Scenario

You and your team members have an investment company. You have to decide which of the following stocks to invest in:

Investment 1: Bond

Investment 2: Income Stock

Investment 3: Cryptocurrency

Investment 4: Equity ETF

Investment 5: Crypto ETF

Tasks

Your group has to decide how to invest its funds in any, or all, of the 5 investments. In order to make an informed decision, you have to analyze each option and decide as a team.

How do you divide the work?

Each one of you will be responsible to run an analysis of the following portfolios:

Portfolio A Portfolio B Portfolio C

Team Member 1 Buy 1 asset and

short 1 asset

Team Member 2 Buy any number of

assets

(no shorting allowed)

Team Member 3 Buy some assets and short some other assets.

There should be 3 or more assets in the portfolio

Team Member 1 picks Portfolio A, Team Member 2 picks Portfolio B, and Team Member 3 picks Portfolio C.

In a group of two students, Team Member 1 picks Portfolio A, Team Member 2 picks Portfolio B, and both team members work on Portfolio C.

What do you need to know to make such a decision?

Each team member should follow these steps for their respective portfolio:

Step 1 - For each investment, produce the given statistics:

1. Average return

2. Volatility

3. Skewness

4. Kurtosis

Also, compute the correlation and covariance matrix of historical returns.

Note that a sample sheet is provided (Link to Sample Calculations sheet) that illustrates how to compute average, standard deviation, skewness, and kurtosis from sample data. Also, a sample correlation matrix and a covariance matrix are given.

You must compute the portfolios average return and portfolio volatility. You do not need to compute the portfolio skewness and portfolio kurtosis.

Portfolio APortfolio BPortfolio C Portfolio APortfolio BPortfolio C 0.0770.0680.056 Portfolio A1-0.608-0.593 -0.1550.4960.447 Portfolio B-0.60810.49 0.391-0.041-0.348 Portfolio C-0.5930.491 0.101-0.432-0.292 0.249-0.350.333 Portfolio APortfolio BPortfolio C1avg0.133-0.0520.039 Portfolio A0.0370.0890.0782stdev0.2050.370.358 Portfolio B0.0890.1220.123skew-0.2490.697-0.012 Portfolio C0.0780.120.1144kurtosis0.224-0.064-2.697

Step 2 - Answer the following questions:

Each Team Member/Portfolio Manager will answer the following questions about their own portfolio:

1. Shorting

a. Can this portfolio be sold short? (Hint: Yes, but be sure to explain part b)

b. If it can be sold short, walk through the mechanics.

2. Credit Risk

a. Does this portfolio have credit risk?

b. If it has credit risk, explain what the credit risk is.

3. Portfolio Statistics

a. Compute the weighted return of the portfolio.

b. Compute the variance of the portfolio.

4. Diversification

a. Describe the diversification in words between the two assets.

b. Do you think this portfolio is well diversified or not?

5. Comparing Portfolios

a. How does your portfolio compare to the others in terms of risk?

b. How does your portfolio compare to the others in terms of return?

6. Assessing Risk

a. Describe economic conditions or scenarios that would affect your security. For example, the COVID-19 pandemic could disrupt travel and halt the production of new aircraft, hurting the demand for airline parts. (Note: this particular example CANNOT be used!)

b. Determine if similar events would hurt one or both members of a portfolio.

7. Performance

a. Now describe economic conditions or scenarios that would greatly

b) improve each security. For example, increased business and vacation travel could increase the demand for airline parts (Note: this particular example CANNOT be used!) a. Determine if similar events would help one or both members of a portfolio.

8. Disrupters

a. List the potential influence the central bank may have on the portfolio.

b. List the potential influence that investment banks may have on the b) portfolio.

9. Re-assessing Risk

a) Do the two investments in the portfolio have the same skew?

b) Is there a difference between the types of correlation?