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Final Project FN 315 – Summer 2021 Due Date: Friday 2nd July Portfolio Construction The Case My wife and I are 60 years old and plan to retire in 5 years. At present, we have assets of $750,000 in...

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Final Project
FN 315 – Summer 2021
Due Date: Friday 2nd July
Portfolio Construction
The Case
My wife and I are 60 years old and plan to retire in 5 years.
At present, we have assets of $750,000 in stocks and bonds and retirement savings of $600,000.
We own our house and car and have no liabilities.
The clients are looking to grow their retirement savings by assuming risk more significant than the market β.
However, they want to take a more conservative position on their cu
ent cash and fixed income portfolio.
My wife and I would like you to construct two new portfolios meeting our risk profiles.
Assignment
· Construct the two portfolios per the clients' request showing the β of each. There are no more than ten stocks/ Bonds in each portfolio but must have four stocks and one bond.
· Explain to the client how the CAL works and how the client can increase and decrease risk and the CAL.
· Explain how the portfolio compares to the SML showing the Sharpe ratio. Of each portfolio.
· Based on five years of daily prices (15th June 2016 to 15th June 2021), calculate the ten-day 99% Var for each portfolio and explain the results to the client
Please use PowerPoint to explain your results and an excel spreadsheet to show me your workings.
Note that there is no right or wrong portfolio; it's how you make the case.

Sheet1
            Stock    Price    % of portfolio    Beta    Portfolio B
            IBM    $ 145    10%    1.23    2.70        100%
            OSTK    $ 94    50%    4.46
            C    $ 80    10%    1.92
            KHC    $ 44    10%    1.10
                    20%    0.67
            Stock    Price    % of portfolio    Beta    Portfolio B
            IBM    $ XXXXXXXXXX    30%    1.23    1.20
            WMT    $ XXXXXXXXXX    4%    0.48
            AAPL    $ XXXXXXXXXX    51%    1.27
            KHC    $ XXXXXXXXXX    15%    1.10

Example
            Stock    Price    % of portfolio    Beta    Portfolio B
            IBM    $ 145    10%    1.23    2.70        100%
            OSTK    $ 94    50%    4.46
            C    $ 80    10%    1.92
            KHC    $ 44    10%    1.10
                    20%    0.67
            Stock    Price    % of portfolio    Beta    Portfolio B
            IBM    $ XXXXXXXXXX    30%    1.23    1.20
            WMT    $ XXXXXXXXXX    4%    0.48
            AAPL    $ XXXXXXXXXX    51%    1.27
            KHC    $ XXXXXXXXXX    15%    1.10
Homework
        Stock     Price    Beta (5yr)    Dividend Yield     OYTR    Portfolio Weight    Market Risk Premium        Portfolio Beta
        Dollar Gereral    $206.76    0.51    0.82%    0.06%    10%    7.70%        1.211
        Lowe's Inc    $190.30    1.19    1.69%        20%
        NVIDIA     $703.67    1.58    0.09%        30%
        Visa    $230.50    1.12    0.56%        40%
        Question 1
            Single-index return
        Dollar Gereral    3.96%            Porfolio Return:
        Lowe's Inc    9.15%            9.31%
        NVIDIA     12.13%
        Visa    8.62%
        Question 2
            Price    Return
        Dollar Gereral    $206.76    $8.18        Portfolio Return
        Lowe's Inc    $190.30    $17.42        37.85
        NVIDIA     $703.67    $85.36
        Visa    $230.50    $19.86
        Question 3    Risk adjusted return
        m2= Rp-Rm
                        Risk Adjusted Return
        Dollar Gereral    -3.74%            1.61%
        Lowe's Inc    1.45%
        NVIDIA     4.43%
        Visa    0.92%
        Question 4
        New Portfolios
        Stock     Price    Beta (5yr)    Dividend Yield     OYTR    Portfolio Weight    Market Risk Premium        Portfolio Beta
        Dollar Gereral    $206.76    0.51    0.82%    0.06%    10%    7.70%        1.211
        Lowe's Inc    $190.30    1.19    1.69%        20%
        NVIDIA     $703.67    1.58    0.09%        30%
        Visa    $230.50    1.12    0.56%        40%
        Stock     New Percents    Beta        Stock     New Percents    Beta
        Dollar Gereral    29%    1.011        Dollar Gereral    7%    1.411
        Lowe's Inc    30%            Lowe's Inc    15%
        NVIDIA     10%            NVIDIA     68%
        Visa    31%            Visa    10%
            1.010    Calculated            1.401    Calculated

