ACFI1003 Introduction to Finance
Task :
You are leading a team in the Hamilton Wealth financial advisory company. Now you have a client, Peter Clark, who would like to invest $100,000 in two stocks listed in the New Zealand Stock Exchange. As an investing professional, your team plan to fulfil Peter’s need of wealth
growth. The team has been thinking of several strategies to construct portfolios for sound return performance and efficient risk control.
Requirement
Your team are expected to use IRESS Professional Database and X-Plan to implement the tasksof portfolio construction and performance tracing. Your team can choose any two stocks listed in the NZ stock exchange as “normal shares” for the tasks.
Your team are expected to write a report to analyse the results of several strategies and interpret the differences among them. The reasons why the results are different or similar are expected to be discussed. In addition, in your report you should suggest the best portfolio to Peter and explain why to choose it.
Strategies to implement You are supposed to conduct three strategies (portfolios) at the start of the investment horizon:
Naïve, Minimum Variance and Minimum Variance with one rebalancing of positions.
The considerations of these strategies are shown below.
Naïve strategy: You invest 50% of fund in one stock and 50% of fund in the other stock. And you do not plan to adjust the position anytime during the whole investment horizon. You will hold the portfolio to the end. Minimum Variance strategy:
The weights you plan to use for each stock in the portfolio lead to a minimized variance/standard deviation of the resulted portfolio at the beginning of the investment horizon. That means, you should determine two optimal weights on the two stocks which should minimize the variance/standard deviation of the whole portfolio. To obtain the weights, you can use the equations you learned in Week 5 of this trimester (Chapter 6 of Bodie
et al. (2019)). In order for the calculations of the optimal weights, you also need to collect data of daily close prices of the two stocks you choose in the past five working days, calculate the daily returns using past prices, and calculate standard deviation and correlation coefficient using the past daily returns. You can do this task by using the IRESS Professional Database for data collection. You are not expected to adjust the position of any stock during the whole investment horizon. You will hold the portfolio to the end. Minimum Variance with one rebalancing of positions: this strategy has the same construction method for the initial portfolio at the beginning of the investment horizon as Minimum Variance strategy as illustrated above, where you are expected to invest in the two stocks with the optimal weights that minimize the resulted portfolio. However, under this strategy, you plan to adjust the weights on the two stocks ONCE during the entire investment horizon. The
adjustment is based on the new weights you will re-calculate on the two stocks on the adjustment day. In doing this, you are expected to re-collect data of daily prices of the two stocks at least in the past five working days before the adjustment day. The remainingsteps to calculate new weights are the same as those for the weights of initial positions on the two stocks. Also note that you need to record the daily gain or loss of your portfoliobefore you do the changes on the weights on the adjustment day. The daily gain or loss of the portfolio after the adjustment day is based on the new weights you make.
The Choice of investment horizon and adjustment day
The investment horizon is at least 10 working/trading days excluding weekends and public holidays. It is recommended that you start the portfolio as early as possible and no later than October 11, 2021. For the third strategy with one adjustment requirement, it is recommended
to choose the adjustment day at least 5 working days after your selected starting day of the three strategies.
Items to track down/report
During the whole horizon of the three strategies, you are expected to track down the following
items with respect to portfolio performance and risk metrics for each portfolio:
1. Portfolio gain/loss each day
2. Portfolio market value each day
3. Portfolio return each day
4. Total portfolio gain/loss during the horizon
6. Ending portfolio market value
7. Variance of daily portfolio return for the horizon
8. Standard deviation of daily portfolio return for the horizon
9. Average daily portfolio return for the horizon
10. Sharpe ratio of the portfolio for the horizon
It is highly suggested that your team should trace and record down the first three items every day in order to obtain the last four portfolio performance metrics. You are supposed to obtain the relevant information from the X-Plan.
The essential parts of the report should include:
a. Title Page
b. Introduction
c. Discussion on a comparison of portfolios, the best portfolio and your reason for the choice
d. Concluding comments, recommendations and limitations
e. In the section of “Security Selection and Initial Portfolio Construction”, you are supposed to at least show
f. what the two stock you choose are
g. some descriptive statistics and graphs of daily prices of the two stocks you collect
h. how you calculate the optimal weights for the Minimum Variance portfolio at the beginning of the investment horizontal
i. the result of optimal weights for initial positions
Other Issues to Note
1. You must use the IRESS Professional and X-Plan to complete the tasks of this assignment.
2. You are supposed to do the assignment in a group. You will use the group selection function “Please select your group here” under the Section “Group Assignment” on the Moodle webpage to choose your group. The max number of group members is limited to 4. This
function ends at 11 pm on September 17 2021. After that time you are not able to do the selection using the function. If there will be some changes in your group, you should let the paper convener know at the first place. The proposed changes in group members might take place if all the affected parties including paper convener agree with the changes.
3. The maximal length of the report should not exceed 2,000 words, including any references, tables and figures. You should submit a MS word document with a cover page showing names of group members and student ID. The font size is 12 and line space is 1.5. Use APA as the referencing style. You can have an Appendix to locate additional tables, figures or any other
information you choose to show.
4. When you do the submission for your group, just let one member submit to Moodle link. Please avoid multiple submissions.
5. I highly recommend you to finish selection of your group before September 17 2021. So I can arrange the access of your group to IRESS Professional and X-Plan. Please note each group can only have one account with associated username and password for access to each software.
6. In principle, every group member will have an equal mark once the mark is given to your group. You have the chance to suggest alternative marking allocation for members based on members’ contributions to the assignment. The suggestion must be told to paper convener before your submission if you choose to do that.
Formulas for mean, variance, standard deviation, covariance and correlation of time
series returns
Formulas for weights in the Minimum Variance portfolio for two assets
