Finance Assignment | Professional Writing

You are required to construct an investment portfolio containing of investments in 5 Australian companies, chosen from stocks listed in the S&P/ASX 200. Moreover, you are required to graph two estimated efficient frontiers for your portfolio.

To complete your graphs, you are required to determine estimated expected returns, standard deviations and correlations of the 5 stocks in your portfolio. In order to complete this task, you should go to http://au.finance.yahoo.com/ (Links to an external site.). Click on ‘S&P/ASX 200’ and then on ‘Components’. Then select 5 companies, with a view to building a reasonably well diversified portfolio. For each company, go to ‘Historical Data’ and obtain monthly data covering the most recent 24 months up to and including the end of February 2020 (March 1 2020 data – your first adj. closing price will be March 1 2018).

For each month, estimate the monthly holding period return as the ratio of Adj. Close Prices for that month/Adj Close Price for the previous month, minus 1.

You will have a sample (size 24) of monthly returns for each of your 5 companies, covering the same two year period.

(a)        Using the Solver function in Microsoft Excel, determine the optimal weights for each stock in your portfolio across an appropriate set of monthly expected returns and graph

(i)         the unrestricted efficient frontier.

(ii)        the restricted efficient frontier .   

(b)        Explain the sense in which your frontiers can be described as ‘efficient’, and the difference (if any) between your restricted and unrestricted efficient frontiers. Which is the more efficient?

(c)        Suppose you are able to borrow or lend limitless amounts of at a certain rate of interest. Illustrate and explain the implications for the efficient frontier, and also for portfolio selection decisions where investors have the same information but differing degrees of risk aversion. No calculations are necessary in this section.

(d) Suppose the rate of interest on borrowing is higher than the rate of interest at which you can lend. Illustrate and explain the implications for the efficient frontier, and also for portfolio selection decisions where investors have the same information but differing degrees of risk aversion. No calculations are necessary in this section.

(e)       With reference to your research

(i)         Suggest one additional way in which your frontiers could be made more efficient.

(ii) Identify one key limitation of your analysis.

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