Sheet1
    Question 1: Using the annual return data provided in Exhibit 1 of the case for Lyxor ChinaH and Lyxor MSIndia, calculate their mean returns, standard deviations, covariance and co
elation. With these numbers, compute the standard deviation and return for Susie’s entire portfolio.
        Lyxor ChinaH    Square of Deviation From the Mean
    2009    2.00%     XXXXXXXXXX
    2010    4.25%     XXXXXXXXXX
    2011    -29.40%     XXXXXXXXXX
    2012    13.23%     XXXXXXXXXX
    2013    8.86%     XXXXXXXXXX
    2014    2.31%     XXXXXXXXXX
    2015    -2.96%     XXXXXXXXXX
    Mean    -0.24%
    Variance         XXXXXXXXXX
    Standard Deviation        13.866%
        Lyxor MSIndia    Square of Deviation From the Mean
    2009    5.86%     XXXXXXXXXX
    2010    22.40%     XXXXXXXXXX
    2011    -27.07%     XXXXXXXXXX
    2012    0.60%     XXXXXXXXXX
    2013    -6.84%     XXXXXXXXXX
    2014    33.87%     XXXXXXXXXX
    2015    -9.28%     XXXXXXXXXX
    Mean    2.79%
    Variance         XXXXXXXXXX
    Standard Deviation        20.391%
        Lyxor ChinaH    Lyxor MSIndia    Product of Deviation From the Mean
    2009    2.00%    5.86%     XXXXXXXXXX
    2010    4.25%    22.40%     XXXXXXXXXX
    2011    -29.40%    -27.07%     XXXXXXXXXX
    2012    13.23%    0.60%     XXXXXXXXXX
    2013    8.86%    -6.84%     XXXXXXXXXX
    2014    2.31%    33.87%     XXXXXXXXXX
    2015    -2.96%    -9.28%     XXXXXXXXXX
    Mean    -0.24%    2.79%
    Covariance            0.01601
    Co
elation            0.56623
    Existing Portfolio: 60% in Lyxor ChinaH and 40% in Lyxor MSIndia
        Lyxor ChinaH    Lyxor MSIndia    Existing Portfolio    Square of Deviation From the Mean
    2009    2.00%    5.86%    3.54%     XXXXXXXXXX
    2010    4.25%    22.40%    11.51%     XXXXXXXXXX
    2011    -29.40%    -27.07%    -28.47%     XXXXXXXXXX
    2012    13.23%    0.60%    8.18%     XXXXXXXXXX
    2013    8.86%    -6.84%    2.58%     XXXXXXXXXX
    2014    2.31%    33.87%    14.93%     XXXXXXXXXX
    2015    -2.96%    -9.28%    -5.49%     XXXXXXXXXX
    Mean    -0.24%    2.79%    0.97%
    Portfolio Variance                 XXXXXXXXXX
    Portfolio Standard Deviation                14.581%
    Alternative way of calculating standard deviation by using the formula
    w2    0.36    0.16
    Variance     XXXXXXXXXX     XXXXXXXXXX
    Portfolio Variance                 XXXXXXXXXX
    Portfolio Standard Deviation                14.581%
    Question 2: After adding Lyxor USDJIA, what was the portfolio's standard deviation and return? How does the new portfolio compare with the calculation in Question 1?
        Lyxor ChinaH    Lyxor MSIndia    Lyxor USDJIA    New Portfolio    Square of Deviation From the Mean
    2009    2.00%    5.86%    5.56%    4.23%     XXXXXXXXXX
    2010    4.25%    22.40%    6.11%    10.25%     XXXXXXXXXX
    2011    -29.40%    -27.07%    7.94%    -17.50%     XXXXXXXXXX
    2012    13.23%    0.60%    18.29%    10.96%     XXXXXXXXXX
    2013    8.86%    -6.84%    17.09%    6.62%     XXXXXXXXXX
    2014    2.31%    33.87%    14.20%    15.35%     XXXXXXXXXX
    2015    -2.96%    -9.28%    -4.71%    -5.38%     XXXXXXXXXX
    Mean    -0.24%    2.79%    9.21%    3.503%
    Portfolio Variance                     XXXXXXXXXX
    Portfolio Standard Deviation                    11.341%
    Question 3: Based on your data analysis, should Susie diversify her portfolio or remain invested in China and India only?
        Lyxor USDJIA    Square of Deviation From the Mean
    2009    5.56%     XXXXXXXXXX
    2010    6.11%     XXXXXXXXXX
    2011    7.94%     XXXXXXXXXX
    2012    18.29%     XXXXXXXXXX
    2013    17.09%     XXXXXXXXXX
    2014    14.20%     XXXXXXXXXX
    2015    -4.71%     XXXXXXXXXX
    Mean    9.21%
    Variance         XXXXXXXXXX
    Standard Deviation        8.039%
        Lyxor ChinaH    Lyxor USDJIA    Product of Deviation From the Mean
    2009    2.00%    5.56%     XXXXXXXXXX
    2010    4.25%    6.11%     XXXXXXXXXX
