Determine the optimal composition of stocks

Reference no: EM13956385 , Length: word count:1500

You are hired as an investment analyst in a leading portfolio management team. Given increasing interest in "ethical investing", the team is considering launching a new fund which follows an ethical investment mandate. You are tasked with preparing a report and investment recommendation, as well as assessing the performance of selected companies, and coming to a conclusion on the suitability and sustainability of this type of investment strategy.

Part 1: Portfolio construction

Using traditional portfolio optimization tools, construct a portfolio following given investment mandate (below).

- What are the expected returns, standard deviation and covariance for your chosen stocks?

- What are the optimal weights of the stocks in a portfolio of risky assets (subject to given investment mandate constraints below)? Compare your result to:

a. An equally-weighted portfolio.

b. A portfolio which does not permit short selling.

- Identifying a suitable risk-free rate and determine the optimal composition of stocks now for any given investor (assuming unrestricted borrowing and lending at this risk-free rate). Comment on how each investor's net position in each stock can vary.

- Discuss the limitations of the mean-variance optimization process to portfolio construction.

Part 2: Asset pricing model analysis

Compare and discuss the alpha, beta, factor loadings and idiosyncratic volatility for each of the stocks included in your portfolio.

Specifically,

- Is there any evidence of stocks outperforming the Fama-French 3-Factor model?

- Comment on the differences in systematic risk across the companies.

- Are the factor loadings consistent with the factor fundamentals?

- Which stock selected has the highest firm-specific risk?

- Identify whether the estimated regression coefficients are statistically significant.

- Do the estimated betas and factor loadings change over time (for example, between two separate sub- periods)?

- Based on your estimates, comment on whether the FF3F model is a suitable asset proving model.

Part 3: Ethical investing critique

Is a dedicated ethical investment portfolio a worthy venture of the fund? Specifically,

- How do you define ethical investing? Is the investment mandate pursued by your fund suitable?

- Should additional screening and investment criteria be considered? What would you recommend?

- Identify and thoroughly discuss at least three major limitations specific to ethical investing.

- Does ethical investing underperform? Refer to both the theoretical and applied literature.

- Referring to your results in Part 2, is there evidence of underperformance/outperformance amongst the companies you have included in your portfolio.

Additional report requirements

- Word limit: 1,500 words in main report. Penalties apply in excess of this limit.

- Charts, tables, figures: Not included in the word count.

- Appendices: Up to 10 additional pages (not counted towards the word limit).

- Maximum pages: The maximum number of pages of your report should not exceed 20.

- Excel spreadsheet: You must separately submit an Excel file with your complete workings. This will not be directly assessed, but used if necessary to confirm your methodology. This is due by the same due date as the report.

- Data: A clear description of the data used must be provided, including at a minimum the date range, observation frequency, how any filtering may have been applied, and the data source. Share price, fundamentals, and risk-free data can be accessed from any reputable source (eg Bloomberg, Google Finance, Yahoo Finance). Historical price data prior to 2001 should not be considered. FF factors can be downloaded from: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

- Formatting: Reasonable formatting is expected. The presentation of the report should be ‘professional'.

- Submission: Reports are to be submitted through Turnitin.

- References: The Business School Reference Guide should be followed.

The Index constituent list as part of the investment mandate can be found at: https://www.msci.com/constituents

Select "WORLD EX TOBACCO EX CONTRO WEAPONS" from the drop down list. Note that while many of the companies in this index are US-listed, you need to double check this as part of the investment mandate.

Could you please select 5 companies and confirm with me first? Thank you!

Study Country: Australia

Study Programme: Finance

Service Category: Report

Word Count/Pages: 1500 WORDS

Plagiarism Report: Yes

Referencing Style: Harvard

Number of Reference: 16~20

Attachment:- Computer Lab.xlsx

Reference no: EM13956385

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