Theory of Finance (MSc Finance / MSc Corporate Finance) Individual Resit Coursework (2022/23) (Dr Dirk Nitzsche) This project counts for 25% of the overall mark in the course Theory of Finance. Data is provided and students should use Excel or any other software package to perform the statistical analysis. Students can only submit a maximum of two files, one Excel file and one word or pdf file which should not exceed 2 pages without a cover sheet. IMPORTANT : All graphs, discussion and important empirical results need to be included in your report (i.e. word document) and the Excel spreadsheet will NOT be used for marking. Question 1 : Market Index [20 marks ] Use the data provided in the Excel Spreadsheet cwData Spring2023.xlsx. - Use the date from the end of December 2010. - On an annual basis, at the end of December (e.g. 2010, 2011, 2012, ) calculate the weights in a market cap weighted index using all five stocks. - Present the weights in a graphically form. - Calculate the performance of the market cap weighted index from the end of December 2010 until the end of December 2022. - Comment on your empirical findings. Question 2 : Portfolio Theory [40 marks] Use data file cwData Spring2023.xlsx Use all 5 stocks. - Use data only up to the end of February 2018 and calculate (i.) the weights in the optimum portfolio and (ii.) the weights in the minimum variance portfolio. Lets call the two sets of weights opt18 and min18. - Now recalculate the weights in the optimum portfolio and minimum variance portfolio using only data from the end of February 2018 to the end of February 2023. Lets call the two sets of weights opt23 and min23. - Plot the efficient frontiers and capital market lines (in the same diagram) using the two sample periods ( to 2018 and 2018 to 2023). - Critically discuss the efficient frontiers and the different set of weights. - Suppose you have 1,000 to invest (and you can buy fractions of shares). You invest at the end of February 2018. Calculate your final wealth over the next 5 years (e.g. end of February 2018 to end of February 2023) if you invest in opt18, min18, opt23 and min23. - Critically comment on the choice of assets included in your portfolio, your empirical results, efficient frontiers and final wealth. - Carefully explain and discuss whether you would recommend in March 2023 to invest your wealth based on the weights you calculated using historic data (i.e. opt23 or min23). Question 3 : CAPM [40 marks] Use data file cwData Spring2023.xlsx - Use the two sample periods you have used for the construction of the efficient frontier in question 2 ( to 2018 and 2018 to 2023). Use all 5 stocks, use arithmetic returns and calculate the betas using the following three methods. Method 1 ? = Cov(Ri,Rm)/Var(Rm) Method 2 Rit = ? + ?Rmt + ?it Method 3 (Ri rf)t = ? + ?(Rm-rf)t + ?it - Use both sample periods and calculate for each of the 5 stocks the total amount of risk, market risk and firm specific risk. Report your results in a clear and simple way. - Use both sample periods and plot the Security Market Line of the 5 assets. - Carefully comment on all your empirical results, particular its implications for practitioners. GOOD LUCK

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