    2011    -29.40%    7.94%     XXXXXXXXXX
    2012    13.23%    18.29%     XXXXXXXXXX
    2013    8.86%    17.09%     XXXXXXXXXX
    2014    2.31%    14.20%     XXXXXXXXXX
    2015    -2.96%    -4.71%     XXXXXXXXXX
    Mean    -0.24%    9.21%
    Covariance            0.00433
    Co
elation            0.38822
        Lyxor MSIndia    Lyxor USDJIA    Product of Deviation From the Mean
    2009    5.86%    5.56%     XXXXXXXXXX
    2010    22.40%    6.11%     XXXXXXXXXX
    2011    -27.07%    7.94%     XXXXXXXXXX
    2012    0.60%    18.29%     XXXXXXXXXX
    2013    -6.84%    17.09%     XXXXXXXXXX
    2014    33.87%    14.20%     XXXXXXXXXX
    2015    -9.28%    -4.71%     XXXXXXXXXX
    Mean    2.79%    9.21%
    Covariance            0.00322
    Co
elation            0.19643
    Question 4: Calculate the betas of Lyxor ChinaH, Lyxor MSIndia, and Lyxor USDJIA. To calculate the covariance with the market proxy, use the Lyxor World return data shown in Exhibit 1 in the case. Assuming a risk-free rate of 2.5 per cent and a market risk premium of 5.5 per cent, what are the required returns for each of the three ETFs?
        Lyxor World    Square of Deviation From the Mean
    2009    7.69%     XXXXXXXXXX
    2010    5.79%     XXXXXXXXXX
    2011    -3.28%     XXXXXXXXXX
    2012    20.75%     XXXXXXXXXX
    2013    14.14%     XXXXXXXXXX
    2014    15.06%     XXXXXXXXXX
    2015    -4.28%     XXXXXXXXXX
    Mean    7.98%
    Variance         XXXXXXXXXX
    Standard Deviation        9.426%
        Lyxor ChinaH    Lyxor World    Product of Deviation From the Mean            Lyxor MSIndia    Lyxor World    Product of Deviation From the Mean            Lyxor USDJIA    Lyxor World    product of deviation from mean
    2009    2.00%    7.69%     XXXXXXXXXX        2009    5.86%    7.69%     XXXXXXXXXX        2009    5.56%    7.69%     XXXXXXXXXX
    2010    4.25%    5.79%     XXXXXXXXXX        2010    22.40%    5.79%     XXXXXXXXXX        2010    6.11%    5.79%     XXXXXXXXXX
    2011    -29.40%    -3.28%     XXXXXXXXXX        2011    -27.07%    -3.28%     XXXXXXXXXX        2011    7.94%    -3.28%     XXXXXXXXXX
    2012    13.23%    20.75%     XXXXXXXXXX        2012    0.60%    20.75%     XXXXXXXXXX        2012    18.29%    20.75%     XXXXXXXXXX
    2013    8.86%    14.14%     XXXXXXXXXX        2013    -6.84%    14.14%     XXXXXXXXXX        2013    17.09%    14.14%     XXXXXXXXXX
    2014    2.31%    15.06%     XXXXXXXXXX        2014    33.87%    15.06%     XXXXXXXXXX        2014    14.20%    15.06%     XXXXXXXXXX
    2015    -2.96%    -4.28%     XXXXXXXXXX        2015    -9.28%    -4.28%     XXXXXXXXXX        2015    -4.71%    -4.28%     XXXXXXXXXX
    Mean    -0.24%    7.98%            Mean    2.79%    7.98%            Mean    9.21%    7.98%
    Covariance With Market            0.00996        Covariance With Market            0.00955        covariance with market            0.00654
    Beta of Lyxor ChinaH            1.12044        Beta of Lyxor MSIndia            1.07504        beta of Lyxor USDJIA            0.73655
    Required Return            8.662%        Required Return            8.413%        required return            6.551%
    Question 5: Calculate the existing portfolio’s beta and the new portfolio’s beta. Assuming a risk-free rate of 2.5 per cent and a market risk premium of 5.5 per cent, what are their required returns?
        Beta    Required Return    Mean Historical Returns
    Lyxor ChinaH    1.12044    8.662%    -0.24%
    Lyxor MSIndia    1.07504    8.413%    2.79%
    Lyxor USDJIA    0.73655    6.551%    9.21%
    Existing Portfolio: 60% Lyxor ChinaH, 40% Lyxor MSIndia    1.10228    8.563%    0.97%
    New Portfolio: XXXXXXXXXX% Lyxor ChinaH, 30% Lyxor MSIndia, 30% Lyxor USDJIA    0.99165    7.954%    3.503%
    The historical returns calculation for Lyxor USDJIA was higher than its required return after the CAPM calculation. This means that the Lyxor USDJIA ETF falls above the SML line, and is underpriced. Therefore, Susie should purchase this ETF.

