return net of the fee.)

20 Marks

4. Abigail Grace has a £900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth £100,000. Her financial adviser provided her with  the following forecast information. The monthly expected return on her original portfolio is 0.67% with a standard deviation of 2.37% whereas the monthly expected return on the ABC stock is 1.25% with a standard deviation of 2.95%. The correlation coefficient  of ABC stock returns with Abigail’s original portfolio returns is .40.

a)  The inheritance obviously changes Grace’s overall portfolio and she must decide whether to keep the ABC stock. Assuming Grace keeps the ABC stock, calculate:

i. The expected return of her new portfolio which includes the ABC stock.

ii. The covariance of ABC stock returns with the original portfolio returns.

iii. The standard deviation of her new portfolio, which includes the ABC stock.

b)  If Grace sells the ABC stock, she will invest the proceeds in risk-free government securities yielding .42% monthly. Assuming Grace sells the ABC stock and replaces it with the government securities, calculate:

i. The expected return of her new portfolio, which includes the government securities.

ii. The covariance of the government security returns with the original portfolio returns.

iii. The standard deviation of her new portfolio, which includes the government securities.

c)  Determine whether the systematic risk of her new portfolio, which includes the government securities, will be higher or lower than that of her original portfolio.

d)  On the basis of conversations with her husband, Grace is considering selling the £100,000 of ABC stock and acquiring £100,000 of XYZ Company common stock instead. The XYZ stock has the same expected return and standard deviation as ABC stock. Her husband comments, “It doesn’t matter whether you keep all of the ABC stock or replace it with £100,000 of XYZ stock.” State whether her husband’s comment is correct or incorrect. Justify your response.

e)  In a recent discussion with her financial adviser, Grace commented, “If I just don’t lose money in my portfolio, I will be satisfied.” She went on to say, “I am more afraid of losing money than I am concerned about achieving high returns.”

i. Describe one weakness of using standard deviation of returns as a risk measure for Grace.

ii. Identify an alternate risk measure that is more appropriate under the circumstances.

20 Marks

5. For this question, you need to consider the daily returns on the stock index you have been assigned over the last six months. You may use Excel or Refinitiv to produce your answer.

a) Calculate the 15-day simple moving average of the index. Graph the SMAVG against the daily closing price of the index.

b) Identify every instance in which the simple MA strategy gives a buy signal. c) Identify every instance in which the simple MA strategy gives a sell signal. d) How well does the moving average rule perform in identifying buy or sell opportunities? You should produce a performance summary table.

20 Marks

6. Consider the stocks in your optimal portfolio from Section A, and a new hypothetical portfolio where each of these stocks is equally weighted. Analyse this new portfolio from the perspective of ethical and green investing. In particular, you should identify the potential risks each stock may carry in terms of ESG considerations, and suggest alternative strategies to mitigate these risks (for instance, under/overweight or replace a given stock in the hypothetical portfolio, add another stock so as to create another portfolio that is comparable in terms of the financial risk-return profile yet superior in terms of its ESG profile).

20 Marks