As following

Project description
1. Download stock prices for any three different companies – 22 daily closing
prices for each company. You can use any database to obtain the prices e.g.
datastream, yahoo finance etc. Use prices from September 2014 onwards.

2. Present in a table the name of the companies, the dates, the prices and the
returns (in %). The table must fit in one page only, and it does not count
towards the word limit. Example:

Company A Company B Company C

Date Price Return (%) Price Return (%) Price Return (%)
DD/MM/YY aa.aa aa.aa bb.bb bb.bb cc.cc cc.cc
… … … … … … …
DD/MM/YY aa.aa aa.aa bb.bb bb.bb cc.cc cc.cc

[5 marks]

3. Calculate the average return and variance of returns for each company
(a) Briefly discuss the results. Compare them with the theory discussed in
class e.g. are there any companies that dominate other companies?
(Maximum of 200 words)
[10 marks]

4. Calculate the variance-covariance matrix and correlations for each company
above.
[5 marks]

5.
(a) Select the two companies from question 4 with the highest correlation
coefficient. Use different weights for the two companies in order to create
N combinations, with N > 8. Calculate the expected returns and standard
deviations of each combination. Present the results in a table e.g.

Combinations Weight
Company A
Weight
Company B
Return
(%)
Standard Deviation
(%)
1 1 0 ab.ab ab.ab
… aaa bbb ab.ab ab.ab
N 0 1 ab.ab ab.ab

[5 marks]

(b) Repeat step 5(a) above using the two companies from question 4 with the
lowest correlation coefficient. [5 marks]
6. Draw the Markowitz Efficient Frontier (MEF) using the Tables from question
5(a) and 5(b). Identify in the graphs the Minimum Variance Portfolio.
[10 marks]

7.
(a) Discuss the results obtained in question 6 for each one of the two MEF
e.g. explain why some portfolios are preferred to others, the
shape/curvature of the MEF, the relevance of investors’ risk preference and
the selection of an optimum portfolio etc.
[15 marks]

(b) Based on the results obtained in question 6 would you chose an individual
stock or a portfolio? Which stock/portfolio would you chose? Explain your
choice based on the modern portfolio theory.
[15 marks]

8.
(a) Explain the relationship between the possibility of lending and borrowing
at a risk free rate and the MEF.
[15 marks]

(b) Would the existence of a risk-free asset change your answer in question
7(b)? Discuss.
[15 marks]

NOTE: The work that do not follow the requirements specified below will be
penalised.

** You must present all relevant details and show clearly how results were obtained.
For instance, if you calculate returns like this (Pt Pt1)/Pt 1 then you need to
specify what Pt and Pt-1 are, and provide an example based on your data.

** An equation editor must be used to type equations.

**The assignment must be word processed, font Times New Roman or Arial, with a
font size of 12 and with lines double-spaced. All work should be spell-checked
and read carefully for typos before handing in.

**Check that you have answered the question that is asked and that your response
provides a logical reasoned answer.

As following

Project description
1. Download stock prices for any three different companies – 22 daily closing
prices for each company. You can use any database to obtain the prices e.g.
datastream, yahoo finance etc. Use prices from September 2014 onwards.

2. Present in a table the name of the companies, the dates, the prices and the
returns (in %). The table must fit in one page only, and it does not count
towards the word limit. Example:

Company A Company B Company C

Date Price Return (%) Price Return (%) Price Return (%)
DD/MM/YY aa.aa aa.aa bb.bb bb.bb cc.cc cc.cc
… … … … … … …
DD/MM/YY aa.aa aa.aa bb.bb bb.bb cc.cc cc.cc

[5 marks]

3. Calculate the average return and variance of returns for each company
(a) Briefly discuss the results. Compare them with the theory discussed in
class e.g. are there any companies that dominate other companies?
(Maximum of 200 words)
[10 marks]

4. Calculate the variance-covariance matrix and correlations for each company
above.
[5 marks]

5.
(a) Select the two companies from question 4 with the highest correlation
coefficient. Use different weights for the two companies in order to create
N combinations, with N > 8. Calculate the expected returns and standard
deviations of each combination. Present the results in a table e.g.

Combinations Weight
Company A
Weight
Company B
Return
(%)
Standard Deviation
(%)
1 1 0 ab.ab ab.ab
… aaa bbb ab.ab ab.ab
N 0 1 ab.ab ab.ab

[5 marks]

(b) Repeat step 5(a) above using the two companies from question 4 with the
lowest correlation coefficient. [5 marks]
6. Draw the Markowitz Efficient Frontier (MEF) using the Tables from question
5(a) and 5(b). Identify in the graphs the Minimum Variance Portfolio.
[10 marks]

7.
(a) Discuss the results obtained in question 6 for each one of the two MEF
e.g. explain why some portfolios are preferred to others, the
shape/curvature of the MEF, the relevance of investors’ risk preference and
the selection of an optimum portfolio etc.
[15 marks]

(b) Based on the results obtained in question 6 would you chose an individual
stock or a portfolio? Which stock/portfolio would you chose? Explain your
choice based on the modern portfolio theory.
[15 marks]

8.
(a) Explain the relationship between the possibility of lending and borrowing
at a risk free rate and the MEF.
[15 marks]

(b) Would the existence of a risk-free asset change your answer in question
7(b)? Discuss.
[15 marks]

NOTE: The work that do not follow the requirements specified below will be
penalised.

** You must present all relevant details and show clearly how results were obtained.
For instance, if you calculate returns like this (Pt Pt1)/Pt 1 then you need to
specify what Pt and Pt-1 are, and provide an example based on your data.

** An equation editor must be used to type equations.

**The assignment must be word processed, font Times New Roman or Arial, with a
font size of 12 and with lines double-spaced. All work should be spell-checked
and read carefully for typos before handing in.

**Check that you have answered the question that is asked and that your response
provides a logical reasoned answer.