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Portfolio Management

Pick three stocks of your choice (Select stocks listed in the ASX or any other national Exchange), preferably from different industry groups. Go to the recommended websites or any other website that offers historical stock price data or to published information sources such as Yahoo Finance, or any other source of financial information. Extract weekly (for example, every Friday) closing share prices for the most recent 28 weeks

Extract also the values of the stock market index, (represented by the ASX 300 or ASX 200 Index in the case of Australia), on a weekly basis over the same time period.

Calculate the following:

Part 1 (30 marks)

(a) The rate of return in each week for each stock and for the stock market index for the 27 weekly periods. Calculate the discrete rate of return as well as the continuously compounded rate of return. Calculate the arithmetic mean return and the geometric mean return of each stock for the entire period. Use only the discrete returns for your calculations and for the calculations in the questions that follow. (10 marks)

(b) The variance of returns for each stock and the index and the covariances of returns between each pair of stocks, the covariance between each stock and the stock market index, and the corresponding correlation coefficients. (5 marks)

(c) Compare your results in (a) and (b) for each stock and the stock market index and comment on the risk return characteristics and performance of each of your stocks and the index. Illustrate with tables/charts as appropriate. Comment on the results, relating to what you have learnt in this course. Relate the risk return pattern and the performance of the market index and your stocks to relevant events that took place during this period. Draw on economic, political, industry and company related events that took place over this period that may have impacted on the performance of your stocks and the market index. Give bibliographic references to the sources of your information. (15 marks)

Part 2 (10 marks)

(a) Based on the discrete returns calculations in Part 1, compute the weekly rate of return and the variance of an equally weighted portfolio formed from the three stocks. Make use of your knowledge of matrix algebra in your calculations. (5 marks)

(b). Examine and compare the pattern of the returns of your portfolio with those of the individual stocks, and the stock index. Compare the corresponding variances. Comment on your observations, relating to material learnt in this course. (5 marks)

Part 3 (45 marks)

(a) Extract for each week, the yield of the 26-week Treasury bill (or equivalently the 90 day or 180-day bank accepted bill (BAB) rate) from the financial media (i.e. RBA website http://www.rba.gov.au/statistics/tables/index.html#interest_rates) over your sample period. (Remember that reported yields are usually annualised figures.) Convert the yields to weekly numbers. Use these as a proxy for the risk free rate.
(5 marks)

(b) Estimate the Security Characteristic Line (SCL) for each of your stocks and the equal weighted portfolio, based on the ‘Market Model’, using excess returns (discrete returns less the risk free rate), using Excel regression analysis functions. Show your results graphically. From your results, compute the Beta and the Jensen’s Alpha of each stock and the portfolio. (15 marks)

(c) Calculate the total risk (the return variance) of each stock and the portfolio. Partition the total risk to their respective systematic and unsystematic risk components. (10 marks)

(d) Based on your observations and results in parts (b) and (c) above, comment on each of your stock’s and portfolio’s performance, and on their risk characteristics, comparing and contrasting the magnitude and the proportions of their systematic and unsystematic risk components. What further insights can you gain on the characteristics and behaviour of your stocks and portfolio compared to the analysis and observations you made in Part 1 (c) and Part 2 (b)? (15 marks)

Part 4 (15 marks)

From the point of view of an investor who wishes to evaluate whether the stocks that you examined are worth investing in, how useful was the analysis you carried out on these stocks? What limitations do you see in your analysis and results for investment decision making purposes? What further analysis would you wish to carry out? Explain briefly.
__________________________________________________________________________________
Examples of websites for sourcing data

Australian Stock Exchange:
http://www.asx.com.au/asx/statistics/indexInfo.jsp
BARRA indexes:
http://www.barra.com/research/download_returns.asp
Morgan Stanley Indexes:
http://www.msci.com
For individual stock data:
http://finance.yahoo.com/
Reserve Bank of Australia – for interest rates, exchange rates etc.
http://www.rba.gov.au/Statistics/

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Portfolio Management

MODULE GUIDE   2014-15

This document is designed to supplement information contained in the University’s Web based Module Information Directory http://mid.coventry.ac.uk/midhome.html

Students should consult the MID entry for information on;

Module summary    Teaching Learning and Assessment

Module resources    Module organisation.

1.    Module delivery

If you have a disability or medical condition and need an adjustment to allow you to fully participate in this module (e.g. different format of literature, clear communication for lip reading, breaks for medication, etc.) please tell your lecturer so that arrangements may be made.

1.1    Teaching Plan

To complete the module successfully, attendance at all classes is advised. Students are also expected to work independently, undertake any required background reading or practice exercises and actively participate in seminars or other small group work.  If allocated to a seminar group, students should remain with that group.

Week    Method of Delivery    Topic

1    L + S    Introduction to portfolio management.

2    L + S    The measurement of risk and return

3    L + S    Markowitz portfolio theory.

4    L + S    The Capital Market Line and the CAPM

5    L + S    Using the CAPM for portfolio management.

6    L + S    Testing the CAPM – Single Index Model.

7    L + S    Efficient market theory.

8    L + S    Passive fund management and EMT.

9    L + S     Active fund management and alpha returns.

10    L + S    Behavioural finance and the critique of modern portfolio theory.

1.2    Module tutors

Module Leader    Room    E-mail    Telephone

Tony Kilmister    WM121

Surgery hours:     Monday 12.00-2.00.

Tuesday 11.00-1.00

Messages can be left at reception in the William Morris building or emailed to the tutor.

