ACFI3018
APPLIED PORTFOLIO MANAGEMENT
TRIMESTER 3 2025 SINGAPORE
ASSESSMENT 1 - PROBLEM SET
[This problem contributes 30% to your overall mark in this course. You should answer all the questions.]
The spreadsheet ACFI3018_25T1_ProblemSetData.xlsx contains financial markets data that is used for this assignment. The data is allocated into three tabs:
– “Q3 Stock Data” relates to question 3
– “Q3 Template” can be used to construct your answer for Q3
– “Q4 Industry Data” relates to Question 4
– “Q5 Value Data” relates to Question 5 part (a)
– “Q5 Stock Data” relates to Question 5 part (b)
You may not need to use all the data provided in the spreadsheet. You are required to submit both an Excel spreadsheet that shows your workings and a word file with a report that summarises your responses to each question. The word file should be a stand-alone report; the Excel spreadsheet is only submitted so that your working out can be checked as required. You may make reasonable assumptions (if necessary) in answering the questions.
Question 1 (7 marks)
a) Your client is considering investment in one of the following assets. Probability distribution of returns on each security is given in the following table.
|
State
|
Probability
|
A
|
B
|
C
|
D
|
|
1
|
20%
|
25%
|
70%
|
30%
|
7%
|
|
2
|
30%
|
40%
|
10%
|
7%
|
7%
|
|
3
|
30%
|
10%
|
10%
|
3%
|
7%
|
|
4
|
20%
|
15%
|
-20%
|
-14%
|
7%
|
1) On the basis of excess returns per unit of risk, which security would you recommend to your client? (2 marks)
2) On the basis of skewness, which security would you recommend to your client? (2 marks)
3) In 200 words or less, explain the relationship between skewness ofa return distribution and the following investors’ utility preferences.
(1) Mean-variance investors (1.5 marks)
(2) Non-mean-variance investors (1.5 marks)
Question 2 (5 marks)
Suppose you are bearish on MNY and decide to sell short 200 shares at the current market price of $70 per share. If the broker’s initial margin requirement is 40% of the value of the short position and the maintenance margin is 25%.
a) How much in cash or securities must you put into your brokerage account? (1 mark)
b) If the price of CBA immediately changes to: (i) $54; (ii) $60; (iii) $84, will you receive a marginal call? If so, please calculate the additional margin you need to deposit in the account. (2 marks)
How high can CBA’s price increase before you get a margin call? (2 marks)
Question 3 (6 marks)
You are employed as a research analyst and have been given five stocks to analyse. The five stocks are the BHP Group (ASX code BHP), Commonwealth Bank of Australia (CBA), Westpac Banking (ASX code WBC), Australia and New Zealand Banking Group (ANZ), and Rio Tinto (RIO). Daily dividend adjusted price data for these five stocks for the period January 2010 to December 2023 are provided in the Problem Set Excel spreadsheet. The ASX200 index value and 10-year government bond rate (daily) are also provided in this spreadsheet. Using the data provided, you are required to undertake the following:
a) Use Microsoft Excel’s Solver add-in to derive the efficient frontier of risky assets for a portfolio comprising the five stocks that you have been asked to analyse. When calculating expected returns, you should use the Capital Asset Pricing Model. The market consensus forecast for the expected market return is 10% per annum and the expected risk-free rate of interest is 5% per annum. (5 marks)
b) Assume that your coefficient of risk aversion is 3. What is the combination of the optimal risky portfolio and risk-free asset that would maximise your utility? (1 mark)
Question 4 (6 marks)
US monthly stock returns across 12 industries (labelled P1 through to P12) for the period from 2009 to 2023 are provided. You have been asked to back test a cross-sectional momentum strategy using this data. Within this strategy, you are required to demonstrate the monthly returns on a portfolio of past winners and the returns on a portfolio of past losers. You plan to apply 6/6 strategy, whereby industries are allocated into portfolios based on their performance over the past 6 months and each portfolio is then held for the subsequent 6 months and rebalanced semi-annually for 6/6 strategy. Monthly returns on the market index (Mkt) and the monthly risk-free rate (RF) are also provided.
a) Create equally weighted portfolios comprising three industries of past “winners” and three industries of past “losers” and report the historical mean, standard deviation of returns, Sharpe ratio, and Jensen’s alpha for the “winner” and “loser” portfolios. (3 marks)
b) Repeat the process in a) by using the 3/3 strategy (industries are allocated into portfolios based on their performance over the past 3 months and each portfolio is then held for the subsequent 3 months and rebalanced annually for 3/3 strategy). Compare and comment on the results in a) and b). (3 marks)
Question 5 (6 marks)
You are required to construct an equal weighted value portfolio with 5 stocks by using the data from the Q5 spreadsheet.
a) Please identify the 5 value stocks for the value portfolio if the following screens are used (2 marks):
1) Price to cashflow ratio
2) M/B ratio
b) Use the stock price data contained in the Problem Set Excel Spreadsheet and obtain daily price observations for each equal weighted value portfolio constructed in (a), and the market index (ASX200 index) for the period January 3rd 2012 — Dec 31st 2018. Please use appropriate performance measures to evaluate the performance of the above two value portfolios, assuming the daily risk-free rate is 0.01% (4 marks):