Question
1. Introduction This is an individual activity and you must work on your own. See section 6 below on originality. 2. Task (Case quiz 10%)
1. Introduction This is an individual activity and you must work on your own. See section 6 below on originality. 2. Task (Case quiz 10%) A. In worksheet Ex 1of the Excel file provided, model a two-asset portfolio and examine the risk and return characteristic of a two asset portfolio - using the data provided. In this worksheet paste three graphs: a. When correlation coefficient of returns between the assets is -1.0, b. When the correlation is 0.5 and c. when the correlation is1.0. B. On worksheet Ex 2 construct an optimal risky portfolio using the selected 10 stocks monthly returns. Assume the risk free rate is 2%. (Note: use arithmetic average to get average monthly return. Assume the returns are not auto-correlated.) C. Construct an optimal risky portfolio that provides the highest return with the constraint that: i. The weight of any risky asset in the portfolio should not exceed 30% to ensure that the portfolio is diversified. ii. No short selling or borrowing. D. Answer the quiz taking the required figures from your spreadsheet. 3. Report (10%) Please write a report addressing the following tasks: 1. Using CAPM model to evaluate each stock. Rank their performance by alpha and information ratio. (5%) 2. Compare the optimal risky portfolio from 2B and the optimal risky portfolio with constraints from 2C using both CAPM model and Fama-French 3 factors model. (5%) Note: You can create extra worksheets for your analyses. You can obtain the risk free rate, market risk premium, and the Fama-French 3 factors from French Library: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
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