Daily Prices London 10 am Fix
    FRED Graph Observations                SMA Daily Vol formula is per below
    Federal Reserve Economic Data
    Link: https:
fred.stlouisfed.org
    Help: https:
fredhelp.stlouisfed.org
    Economic Research Division
    Federal Reserve Bank of St. Louis
    5 Years
    Frequency: Daily
    observation_date    GOLDAMGBD228NLBM    Average     Daily Returns    Daily SMA Volatility
     XXXXXXXXXX     XXXXXXXXXX     XXXXXXXXXX     XXXXXXXXXX     XXXXXXXXXX
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    Confidence Interval
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    99%
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    Daily Var 99%    1.9556%
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    Holding Period ( days )
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    10
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX
     XXXXXXXXXX     XXXXXXXXXX         XXXXXXXXXX    10 day 99% conf Var    6.1841%
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Answered 1 days After Jul 02, 2021

Solution

Akhilesh answered on Jul 03 2021
145 Votes
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Average life expectancy of is few years lower at 70.6 years for men and 75.0 years for women.
Source : www.worlddata.info
Hence we women can take slightly higher risk while investing in financial markets as compared to male. Basis this logic we have a
ived at below allocation:
    Cu
ent Age    60
    Retirement    After 5 yrs
    Stocks Value     750,000
    Bonds value     600,000
    Total Net worth     1,350,000
    Name    Alloc. For male    Alloc. For Female
    Marvell Technology Inc    20%    10%
    Enphase Energy Inc    20%    10%
    Tesla    20%    30%
    Microchip Technology Inc.    20%    30%
    US 5 year Treasury    20%    20%
Since both the clients want to...
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