Part A Question 3. How to determine the beta and alpha for portfolio E and H

SUNWAY UNIVERSITY BUSINESS SCHOOL BACHELOR OF SCIENCE (HONS) ACCOUNTING AND FINANCE ACADEMIC SESSION : Aug 2016 FIN 3024: INVESTMENT MANAGEMENT ASSIGNMENT: Financial Portfolio Management DEADLINE: 4pm, 02/11/2016 INSTRUCTIONS TO CANDIDATES 1. There are SIX (6) pages in this Assignment including the cover page. 2. This is a group assignment. Each group must have 5 members. 3. This assignment will contribute 25% to your final grade. 4. Submission is to be both via Turnitin and hardcopy (to the SUBS dropbox) by: 4pm on Wednesday 2th November, 2016 5. Turnitin details: Class Name: FIN3024 Group Assignment_Aug 2016 Class ID: 13073445 Enrollment Password: Investment 6. Requirements: a) Required the use of Microsoft Excel. b) Must be neatly typed by using Microsoft Word document. c) A-4 sized papers d) Double-sided printing e) Spacing : 1.5 f) Font : Arial g) Size : 12 h) Must include references following the Harvard referencing format. i) Cover page must include university name, subject name and code, coursework topic and group members' names and ID. FIN 3024 - INVESTMENT MANAGEMENT 1 FIN 3024 - INVESTMENT MANAGEMENT 2 FIN 3024 Assignment (Q) / AUG 2016 Preamble Assuming that you all are Investment Consultant team members with a local investment firm. Your team has been tasked to construct the optimal portfolio comprising of two risky assets (Portfolios E and H) while considering the client's risk tolerance. You are given the following information: 5-year historical monthly returns (March2011 - March2016) of the two portfolios, KLCI index, and 90-day Treasury Bills; and also the annualized returns and standard deviations for each of the period specified (please refer to Table A attached on the last page). In brief, Portfolio E is an equity investment strategy that uses publicly available valuation, technical and sentiment factors to assess stocks in the portfolio. Portfolio H is a hedge fund. This strategy seeks to benefit from mispricing within and across broad asset classes by taking long and short positions in equity and bond markets and currencies. Both portfolios E and H are much more volatile than the risk free rate. You will find that their correlation is small indicating that there are diversification benefits to be had holding both in a portfolio. You will be meeting with a client that is looking for investment advice from you based on your two strategies, E and H. In preparation for your upcoming meeting with the client, your boss asks that you respond to the questions below and be ready to discuss. (Note: All the following information provided in this assignment may not necessarily represent the actual situation that have taken place) FIN 3024 - INVESTMENT MANAGEMENT 3 FIN 3024 Assignment (Q) / AUG 2016 Assignment Questions PART A: Quantitative Analytical Questions (50%) 1. (a) Using the Table below and the information given in the Excel file, calculate the return E(r P) and standard deviation P for combining portfolio E and H based on the weightage allocation given. (11 marks) Portfolio E Portfolio H 100% 0% 90% 10% 80% 20% 70% 30% 60% 40% 50% 50% 40% 60% 30% 70% 20% 80% 10% 90% 0% 100% P E(r P) (b) Plot the risky-asset opportunity set and draw the efficient frontier line for the portfolio based on your answers in Part (a). (7 marks) (c) Determine the optimal allocation of E and H and draw the Capital Allocation Line (CAL). (10 marks) 2. Find the optimal complete portfolio (C) based on your client's indifference curve. (Hint: