FINC3017 Investments and Portfolio Management
Word limit: 1500, excluding tables and figures
Objective
The objective of Assignment 1 is to gain a deeper understanding of modern portfolio theory and
how the theory can be applied in practice. The assignment consists of two parts. In the first part,
you need to apply the portfolio theory to address several investment issues. In the second part,
you need to evaluate whether portfolio allocations recommended by asset management firms
are consistent with the modern portfolio theory.
Part 1
You are hired as an investment consultant by a hedge fund that focuses on the following five US
stocks: Exxon Mobile (ticker XOM), Nike (ticker NKE), Amazon (ticker AMZN), Goldman Sachs
(ticker GS), and Visa (ticker V). Your task is to submit a professional report for your manager to
address the following investment issues. Your analysis is based on implementing the Markowitz
approach and monthly returns of the five stocks over the sample period from January 2010 to
December 2022, as contained in the spreadsheet ‘Assignment1_data’.
1. Discuss the risk return characteristics of the five stocks. Generate a table that reports
mean, standard deviation, skewness, Sharpe ratio, and variance and covariance matrix of
these five stocks. You also need to prepare a cumulative return plot.
2. Plot and describe the investment opportunity set and efficient frontier of the five stocks
with and without the risk-free asset. Clearly identify the weight of each stock in the
tangency portfolio as well as the expected return and standard deviation of the tangency
portfolio. Assume the risk-free rate is 2% per annum.
3. Investor Jennifer wants to invest only in Amazon because many stock analysts
recommended it. You explain to the investor that she will be better off by creating
portfolios of the five stocks rather than investing in only Amazon.
4. There are two individual investors, Tom and Amy who are interested in investing in your
fund. Both investors’ utility is represented by: = () ? !"σ". Tom has a risk aversion
coefficient () of 8 and Morgan has a risk aversion coefficient of 12. Suppose each investor
has $2 million USD to invest, calculate the portfolio allocation (in dollar amount) to the
five stocks and risk-free asset you would recommend to the two investors to maximise
their utilities, and summarise the expected returns, standard deviations, and Sharpe
ratios of these recommended portfolios. Are these portfolios still attainable if investors
are not allowed to take short positions?
Additional Information
Express returns, standard deviations, and Sharpe ratios in annual term.
If using Solver, please set the initial weights to be equal weights when conducting each
optimisation.
The data provided is adapted from real stock market data. You should only use the data
provided to you in completing this report (you are not required to gather any additional
data). Further, ignore any potential transaction costs, fees, and taxes in determining your
responses.
Part 2
The table below summarizes asset allocations recommended by Blackrock and Charles Schwab
to three different types of investors: Conservative investors with high risk aversion, moderate
investors with moderate risk aversion, and aggressive investors with low risk aversion. The three
assets are T-bills, bond, and stocks.
Portfolio Weights
T-bills Bonds Stocks
A. Blackrock
Conservative 50 30 20
Moderate 20 40 40
Aggressive 5 30 65
B. Charles Schwab
Conservative 20 35 45
Moderate 5 40 55
Aggressive 5 20 75
Are those recommendations by Blackrock and Charles Schwab consistent with portfolio theory?
Explain why.
Additional Information
T-bills should be interpreted as the risk-free asset and bonds and stocks as two alternative
risky assets.
The weights in the table are in percent.
Marking
Address the requirements of each question clearly. In preparing your report, it is recommended
you consider how charts, tables, subheadings, and dot points can be used to enhance the way
you present your findings.
Marks will be awarded for correct quantitative analysis, the clarity of your discussion, and
editorial aspects of your report (the report, tables, and figures should be professionally
formatted).
Reports will be checked by Turnitin and actions will be taken if academic dishonesty or plagiarism
is suspected.
Submission
You need to prepare two files for submission in Canvas.
1. a written report that contains your results and discussions. Submit your report as a pdf
document via the ‘Report 1’ link in Canvas
2. your workings. Submit your workings as an Excel spreadsheet via ‘Report 1 – Supporting
workings’ link in Canvas (or code if using an alternative optimization program). Your
workings will not be directly graded.
3. You will lose 3 marks if you make wrong submissions.