1 Group Research Assignment FIN323 Portfolio Analysis (2017T1) Subject coordinator: Dr. Shiguang Ma INSTRUCTIONS 1. This is a group assignment. Each group consists of two students. Only in a particular situation, the subject coordinator / tutor is able to authorise one or three students a group. Students are expected to actively discuss and work with the other members of their group. However, group assignments must not refer to or be similar to the work of any other group; any collusion of this form will be treated seriously and penalised. Each group will submit one co-authored report by a correspondent member. 2. The group assignment will be marked out of 100 and scaled to 15% of the overall assessment of this subject. The marks on an assignment will be allocated equally to every member of the group. Please ensure that each member in a group makes an equal contribution to the assignment as far as possible. Marks may also be discriminately allocated to members with unequal contributions that are identified by the subject coordinator / tutor after discussion with all members of the group. Free riders should be reported to me and may be penalised. 3. You are expected to take this assignment as an opportunity to develop your Excel spreadsheet computational skills. Please make use of Microsoft Excel to do your calculations and graphs. 4. In doing this assignment, you are encouraged to refer to the textbook, the journal articles any other material that may assist you in understanding what you are doing in this assignment. Ensure that you adequately cite your references and other sources from which you have gathered information in compiling your report. 5. The criteria used in assessing and grading your assignment will include: • Appropriate collection of data and information; • Computational accuracy; • Relevance and accuracy of the interpretation/analysis of results; • Demonstration of your understanding of the underlying theory; • Appropriate analyses; • Neatness and style of report presentation/format. Academic misconduct will be investigated and penalised severely. SPECIFIC REQUIREMENTS This group assignment comprises two projects. The two projects must be composed in one research report. Project one: RETURN and RISK (45 marks) 2 Choose seven (7) stocks listed on the Australian Stock Exchange (ASX), preferably from different industries. However, the stocks must be from at least two different industries. Go to the Yahoo Finance website. Download monthly closing share prices for the recent 37 months (from 3rd June 2013 to 3st June XXXXXXXXXXBe sure to choose the “adjusted” price, as all of the necessary adjustments (such as rights issues or share splits, and dividend payments etc) required to calculate returns have been done already. Alternatively, students may download the data for their companies from any other reliable internet source. However, in this case students must ensure that stock prices are adjusted for capital structure changes such as bonus, rights issues or share splits, and that dividend payments have been included in order to calculate total returns. This type of information is available from company website and firm’s annual reports. Extract the corresponding data for the S&P/ASX 200 index for the same period of time (from 3rd June 2013 to 3st June XXXXXXXXXXStudents are allowed to either assume the risk-free rate is 1.2% per year, or obtain actual data for a risk-free rate time series such as T-bond. Convert the risk-free rate to a monthly rate, e.g: 1.2% / 12 = 0.1%. Part 1: Calculate monthly returns, expected (average) monthly returns and standard deviations of monthly returns for each of the seven stocks and the market index. Calculate the matrix of correlation coefficients of returns for the seven stocks and the index. Each element of this matrix represents the correlation coefficient for one pair of two stocks or a stock and the index. The rows and columns of the matrix must be appropriately labelled to identify the pair of assets to which each element (correlation coefficient) applies. Provide comments/analyses on your results. (15 marks) (Hints: the tables of expected returns, standard deviation, a matrix of correlation coefficients or a covariance are suggested to be included in the report respectively where relevant analyses) Part 2: Calculate the Beta, Alpha and Sharpe Ratio for each stock using the Capital Asset Pricing Model (CAPM). Discuss and compare the risk and return characteristics for every stock. Identify any underpriced and overpriced stocks and accordingly explain the consequences of your analysis for investment decision making. If the expected returns of some stocks are too low (lower than the risk free rate or negative) and thus cannot apply the CAPM, you just need to indicate it and explain your investment decision (15 marks). (Hints: the tables of alpha, beta, Sharpe Ratio etc. are suggested to be included in the report respectively where relevant analyses) Part 3: You are going to construct a portfolio with five stocks selected from your original seven stocks. Based on the calculations and information obtained in Part 1 and Part 2 and without performing any additional calculations, which five stocks would you prefer to include in your portfolio and