Security Analysis and Portfolio Management

Assignment 2:

Assignment 2 will require the use of Excel and a number of functions in Excel. These will be covered during the seminars.

Section A

For part A of assignment 2, it does not matter whether you choose 2 companies in same or different industries to work on. They are all acceptable.

1. Download 10-years of monthly stock price history for two large market capitalisation stocks from Yahoo Finance (click the Investing tab followed by the Historical Prices tab). Create a time series of monthly returns from this time series of monthly stock prices. Calculate the annualised mean return, standard deviation and correlation of the stocks. Calculate the weights on the minimum variance portfolio consisting of the two stocks, which we denote by stock X and stock Y, using the following formulae. (Formulae given at the hint document). The password: sapm. ?

2. Calculate the expected return and standard deviation of this minimum variance portfolio. Plot the two assets and the minimum variance portfolio on a diagram and plot the efficient frontier consisting of portfolios made up of these two assets. (You only have three points on this curve, but you can draw a smooth curve that joins these three points).

3. Write a 1000 word report on section A of the assignment. Include in your report an introduction, a method section, a results section and conclusions.

4. Discuss in your report diversification referring to the expected return and standard deviation of the minimum-variance portfolio in your answer.

Section B

1. Download 10-years of monthly price history for a US mutual fund from Yahoo Finance (for example any Vanguard or Fidelity mutual fund would be fine but you can choo

se another US mutual fund if you would prefer). From Kenneth French’s data library (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html) download the corresponding ten years of data on the Fama-French three factors plus the risk-free rate.

2. Using LINEST in Excel run a CAPM regression to determine the alpha and the appraisal ratio of the mutual fund.

3. Using LINEST in Excel run a Fama-Fama type regression to determine the alpha and the appraisal ratio of the mutual fund when the additional two factors of Small Minus Big and High Minus Low are taken into account.

4. Calculate other performance measure for the mutual fund such as the Sharpe ratio.

5. Write a 1000 word report on section B of the assignment. Include in your report an introduction, a method section, a results section and conclusions.

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