PORTFOLIO ANALYSIS

Suppose you are considering an investment in a two-factor portfolio. You wanted to analyse the stock return data for five years from August 2016 to July 2021 of four companies listed on the New Zealand Stock Exchange (www.nzx.com). In any possible two-factor portfolio, the weight of each security in the portfolio will be 50%. The possible portfolio combinations are A&B; B&C; A&C; C&D; A&D, and B&D.

Four companies:

1. Sky City Entertainment Group Limited (SKC)

2. Fletcher Building Limited (FBU) and any TWO (2) NZ listed companies of your choice.

Calculate monthly stock returns for the above four companies for the period from August 2016 to July 2021. Stock return can be calculated using the formulae: Ri= (Pt - Pt-1)/Pt-1).

Stock price data can be obtained either from https://finance.yahoo.com or from the NZX Company Research Database: Click on https://companyresearch-nzx-com.ezproxy.aut.ac.nz/deep_ar/, enter company name> click on Historical prices.

Required:

Using the appropriate Excel function (see fx), determine the average monthly return, the standard deviation, and variance for each company. (Use 60 month returns data and use Excel functions Variance P and Standard Deviation P.) (4 marks)

Graphically show the stock price performance of the four companies for the periods from August 2016 to July 2021. (4 marks)

Comment on the companies stock price performance trend since April 2020. (4 marks)

Determine, using the appropriate Excel function, the covariance between securities A&B; B&C; A&C; C&D; A&D and B&D. (Use the 60 months returns data and use Excel function COVARIANCE P.)

Using two-factor portfolio equations, calculate the portfolio returns and risks (both standard deviation

and variance) for the following portfolios:

1. A and B

2. B and C

3. A and C

4. C and D

5. A and D

6. B and D

(6 marks)

6. By computing the ratio of () select the best investment that you should undertake, assuming you are

a risk-averse investor. Explain the rationale for your choice of investment. (6 marks)

Draw a portfolio graph (showing Risk on the X-axis and Return on the Y-axis) for the investment portfolio that you have chosen in (6) above for a range of investment weights that you could choose from (i.e., you could invest 5% in one company and 95% in the other or 10% in one company and 90% in the other and so on). Determine from the portfolio graph the minimum risk you could obtain for this portfolio and the respective weightings that should be invested in each of the securities in the portfolio.

(8 marks)

Determine the betas for the four securities by regressing each company's returns on the returns for the S&P/NZX50 Index (close) for the same period. The S&P/NZX50 index data can be obtained from https://finance.yahoo.com/quote/%5ENZ50/history?p=%5ENZ50.

Explain what the values of the betas (the slope coefficients in the regression) indicate and discuss the factors that might explain the differences in the betas of the four companies. (8 marks)

(Regression Calculation: Go to Data > Data Analysis and choose regression. The company returns constitute the Y input, and the index returns the X input. Alternatively, the slope found in f(x) also represents Beta. If Data Analysis does not appear, you can add the tool. It is available in Excel. Go to File > Options and choose Add-ins and go to Manage, then select click on the drop- down button and select Excel Add-ins, then click on Go. Select Analysis Toolpak and OK).

A portfolios risk generally declines as the number of stocks in a portfolio increases. So could an investor, by adding more stocks into their portfolio, completely eliminate risk? Why or why not? Explain.