Coursework Report Template PDF

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This is ONLY AN EXAMPLE of the template to use for coursework.

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Coursework Title: Portfolio Construction and Optimization by

Name of Author

Date: October 2021

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Table of Content 1.

Introduction.......................................................................................................................4

2. 3.

Portfolio Theory................................................................................................................5 Portfolio Construction and Optimization Process.........................................................5

4.

Interpretation of Findings................................................................................................7

5.

Recommendations for Performance Enhancement.......................................................7

6.

Summary and Conclusion................................................................................................7

References.................................................................................................................................8 Appendix...................................................................................................................................8

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1. Introduction Your discussion can include: An overview of the companies of your choice. An analysis of the industry of the firms that strengthens your justification of choices of your companies is a good way to elaborate your companies’ businesses. As an example, you may need to discuss the following factors in the first section of your report. This is just a guideline. You do not necessarily need to refer to or cover all the following points. Company-specific factors i. ii. iii. iv. v. vi. vii.

The background/history of the company or the company’s industry The growth prospect of the company or the company’s industry Leaders and competitors in the sector of the company The sale growth over the recent years Market share of the company Historical performance of the company (e.g. the stock performance) The company’s financial fundamentals, including earnings, operating margins and cash flow

Portfolio-specific factors i. Selection of companies from different/unrelated sectors or industries, ii. Selection of companies with diversified businesses and multiple unrelated products/services, iii.Selection of companies that operate in different countries, iv. Selection of companies with different market capitalization (size) v. Selection of companies with different types/strategies (e.g. cyclical vs defensive) vi. Selection of companies with different level of past-performance (e.g. past winners vs past losers) The choice of companies from a portfolio construction perspective can play a significant role in this section. In other words, a justification on why the five companies are chosen for the purpose of portfolio optimization process is very much important. This helps the student to verify how they can best achieve the objective of this coursework assignment that is construction of the portfolio which maximizes risk-return performance of investment. The technical aspects and process to portfolio optimization will have to be followed up in later section.

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2. Portfolio Theory Students are required to critically discuss the underlying portfolio theory and explain the main concepts. Use of citations to the existing literature on portfolio selection theory can improve the quality of this section. 3. Portfolio Construction and Optimization Process Students are required to illustrate the approaches taken in the process of portfolio construction and optimization. The process has to begin with the data collection of share prices of the chosen companies, from www.finance.yahoo.com as recommended in the coursework brief, and/or any other reliable sources. The share price data will then be analyzed to measure the average return over a 5 year sampled period (subject to availability of the data), which includes 60 monthly observations. An example of the answer for a two-share portfolio is as follow:

Company A Company B Risk-free rate

Retur n 0.1355 0.1497 0.0500

Deviatio n 0.1535 0.2298

Risk Premium 0.0855 0.0997

Varianc e 0.0236 0.0528

Using the return data and the collected risk-free rate of return, the student can then obtain the risk-premium measures, variances, covariance, and correlation, all of which are necessary inputs for construction and optimization of the portfolio.



Use of relevant formulae for risk, return, covariance and portfolio statistics in this section would improve the quality of the report.



A variance-covariance matrix and/or correlation matrix can improve this section. Following is an example for a two-share portfolio. Company A Company A Company B

0.0236 0.0094

Company B 0.0094 0.0528

The student can then obtain different weights (or allocations) to be invested in each of the (risky) assets in the portfolio. The table showing the allocations in every asset can be provided in this section. As an example: Portfoli o

Allocation in Company A

1 2

10.00% 60.00%

Allocation in Company B 90.00% 40.00%

Expecte d Return 14.83% 14.12%

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Standard Deviatio n 21.14% 14.64%

3 4 5

69.83% 70.00%

30.17% 30.00%

13.98% 13.98%

14.23% 14.23%

75.39%

24.61%

13.90%

14.17%

6 7

80.00% 90.00%

20.00% 10.00%

13.83% 13.69%

14.21% 14.60%

tangency portfolio minimum variance

The appropriate weightage to construct the tangency (or Mean Variance Efficient) portfolio can be obtained using the following equation. Note that this formula is only applicable for a two-share portfolio, so it may not be required in the coursework report.

wS 

[E (rS )  r f ]  B2  [E (rB )  r f ] Cov (rS ,r B ) [E (rS )  r f ]  B2  [ E (rB )  r f ] S2  [ E (rS )  rf  E (rB )  r f ]Cov(rS , rB )

wB 1  wS where wS represents the weight to be invested in company A, and wB denotes the weight to be invested in company B, such that the return will be the highest for a commensurate or reasonable degree of the risk. Similar approach, as in the following equation, can also be taken to obtain the weights to be invested in each (risky) asset to obtain the minimum variance portfolio. Note that this formula is only applicable for a two-share portfolio, so it may not be required in the coursework report.

 2B  Cov( rS , rB ) w Min (S )=¿  S2   B2  2Cov (rS , rB )

w Min( B) 1  w Min( S) The next step is to plot the obtained risk and return series on a graph to obtain the efficient frontier, on which there are different combinations of assets with varying risk and return degrees which offer the best risk-return combinations with the use of the two (risky) assets in the portfolio. The mean-variance efficient portfolio and the minimum variance portfolio will also lie on the efficient frontier.

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7.00%

6.3314% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

The last step is to construct (or expand) the portfolio to include the risk-free asset, as well, in the portfolio, using the Capital allocation line can be obtained. In other words, while the first step is to construct the portfolio by the appropriate choice of the assets (i.e. security selection), the second step is to add the risk-free asset, which can help reduction of risk, and return enhancement, given the appropriate proportions to be invested in each asset (i.e. capital allocation). So, these two aspects of portfolio construction have to be addressed and explained by the student. Using the appropriate weightage, the student can also obtain the Sharpe ratio as in the following equation:

Sp 

E (rp )  r f

p

where p represents the mean-variance-efficient portfolio. The Sharpe ratio is thus a measure for evaluation of the performance of the constructed portfolio by the student. 4. Interpretation of Findings The student should interpret the findings specifically the results obtained on the portfolio. For example, there can be an interpretation of obtained efficient frontier and the capital allocation line (CAL). Additionally, students can provide a discussion of what the Sharpe ratio means and how it can be maximized as well as how the CAL can provide inferences about maximization of investors’ utility. That is how to maximize the risk-return preferences of the investors using the CAL given every investor’s degrees of risk aversion.

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5. Recommendations for Performance Enhancement In this part, students may need to provide detailed discussion by highlighting key points based on the existing literature about enhancement of the performance of portfolios. There are several possible strategies students might want to refer to. Some examples are provided below: a. b. c. d. e. f. g.

Find Lower Cost Ways to Invest Equities over Bonds Small vs. Large Companies Value vs. Growth Companies Rebalance Regularly Take Advantage of Tax Efficient Investing Think Long-term

Use of citations and referencing is strongly recommended for this section. 6. Summary and Conclusion Finally students are required to provide a brief of summary of their work. Also there can be some brief discussions or concluding remarks about the implications or significance of the portfolio construction and optimization in effective management of investment.

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References Appendix If there are additional information in terms of tables, figures, graphs, etc. these can be provided in this section. Note that the 1500 (+/- 10%) word count does not include the cover page, table of content, references and appendix.

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