Optimal Portfolio Creation Using Hypothetical Companies Objective: To opply concepts of risk, return, CAPM, and portfolio weights to construct o balanced investment portfolio using provided company dato. Resources Provided: - A list of 10 hypothetical companies with their corresponding beta values and standard deviations. - Hypothetical risk-free rate and market return rate. Steps: 1. Introduction and Research: - Examine the list of 10 companies with their fictional data (beta, standard deviation). 2. Calculate Expected Returns Using CAPM: - Use the CAPM formula: Expected Return = Risk-Free Rate + Beta * (Market Return - RiskFree Rate). - Calculate each stock's expected return using the risk-free rate and market return. 3. Normalize Returns by Standard Deviation: - Normalize the calculated expected returns by dividing each by the stock's standard deviation. This step adjusts the returns for each stock's risk (volatility). 4. Portfolio Construction: - Students select 5 companies from the list to include in their portfolio. - They should consider diversification and balance risk and return in their selection. 5. Determine Portfolio Weights: - Allocate weights (percentage of the total investment) to each chosen stock. - Ensure the total weights sum up to 100%. 6. Calculate Portfolio Expected Return and Risk: - Calculate the portfolio's expected return as a weighted average of the returns of the individual stocks. 7. Analysis and Justification: - Provide a brief analysis and justification for their stock selection and weighting. - Emphasis should be on how their choices aim to maximize return while minimizing risk. 8. Submission: - A report including chosen stocks, their weights, calculated returns, and a justification of their strategy. Evaluation Criteria: - Accuracy in calculations. - Rationality behind stock selection and portfolio construction. - Understanding and application of risk management and diversification concepts. - Clarity and coherence in the presentation of their strategy. Risk-free Rate and Market Return: R. 2% Rm:8% Hypothetical Company Data for Portfolio Assignment 1. Alpha Technologies (ALPH) - Standard Deviation: 18% - Beta: 1.2 2. Beta Motors (BETA) - Standard Deviation: 22% - Beta: 1.5 3. Gamma Electronics (GAMA) - Standard Deviation: 15% - Beta: 0.9 4. Delta Retail Group (DELTA) - Standard Deviation: 12% - Beta: 0.8 5. Epsilon Pharmaceuticals (EPSI) - Standard Deviation: 20% - Beta: 1.1 6. Zeta Energy (ZETA) - Standard Deviation: 25% - Beta: 1.4 7. Eta Financial Services (ETA) - Standard Deviation: 10% - Beta: 0.7 8. Theta Food \& Beverage (THETA) - Standard Deviation: 8% - Beta: 0.6 9. lota Software (IOTA) - Standard Deviation: 17% - Beta: 1.3 10. Kappa Healthcare (KAPPA) - Standard Deviation: 14% - Beta: 1.0
