Group Assignment

Application of Portfolio Theory and Empirical Estimation

EFN412, Semester 1, 2017
Total Marks: 35

Investment Guidelines

You are required to construct an Equity Investment Portfolio with the following specifications:

Market: Australia
Portfolio Size: $1 Million
Portfolio Composition: 4 assets; must be shares of companies listed on the ASX
Asset Allocation: Direct Investment in equities
Time Horizon: 5 years commencing January 1, 2012 to December 31 2016
Transaction Fees, taxes and charges: Ignore
Portfolio Policy Objectives: Maximise total return (capital gains plus reinvested income)
for a given level of risk
Portfolio Benchmark: S&P ASX200
Portfolio Management Style: Passive, Buy and Hold
Asset Weights: Equal weighting
Market proxy: S&P ASX200
Risk free proxy: 90 day Bank Accepted Bill rate (BAB)

1. Portfolio Construction

 Collect price data for your 4 assets from the investment horizon - 5 years commencing January 1,
2012 to December 31 2016.
o The price data should be Daily. Depending on your choice of company you could find the
price data from: Yahoo finance; the ASX; or the company’s own website
o Download the price data for the sample period required.

[Note: You must leave all formulas in your answer, the excel functions allowed are “AVERAGE”,“SUM”
and “SQRT” only]. Other excel data analysis package or functions can be used for checking purposes only.

i. Calculate the mean return and standard deviation of each investment asset
ii. Calculate the mean return and standard deviation of your portfolio
iii. Calculate the mean return and standard deviation of the market portfolio (S&P ASX200)
iv. Generate the variance/covariance matrix for: the individual assets; your portfolio; and the
market portfolio
v. Calculate Beta for: the individual assets; your portfolio; and the market portfolio.
vi. Calculate the Sharpe ratio for: the individual assets; your portfolio; and the market
portfolio.
vii. Construct the CML based on the market portfolio and the risk free asset. Chart the CML.

(7 marks)

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 2. Portfolio Optimisation

 Use the Solver Addin function in Excel, determine the optimal weights for the four assets in your
portfolio. Optimal weights will be those that give you a portfolio with the highest mean return for a
given level of risk (ie. you want to maximise the Sharpe Ratio by allowing the weights for each
asset to change).
 [Note: Assume no borrowing is allowed, you will need to constrain each of the weights to be
between 0 and 1]

(5 marks)
3. Empirical Estimation with regression

You are now required to estimate the data with a regression analysis.
Step 1. Run a regression using the market model for each individual asset and your equally weighted
portfolio and report your output.

Download Asian Pacific ex Japan Fama French factors from the website:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Step 2. Run a regression using Fama French three factors models for each individual asset and your
equally weighted portfolio and report your output.

To use regression in excel, you need to add in the data analysis to your excel (for help, please refer to
the link: https://support.office.com/en-us/article/Load-the-Analysis-ToolPak-6a63e598-cd6d-42e3-
9317-6b40ba1a66b4). There are also plenty of youtube videos on simple regression.

(5 marks)
4. Alternative Factors

Step 1. Determine 2 macroeconomic factors that may be important in determining share prices.
Collect the monthly return series for these factors [You may want to look at the RBA website
www.rba.gov.au]

Step 2. Run a regression using the market model and your two macroeconomic factors for each
individual asset and your equally weighted portfolio and report your output.

Step 3. Discuss whether the factors included in the Fama French model in Question 3 and your
macroeconomic model in Question 4 would vary over time. Is it possible that the factors are more
important at particular times during the business cycle or that factors that were once considered
important are no longer relevant?

(8 marks)

5. Evaluation

Provide a brief summary of your analysis in a word document containing charts or tables of your key
findings and a brief discussion of the important aspects of your work from Questions 1 to 4.

(10 marks)

Hints:
1. You can find all Australian listed shares at: www.asx.com.au. , as well as from yahoo finance.
2. You can get the 90 day Bank Accepted Bill rate from http://www.rba.gov.au/statistics/historical-
data.html#interest-rates. But be consistent with the frequency – Monthly. For the rest, go to the current
data.

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