Investments & Portfolio Management
Assessment Learning Outcomes
Upon successful completion of this assessment the students will be able to:
A2: Demonstrate a command of relevant investment analysis, corporate finance and risk management techniques and methodologies applicable to problem solving, evaluation and strategy formulation in the global financial, trading and investment context.
A3: Provide a comprehensive understanding of the interaction of finance, economics and technology with the trading and investment sectors.
A5: Critically evaluate markets and organisations’ financial positions, carry out the risk assessment process and develop an investment decision making strategy that acknowledges ethical and diversity dilemmas of financial markets.
Completing Your Assignment
You work for the 3 Rs Wealth Management LTD, an investment fund that specialises in financial securities investment. Your fund currently holds an international portfolio of equities including US, European, and Japanese stocks.
The fund management is considering a further diversification of the fund portfolio and contemplates the possibility of investing in some emerging markets (in South Asia, Eastern Europe, and Latin America) or diversifying by adding different assets types including Fixed Income Securities, Any sector sectors Indexes, Commodities and Cash equivalent securities You are asked to analyse the optimality of such a diversification in the mean-variance framework.
Your manager requires you to write a report that should summarise and critically discuss your empirical findings, as well as provide a recommendation about the inclusion of emerging market stocks in the portfolio of your fund. Your manager sets very high standards and expects a professional report that he can present to the fund’s clients.
Detailed problem description
Why might the fund management be interested in diversification into emerging markets? Are they right to recommend such a diversification? Answer these questions citing some empirical evidence.
Obtain monthly total return index data for the following 5 equity markets indexes, in US dollar terms, for the 5-year period from October 2016 to September 2020 (the names of the corresponding indices provided in parentheses), plus two financial asset indexes f your choices: (Bonds, Commodities, Derivatives, Cash indexes etc)
US (MSCI USA)
Europe (MSCI EUROPE U$)
Japan (MSCI JAPAN U$)
Pacific, excl. Japan (MSCI PACIFIC EX JP U$)
Latin America (MSCI EM LATIN AMERICA U$)
Index 1
Index 2
Compute monthly returns for each series. Obtain the current US risk-free rate of interest.1 Compute the mean and standard deviation of each series and the variance-covariance matrix. Obtain monthly total return index for the US dollar-based MSCI World equity index (MSCI WORLD U$) and compute its returns.
In order to estimate expected returns, you decide to use the CAPM. Estimate the beta of the six indices listed above with respect to the MSCI All Country index. Use these estimates of beta in order to compute the CAPM expected return of these 7 indices.
Compute the efficient frontier for (i) the first three markets (i.e. US, Europe, Japan) and (ii) all the 7 markets considered. Assume that investors can borrow and lend at the risk free rate of interest and that they are able to take short positions. How does diversification into emerging markets or other assets affect the efficient set?
In the light of existing empirical evidence and your own findings, what are your recommendations? Should the fund expand on emerging markets, consider new assets or focus to its current strategy.
Suppose that your fund is not allowed to take short positions in any of the markets. How would such a restriction affect the conclusion you have drawn in Questions 4 and 5?
Critically reflect on the limitations of your analysis.
You must produce all the spread sheet and graphs in your report.
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