why? Do not calculate the expected return and risk for this portfolio. (15 marks) Project three: PORTFOLIOS (45 marks) Select two stocks with positive expected returns from your original seven stocks, based on your calculations in Project One. The two stocks should be in different industries, such that their correlation coefficient will not be close to 1. Stock A should have relatively high return and high risk and stock B should have relatively low return and low risk. 3 Part 1: Construct a series of portfolios with the two stocks by varying the investment weights of each at 2.5% intervals (i.e., starting at 100% investment in stock A and 0 in stock B, increasing the weight of 2.5% in stock B while decreasing the weight of 2.5% in stock A. You will get 41 portfolios until you reach the last one with weight of 0 in A and weight of 100% in B). Calculate the expected return and risk of each portfolio. (10 marks) Part 2: Plot the portfolios in terms of their expected returns and risk. The y-axis in this graph should be expected return and the x-axis should be standard deviation. (10 marks) Part 3: Provide your analysis on this graph by indicating several important portfolios frequently referred and discussed in lectures (for example, the minimum variance portfolio based on your 41 portfolios). If it is possible, draw a Capital Allocation Line (CAL) and give your relevant analysis on the CAL in relation to the efficient frontier. (The graph/figure may be not accurate or has a shape different from those in textbook, why?) (10 marks) (Hints: a graph/figure of the portfolios and a table of important parameters of particular portfolios are suggested to be included in the report respectively where relevant analyses) The remaining 10 marks will reward the report presentation/format. REPORT FORMAT 1. The report must be typed and neatly presented in a professional format. The results or summaries of your calculation and your analyses must be shown in the body of the report. The data collected and details of calculations can be shown as appendices to the report. You are required to make your report look professional and reader friendly. The length of the report should not exceed 1500 words (Excluding reference and appendices). Use 12 point font size, 1.5 line spacing and standard margins. 2. The report should be structured as follow (necessary tables and figures with appropriate analyses are required to appear main context): Title Executive Summary or Introduction (only one of them) Project One (with subtitle) Project Two (with subtitle) Conclusion Reference list (not counted in word restriction of 1500) Appendix (not counted in word restriction of 1500) GROUP ORGANISATION REPORTING and ASSIGNMENT SUBMISSION: 1. Group members and stock codes Your group is required to download an Excel form entitled “Members and Codes” from Moodle. Fill in the form and change file name of Member and Code as the ID numbers of 4 your group members (e.g.: XXXXXXXXXX, XXXXXXXXXXSend your filled-in form via email to your tutor by 20th February 2017. Again: The email subject and the file name of the excel file must be the ID numbers of your group members (for example: XXXXXXXXXX, XXXXXXXXXXThe first row in the sheet of your attached excel file is the ID numbers of your group members. The second row is the codes of your selected stocks (Alphabetic order). After your reporting, the group members and the selected stocks will not be allowed to change without your tutor permission. Example: Member Id XXXXXXXXXXStock Code BSD CDA CKM DVB HGS MKA LMN 2. Assignment submission The assignment is due by 5.00pm 30th March 2017. The electronic version of assignment consists of two files: A research report in word document and an excel file of computation. A cover page that is available in the Moodle must be filled in, and copied and pasted as the first page of your research report. Your research report must be submitted through Turnitin system in Moodle. You excel file of calculation must be submitted through Group Assignment Computation in Moodle. One group assignment can only submitted by the correspondent member of the group. The files name of both research report and excel of computation should be the student ID numbers (For example: 1234567_ XXXXXXXXXXStudents do NOT need to hand in a printed copy of the research report and excel file. Assessed work submitted after due time will be penalised by the deduction of 10 percent of the maximum possible mark for that assessment per working day or part thereof. The operation of this rule will not result in a negative mark being carried forward. This penalty for late submission may be waived upon presentation of a medical certificate of illness for a relevant period, or upon evidence of untoward or approved circumstances that fall under the Student Academic Consideration Policy (See Section C: General Advice for Students). ENQUIRY Enquiry regarding the group assignment is preferred in tutorial class and consultation time. However, you are encouraged to publish your questions on the Discussion Board in the Moodle. Everyone is appreciated to respond the questions no matter whether or not the responses are correct. I will check the discussion board regularly and try to provide you with timely feedback.