Investing and Maximizing Wealth

INVESTMENTS ICM401

GROUP ASSIGNMENT

You work with a group of people in a fund management company. The company provides portfolio management services to clients all over the world, who are looking to maximise their wealth. You’ve been allocated a client who is looking for a 5-year investment in any (one) equity market and would like exposure to a diversified portfolio, invested in 20 stocks across five sectors.

a) i) Following a meeting with your colleagues, decide on which market (which country) you believe you should invest the money for the next five years. State at least three reasons why you picked a specific market and elaborate each of them clearly. It is recommended to include graphs and tables where appropriate.
(10% mark)

ii) Now that you’ve decided in which market you wish to invest, you need to select five sectors and choose four stocks in each sector. Your goal will be to create a diversified portfolio. Describe at least three reasons why you picked each sector and explain in detail how you selected the stocks. Use graphs and tables where appropriate.
(30% mark)

b) i) Download 10 years of historical daily data for your selected stocks; you should also obtain a proxy for the risk-free rate and justify your choice of the risk-free asset. Form and plot the efficient frontier and find the “tangency portfolio” (using only your 20 stocks) assuming that no short-selling is allowed.
(15% mark)

ii) Do you believe that the composition of the “tangency portfolio” that you have found is a desirable or practical one as an investment for your client? Explain why or why not, and present what you can do to resolve such issues. Show the suggested (new) composition of your portfolio and discuss.
(15% mark)

c) i) Repeat the above process but this time allow for short selling. [Note: do not select new stocks to short-sell, use your existing stocks]. Discuss whether any changes in your portfolio are necessary and explain what these imply about your original choice of stocks.
(15% mark)

ii) Form an equally-weighted portfolio and a market capitalisation-weighted portfolio using the 20 stocks and compare the risk-adjusted performance of all portfolios (i.e. your tangency portfolio with and without short selling, the equally-weighted portfolio and the market capitalisation-weighted portfolio). Discuss your findings.
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