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    IFU Coursework

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    © All Rights Reserved
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    12 views3 pages

    IFU Coursework 2015 Semester2

    Uploaded by

    Daniel
    IFU Coursework

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    Group Coursework

    Institutional Fund Management

    BAF_7_IFU

    Business

    2017-18

    7
    Portfolio Optimisation and Portfolio Performance Measurement

    This coursework is designed to illustrate the practical aspects of portfolio


    optimisation and the performance measurement. This exercise involves the
    following tasks.

    1. By doing the optimisation using Excel Solver, you are required to construct a
    mean variance efficient portfolio frontier for any 10 randomly selected ordinary
    shares listed on a stock market. For all your calculations, you should use the 60
    monthly returns, sample means, standard deviations, and covariance and
    correlation matrices. Plot the portfolio frontier and comment on the weights of
    the portfolios along the portfolio frontier including in your discussion the
    correlations among the 10 shares.

    2. By Identifying and combining a riskless asset with the 10 shares, plot the
    portfolio frontier and select the tangent portfolio on the portfolio frontier.
    Provide the rationale for your choice of the riskless asset.

    3. Assume that the following indifference curve reflects the quadratic utility
    function of an investor:

    u r   p
    2
    i p

    where ui is the utility of the investor; rp is the portfolio mean; 𝝀 is the risk
    aversion coefficient; and 𝝀p is the standard deviation of the portfolio.

    Calculate the implied risk aversion coefficient of the selected tangent portfolio
    in the question 2 above which maximises the investor’s utility. Plot the graphs
    of the CML, the indifference curve and the efficient frontier in the same chart
    and discuss your results.

    4. Assume that the short selling is not allowed, how your efficient frontiers would
    differ from those with short selling allowed in questions 1 and 2 above.

    Identify the appropriate benchmark index and critically evaluate the performance of
    the tangent portfolio selected above using various risk-adjusted portfolio
    performance measurement indices. Justify your choice of the benchmark index. For
    calculating Jensen’s alpha, in addition to the CAPM, use Fama and French three
    factors model and Carhart four factors model. The UK factors will be made
    available. The UK SMB, HML and momentum factors are provided. The US, Global
    European Japanese Asia Pacific ex Japan and Fama/French North American
    Factors are available from:
    http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

    5. Comment on the limitation of your analysis and discuss the gains in the
    performance of the identified portfolio from international diversification,
    investment in gilts (including index linked), corporate bonds, convertible bonds,
    commodities, real estate, hedge funds, exchange traded funds and emerging
    markets. In your discussion on inclusion of these assets/asset classes critically

    2
    evaluate the risk and return characteristics highlighting the pros and cons of
    these assets/asset classes.

    You are expected to demonstrate the knowledge, understanding and effective use
    of the analytical tools, underlying theory, and concepts taught in the lectures and
    seminars on Asset fund management.

    Make sure that the random sample of shares for this exercise should be chosen by
    your group and must not be borrowed or copied from any other group. You will be
    provided with the instructions for using Excel Solver and regression in one of the
    seminars.

    Submission Deadline: Monday, 16 April 2018

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