FIN309

1st SEMESTER 2024/25

Analysis Report

INVESTMENTS

I. Introduction

This part ofthe course assessment counts for 30% of the final mark for the course, and consists of a take-home group Analysis Report that will be worked on and submitted jointly by the participants based on the assignment groups formed by students yourselves.

This project aims to 1) practice students’ skills in the construction of equity portfolios using a pool of equity securities; 2) by varying the combination of industries and countries that the firm belongs to,  enhance  students’  understanding  on  the  use  of macroeconomic  and  industry  analysis  in portfolio construction. In this assignment, you need to follow the following requirements.

II. Data Requirements

You are required to construct FOUR optimal risky portfolios of stocks traded in exchanges (e.g., the London Stock Exchange, the Shanghai Stock Exchange, etc.).

1) There are four sets of stocks required overall:

i.   Firms are in the same industry and the same country, e.g. Brazilian Utility industry

ii.   Firms are in the same country (e.g. Brazil) but are in different industries (e.g., Utility industry, Textile industry, and Health care industry, etc.)

iii.   Firms are in the same industry (e.g. Utility) but are in different countries (e.g., South Africa, Brazil and Australia, etc.)

iv.   Firms are in different countries and different industries. (E.g. Utility industry in Brazil, Textile industry in Australia, Health care in South Africa, etc.)

2) For portfolio ii) minimum two industries required; for portfolio iii), minimum two countries required.

3) Portfolio iv) is constructed based on the choices of industries and countries in portfolios ii) and iii). (Please refer to the examples in point 1)). Therefore, the coordination of different portfolios needs to be considered from the start. This is to ensure the following comparison of portfolio performances is feasible,e.g., different performances between portfolios i) and ii) is ONLY due to different industries used since country choice is the same.

4) Ensure that the optimal portfolios are sufficiently diversified,i.e., the number of stocks with non-zero weight in the optimal portfolio should be 4 at least.

1 The industry classification level needs to be consistent throughout the coursework no matter which level the group chooses to use.

2 The country here means the listing stock market is the same as the company headquarter. For example, Coca cola stocks listed in New York stock exchange. British Airway stock listed in London stock exchange.

5) 61 monthly time series of adjusted closing price of individual stocks are needed in order to calculate 60 monthly (i.e., a time series of monthly returns of at least 5 years) return rates of all the securities in your portfolio. (The time series does not have to be recent to avoid any large market crash periods.)

6) The corresponding monthly risk-free rates (e.g., Treasure-bill rate, overnight interbank rate) and exchange rate for the same period and same market are also needed. The stock returns used in portfolio analysis needs to be excess return and denominated in the SAME currency (e.g. US$ or any currency of your choice).

7)  The relevant information about the securities prices can be found through Refinitive, Bloomberg or WIND terminal (accessible at BS429, BS415, Library Level 9).

III.    Stock and Portfolio Performance Analysis requirement:

With the above individual stocks, you are required to complete the following tasks:

1)  Calculate individual  firm  statistics including  mean,  standard  deviation  (These  two should be based on the method shown in the lab sessions, i.e. using Data Analysis Tool in Excel), correlation coefficient, covariance matrix and Sharpe ratio in Excel.

2) For each of the four firm data sets mentioned “Data requirements”, you apply the International Portfolio Diversification procedure (use the procedure demonstrated in the lab sessions) to complete the following tasks in Excel (all the original formulas need to be kept in order to show the calculation process):

i.      Construct the optimal risky portfolio;

ii.      Calculate portfolio statistics (mean, standard deviation and Sharp ratio) for the optimal risky portfolio;

iii.      Plot the efficient frontier of risky portfolio;

iv.      Plot the optimal capital allocation line (CAL);

IV. Group Analysis Submission Guidelines

Note that as the outcome from your group project, you are expected to submit the soft copy of a Word report and an Excel file.

4.1 Structure of the Word Report

Your Word report must include:

1.   Description of the variables used for exchange rate, risk-free rates, stock prices and the data source(s)

2.   Present individual stock summary statistics, industry and country information in Table 1 and present individual optimal portfolio information using Table 2

3.   Compare the risk-return performance between the following pairs as in Table 3

Table 2 Individual portfolio structure and performance

Table 3 Compare the risk-return performance between the following pairs

4.   A detailed literature review and discussion of the relevant academic literature on the  industry and country effects. The literature discussion should be related to the results from Table 3.

4.2 Format of the Word file

•   Overall length, no more than 1000 words (excluding tables and reference list)

•   The filename is “FIN309 analysis word_GROUP #” .

•   Report word count at the end of the report

•   Font: Times New Roman, size 12, align two margins

•   Provide each table with an informative title

4.3 Format of the Excel file

•   Include all the portfolios under “Stock and Portfolio Performance Analysis” in one Excel file containing four spreadsheets, one for each portfolio.

•   Each spreadsheet has a title as ‘portfolio i’, ‘portfolio ii’, etc. according to the sequence in “Data requirements” section.

•   All the original formulas need to be kept in order to show the whole calculation process.

•   The filename is “FIN309 analysis excel_GROUP #” .