1.3       Use of Module web

The module web will be used to convey module resources such as lecture and seminar handouts and announcements.

2.    Module Assessment

The assessment method and coursework weighting can be found in section 1 of the MID entry for this module on http://mid.coventry.ac.uk/

The assessment for this module consists of one examination [70% of module mark] and one coursework [30% of module mark]. The coursework assessment takes the form of one piece of written work.

2.1    Coursework Assignments

Further details will be published on the module website.

2.2    Coursework deadlines

Coursework Assignment    Day    Month    Year

5    December    2014

Late Work

All work submitted after the submission deadline without an approved reason  will be given a mark of zero. This is not the same as a non-submission, as a late submission counts as an attempt and a mark of zero may allow you to resit the coursework (see section 2.6 on referrals).

You should note that short deferrals (extensions) of up to three calendar weeks can only be given for genuine “force majeure” and medical reasons, not for bad planning of your time. Please note that theft, loss, or failure to keep a back-up file, are not valid reasons. The short deferral must be applied for on or before the submission date. You can apply for a short deferral by submitting an Examination/ Coursework Deferral Application Form. Application Forms along with the supporting evidence should go to the relevant Student Support Office (WM404 or GE103), for undergraduates, or Postgraduate Reception (WMG29). For a longer delay in submission a student may apply for a (long) deferral. See your programme manager for details.

Examination/Coursework Deferral Application Forms are available from the BES reception, the Student Support Offices in WM and GE buildings, or the BES Faculty website.

2.3    Coursework submission

Details of the arrangements for coursework submission are set out in the document “Coursework Submission”. If you did not collect a copy of this document at enrolment you can download it from the BES Faculty website or collect a copy from reception.

You should always enter your name and complete all other details on a BES coursework cover sheet and also ensure that your student ID number and the module number are on the front page of the coursework itself.

You must check that all your coursework marks have been recorded accurately on the module web and notify your module tutor if you believe a mistake has been made.

NB. It must be stressed that all marks notified to you during the year are provisional until confirmed by the end of year Subject Assessment Board. It is possible that notified marks may be raised or lowered by this board.

Students MUST keep copies (electronic or photocopies) of all coursework submitted on this module.

2.4    Plagiarism

Students are advised to consult the University Regulations* and their course handbooks regarding the penalties for and definition of plagiarism, which essentially is the deliberate and substantial insertion in your own work of material from someone else e.g. a published source such as a book or article, or simply another student’s piece of work, without acknowledging the extent or source or clearly marking up the quotation in inverted commas.

*To view regulations use the University website.

USE OF TURNITIN

1. Whenever requested by your module leader, you should upload a WORD copy of your work onto the relevant icon on your module web for plagiarism checking. If you do not do this then your work will not be marked.

2. Drafts of assessed work for any particular module should only be uploaded onto the draft icon on that module web, as this draft icon will be configured so that the final submission will not flag up overlaps with the draft submission. If you submit a draft onto any other module web then Turnitin will identify any overlaps with your final submission as plagiarised.

3. You should never submit anyone else’s work onto Turnitin under your own name and you should never ask anyone else to submit your work onto Turnitin under their name.

4. Normally students are only allowed to submit one draft of an assessment via Turnitin. If the guidance on plagiarism has been followed, and the student has written the work themselves, this should be sufficient.

For further guidance on the use of Turnitin please see your module web, ask your tutor or contact the CUOnline helpdesk.

2.5    Form of Examination

The examination will comprise a two hour unseen paper.

You are reminded that the form of the examination may be subject to revision. More information on the structure of the examination paper and what is expected of students in the examination will be provided during the revision session.

2.6    Referral

You must have attempted the coursework (and examination, if appropriate) at the first attempt to be eligible for a re-sit.

If you are referred in a coursework component you will be normally required to submit a complete new set of assignments. Students should look on the BES Faculty website to obtain referred work for assessments and the exact deadline date. (The deadline will be normally be  in mid-August,  just before resit examinations commence.) The referred examination timetable will be published on the university website

3     MODULE RESOURCES

The essential textbook(s) recommended for purchase is / are:-

Author    Date/

Edition    Title    Publisher    Library shelf number

EJ Elton, MJ Gruber, SJBrown & WN Goetzmann    2010

8th Edition    Modern Portfolio Theory and Investment Analysis    Wiley    332.6 ELT

R A Strong    2009    Portfolio Construction, Management, Protection    South Western    332.645 CUT

3.1    Web sites

Site    url    Comments

Bloomberg    www.bloomberg.com

Financial Times    www.ft.com

Reuters    www.reuters.co.uk

Yahoo Finance    finance.yahoo.co.uk

I.M.F    www.imf.org

World Bank    www.worldbank.org

OECD    www.oecd.org

A variety of subject generic Web links are accessible via the BES Faculty website.

3.4    Other resources

Additional resources can be found in the module’s Moodle site

4.    MODULE HANDOUTS

Students enrolled on this module will have the handouts detailed below made available to them via this web site.

4.1    Lecture Notes

Topic    Location

Introduction to portfolio management.    CUonline

Markowitz portfolio theory.    CUonline

The capital asset pricing model.    CUonline

Applying CAPM to portfolio analysis.    CUonline

Testing the CAPM.    CUonline

Efficient market theory.    CUonline

Passive fund management and EMT.    CUonline

Active fund management and alpha returns.    CUonline

4.3    Past examination papers

Copies of previous years’ examination paper can be accessed online via CURVE.

Students are warned that the format of the examination paper may be subject to variation.

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