Reference no: EM132175514
Assignment -
Select three stocks from the ASX group of listed securities and for each stock calculate its expected return, E(Ri), beta coefficient, βi, and the variance of the residual from the ith regression, σe2. Further, assume that the cov(ei, ej) = 0 for all pairs of stocks (i, j). The companies of the stocks selected should be in the mid-range of capitalization of other exchange traded stocks from the industry in which they operate.
In the above calculations, use the previous five years of monthly data for each stock as the estimation period. For the same estimation period, use the variance of the ASX200 index as a proxy for the variance of the market portfolio, σm2, and the yield rate of a government bond of your choice as an estimate of the riskless interest rate (you need to justify your choice of bond).
Use the above information to:
(a) Compute the optimal proportions in a risky portfolio composed of the above three stocks allowing for short sales by minimizing the portfolio variance (or standard deviation) for a given level of expected rate of return and return on the riskless asset.
(b) Now compute the optimal proportions in a risky portfolio composed of the same three stocks, but this time using the Singe Index Model (SIM) approach and again allowing for short sales. Compare this solution to that obtained in part (a) above.
(c) Finally, use the SIM technique to compute the optimal proportions in a risky portfolio composed of the above three stocks when short sales are not allowed.
Although the Unit of Study Outline (US)) specifies a limit of two pages for this report you can disregard this. You should require no more than five pages with an absolute maximum of six pages as the rule. Appendices and references are not included in the page limit.
Assignments submitted after the due date but before the closing date, will incur penalties based on the number of days the work is submitted after the due date. No marks will be awarded for an assignment submitted after the closing date.
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