Plot an indifference curve on the same graph you just created using the utility function formula based on the range of your calculated expected return for the given standard deviations shown in the table below. Assume U = 9% and a risk aversion coefficient (A) of 10 to complete the table below). (10 marks) FIN 3024 - INVESTMENT MANAGEMENT 4 FIN 3024 Assignment (Q) / AUG 2016 Expected Return (%) Standard Deviation (%) 5 7.5 10 12.5 15 17.5 20 22.5 25 3. Determine the beta and alpha for portfolio E and H using regression model functions in Excel based on market model of CAPM formula. What implications can you draw? (12 marks) PART B: Qualitative Analytical Questions (50%) 1. If the client notices that the Sharpe ratio of one of the portfolio is much higher than that of the other one and ask why the optimal risky portfolio wouldn't be 100% of that portfolio with higher Sharpe ratio. How would you respond? (10 marks) 2. Your client is expected to ask why you are recommending the optimal complete portfolio (C) instead of the optimal portfolio (P) even though the latter has a higher expected return. How would you respond? (10 marks) 3. After meeting with the client, if she seems to prefer to the risk/return tradeoff of the optimal portfolio (P) rather than that of the optimal complete portfolio (C). What does that indicate about your initial assumptions regarding the indifference curve? What other considerations you would take? (10 marks) 4. If the client asks you to further elaborate on the strategy of Portfolio E and H, how would you respond? (10 marks) 5. If the client asks about your strategic plan in the event of economic crisis happens within the next 2 years, how would you respond? (10 marks) FIN 3024 - INVESTMENT MANAGEMENT 5 FIN 3024 Assignment (Q) / AUG 2016 Table A: Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Annualized Return Annualized Volatility Portfolio E -4.50% 8.75% 1.03% -2.45% -1.87% -3.77% -7.43% 2.09% 5.94% 1.99% -1.18% -1.45% 4.95% -5.28% -0.68% -8.26% -7.03% 0.80% -10.07% 6.93% 4.13% -4.99% -2.11% -1.51% 1.66% 6.85% 5.13% 1.11% 1.96% 2.37% -0.23% 5.56% 1.48% 4.23% 2.24% 2.34% -0.86% -2.23% 1.88% 2.50% -3.94% -0.19% 1.42% 1.96% 5.21% 3.23% -2.72% 2.57% -0.58% -2.07% 3.84% 0.66% 4.16% -0.72% 1.96% -2.02% 4.75% 0.83% 4.15% 0.05% 1.00% Portfolio H -1.10% 1.38% -7.13% 3.68% 2.72% 13.44% -2.11% 2.51% 4.24% 10.09% 1.27% -0.56% -0.86% 3.56% -1.62% 7.47% -2.09% 3.40% -0.32% 2.82% 4.95% -5.70% 5.90% -6.23% 1.78% 3.24% 10.52% 1.09% -17.02% 1.77% 13.19% 12.80% 3.82% 4.50% 8.29% 7.74% 4.09% -9.22% 1.35% -1.96% 8.12% -2.86% 1.15% 0.62% 6.39% 0.44% 1.18% 9.27% -1.09% -3.82% -0.06% 5.31% 2.78% -1.15% 7.09% 2.84% 5.94% -4.20% 1.17% 2.23% -5.05% KLCI -6.34% 7.77% 0.67% -2.43% -0.98% -6.26% -8.08% 1.91% 7.67% 0.88% -1.46% -1.93% 3.76% -6.06% -0.74% -7.12% -7.79% 0.66% -10.87% 8.80% 5.89% -5.87% -2.62% -1.50% 0.97% 8.24% 5.27% 1.28% 1.76% 1.95% -1.06% 5.66% 0.88% 5.24% 1.84% 1.39% -1.51% -1.57% 1.37% 1.94% -3.31% 0.40% 1.08% 1.53% 4.05% 3.40% -2.44% 2.10% -1.77% -1.90% 3.18% 0.14% 3.72% -0.91% 0.81% -1.67% 3.78% 0.03% 2.65% 0.27% 1.24% 90dBill 0.44% 0.38% 0.37% 0.32% 0.31% 0.30% 0.29% 0.26% 0.21% 0.18% 0.16% 0.13% 0.15% 0.14% 0.15% 0.14% 0.15% 0.14% 0.14% 0.14% 0.13% 0.12% 0.11% 0.09% 0.10% 0.10% 0.10% 0.09% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.07% 0.08% 0.08% 0.08% 0.08% 0.10% 0.11% 0.12% 0.13% 0.14% 0.16% 0.18% 0.18% 0.21% 0.22% 0.24% 0.24% 0.25% 0.27% 0.27% 0.29% 0.30% 0.32% 0.33% 0.32% 0.37% 5.86% 24.64% 2.57% 2.19% 13.4% 19.0% 14.2% 0.3% FIN 3024 - INVESTMENT MANAGEMENT 6