Reference no: EM132287753
Portfolio Optimisation and Portfolio Performance Measurement
Illustrate the practical aspects of portfolio optimisation and the performance measurement. This exercise involves the following tasks.
Task 1. By doing the optimisation using Excel Solver, you are required to construct a mean variance efficient portfolio frontier for any 10 randomly selected ordinary shares listed on a stock market. For all your calculations, you should use the 60 monthly returns, sample means, standard deviations, and covariance and correlation matrices. Plot the portfolio frontier and comment on the weights of the portfolios along the portfolio frontier including in your discussion the correlations among the 10 shares.
Task 2. By Identifying and combining a riskless asset with the 10 shares, plot the portfolio frontier and select the tangent portfolio on the portfolio frontier. Provide the rationale for your choice of the riskless asset.
Task 3. Assume that the following indifference curve reflects the quadratic utility function of an investor:
ui = r¯p - λσ2P
where ui is the utility of the investor; r¯p is the portfolio mean; λ is the risk aversion coefficient; and σp is the standard deviation of the portfolio.
Calculate the implied risk aversion coefficient of the selected tangent portfolio in the question 2 above which maximises the investor's utility. Plot the graphs of the CML, the indifference curve and the efficient frontier in the same chart and discuss your results.
Task 4. Assume that the short selling is not allowed, how your efficient frontiers would differ from those with short selling allowed in questions 1 and 2 above.
Identify the appropriate benchmark index and critically evaluate the performance of the tangent portfolio selected above using various risk-adjusted portfolio performance measurement indices. Justify your choice of the benchmark index. For calculating Jensen's alpha, in addition to the CAPM, use Fama and French three factors model and Carhart four factors model. The UK factors will be made available. The UK SMB, HML and momentum factors are provided. The US, Global European Japanese Asia Pacific ex Japan and Fama/French North American Factors.
Task 5. Comment on the limitation of your analysis and discuss the gains in the performance of the identified portfolio from international diversification, investment in gilts (including index linked), corporate bonds, convertible bonds, commodities, real estate, hedge funds, exchange traded funds and emerging markets. In your discussion on inclusion of these assets/asset classes critically evaluate the risk and return characteristics highlighting the pros and cons of these assets/asset classes.
You are expected to demonstrate the knowledge, understanding and effective use of the analytical tools, underlying theory, and concepts taught in the lectures and seminars on Institutional fund management.
Make sure that the random sample of shares for this exercise should be chosen by your group and must not be borrowed or copied from any other group. You will be provided with the instructions for using Excel Solver and regression in one of the seminars.
Note: Need only Task 3 and 4.