1. Assume you have AUD100,000 that you must invest in stocks. Construct a portfolio of 5 stocks from the data provided. Design the portfolio in any which way you deem fit. Justify your portfolio selection and design.
Data: daily stock price, beta and some fundamental indicators (p/e, p/b etc) for 10 stocks for the last 4 months covering education, hospitality, banking, retail and pharmaceutical sectors.
Assessment criteria:
• Basis and reasons for selecting the 5 stocks based on fundamental analyses. Qualitative analyses will be considered provided the arguments are rigorously justified.
• Clarity of objective/strategy of the portfolio and how its allocation will meet the stated objective.
• Full details of portfolio in a table format with appropriate narrative of all relevant transactions that may occur in real world investment.
2. Hedge your portfolio using index futures contracts. In order to do this you will need to, interalia:
a. determine your hedging objectives,
b. calculate the beta of your portfolio, and
c. work out the optimal number of positions to hedge your long stocks position. Justify the decisions and/or assumptions you make.
Data: daily indices cash and futures prices for the relevant markets and 5 sectors over the same 4 months period
Assessment criteria:
• Clearly stated hedging objective(s), determined in light of earlier portfolio objective and prevailing market conditions
• Explanation for how a long/short position in index futures contribute to meeting that objective
• Justification for the selected index futures contract
• Calculation of portfolio beta, hedge ratio and other relevant transactions that may occur in real world investment with evidence
3. Hold your hedged portfolio (of stocks and index futures) for a period of two weeks. At the conclusion of this period, evaluate the effectiveness of your hedge, the reasons for its success or failure and how the outcome could be improved. Discuss if your hedging objectives have been met.