BUSINESS SCHOOL BEAM046 FINANCIAL MODELLING ASSESSED GROUP ASSIGNMENT (VALUE: 100% OF 15 CREDIT MODULE) SET BY: DR. JANE SHEN Date handed out: 16 November 2010 Deadline: 12.00pm on 9 January 2012 for non-FAFM programme 12.00pm on 16 January 2012 for FAFM programme Maximum Word Length: 7,500 Penalties for late submission: The policy of the School of Business and Economics is that assignments submitted 2 weeks late will be awarded a mark of 50. Assignments submitted after this time will be awarded a mark of zero (see your module handbook). 2 BEAM046 Financial Modelling Assessed Group Assignment (100 percent of 15-credit module) You are a quantitative strategy analyst in an asset management fund company and you have been tasked to help your fund manager with setting up a new actively managed fund, called the Alpha fund. The fund’s investments are drawn from the constituents of the current NYSE World Leaders Index (ticker symbol: ^NYL), and will comprise fifteen individual stocks that have been chosen by your manager. These stocks’ ticker symbols are given in Table 1. Table 1: Ticker Symbol Company Name Manager's Opinion Relative to Market Implied E(Ri): ABX Barrick Gold Corporation 0.0% DIS Walt Disney Co. 0.0% JPM JPMorgan Chase & Co. -0.5% PFE Pfizer Inc. 0.0% XOM Exxon Mobile Corporation 0.0% IBM International Business Machines Corp. 0.5% VZ Verizon Communications Inc. 0.5% EXC Exelon Corporation 0.0% BHP BHP Billion Ltd. 0.0% GE General Electric Co. 0.0% WMT Wal-Mart Stores Inc. 0.0% TM Toyota Motor Corp. -0.5% KO The Coca-Cola Company 0.0% PG Procter & Gamble Co. 0.0% CHU China Unicom (Hong Kong) Limited 0.5% You have been asked to design the investment strategy according to the given tasks below and provide your manager a detailed analytical report on the construction of the portfolios. You will also need to provide your manager a performance and risk return evaluation report over an evaluation period. Assume that today is 1 November 2009. Assume that the relevant risk free rate for portfolio optimisation is 0.94% per annum. Task 1 The first task is to construct the optimal passive portfolio. Use modern portfolio theory to estimate the weights of the tangency portfolio of the above fifteen stocks, both with and without short selling. The expected 3 return vector and variance-covariance matrix should be based on sample estimates using five years of monthly data. Denote the optimal passive portfolios P1 and P2. Task 2 The second task is to address the issue of measurement error in the construction of the optimal passive portfolio. Interpret your results from Task 1 in the light of measurement error in both the expected return vector and variance-covariance matrix. Re-estimate the optimal passive portfolio, both with and without short selling, applying at least one method to correct for this measurement error. Denote the corrected passive portfolios P3 and P4. Task 3 The third task is to adjust the weights of the corrected passive portfolios P3 and P4 to create two actively managed portfolios. To achieve this, you should use the Black-Litterman approach. The views that you could apply have been given to you by your manager and are listed in Table 1 (note that your manager has views about only five stocks). The views are expressed in relative terms, i.e. the difference between the forecast monthly return and the market implied expected monthly return. Use at least one of these views to construct the optimal active portfolios, both with and without short selling. Assume that the anticipated market return is 8.5% per annum. Denote the optimal active portfolios P5 and P6. Assume now that today is 1 November 2011, two years after the Alpha fund started. Task 4 The fourth task is to evaluate the portfolios that you constructed in the first three tasks. Evaluate the performance of the portfolios P1-P6 using style analysis. Compare the portfolios’ performance and style with the benchmark index ^NYL and an appropriate style benchmark index. Provide an analysis of the risk and return of the six portfolios. NOTE: • For the purpose of this assignment, you will NOT be evaluated in terms of the fund’s performance. Instead, you will be evaluated in terms of the techniques that you employ and your justification for using those techniques. 4 • Your report should contain sufficiently detailed explanations to the extent that your results can be replicated exactly. • You should make use of tables and figures to report the results. All tables and charts need to be properly numbered and footnoted. • The word limit excludes tables, figures, equations and references. • A word count must be included on the first page of your report. Five marks will be deducted if you exceed the word limit, or if you misreport the word limit. • Together with your written report, you should submit a CD containing (a) your calculations spreadsheet and (b) your report. • A suggested structure for the presentation of your report is as follows: 1. Executive Summary (no more than 200 words) 2. Answers to Tasks 1 to 4: Answer each task in a separate section or chapter, using the following structure: • Summary of your results • Theoretical or empirical background used to support your model • Explanation of the implementation of your model • Description of the input parameters used in your model • Interpretation of your results • Conclusion 3. Overall conclusion and discussion, including the limitations of your analysis and suggestions for future research 4. References SUBMISSION Deadline: 12.00 noon Wednesday 09 January 2012 for non FAFM program 12.00 noon Wednesday 16 January 2012 for FAFM program • Please submit your completed group assignment to the Students Service Centre in Building One in the Streatham Court by the deadline. 5 Each assignment must be accompanied by a BART submission form. Details about downloading this are included in the module handbook on ELE. • You must also complete one group form (blank copies can be download from ELE) showing the members of your Group who have contributed to the work and indicate the percentage of their contributions. • Under no circumstances should assignments be left in the lecturer’s/administrator’s post box or pushed under doors. It is your responsibility to ensure that you manage you time efficiently to ensure that deadlines are met. • An electronic copy should also be submitted online via ELE/BEAM046/Assignment/Turnitin by the above deadline. More information can be found on: http://as.exeter.ac.uk/support/staffdevelopment/e-learning/antiplagiarismsoftwareturnitin/ GROUP WORK The size of the group should be 3 students per group This is an assessed piece of work that will account for 100% of the total marks available for this course. This is a team assignment with marks allocated equally to each member. It is your own responsibility to ensure that all group members make a fair contribution. We strongly recommend that you minute group meetings to record the time, attendance and the decision made for each meeting. If this process reveals that there is a group member who has provided insufficient positive contribution to the assignment, then the right is reserved to give that student a mark below that of their group. ASSIGNMENTS What is being assessed? The assignment assesses written achievement in at least one of the aims stated above in this document. The assignment will be assessed according to the following criteria: • Argument 6 • Content • Style • Structure (introduction, main body, conclusion) • Presentation • Originality • Relevance to research, relevance to practitioners. The Department expects all assessed Assignments to be completed by using the Computer facilities. Hand-written work is not acceptable. CHEATING AND PLAGIARISM Cheating and plagiarism are totally unacceptable and will result in disqualification. ‘The University treats very seriously any case of a student attempting to seek unfair academic advantage through plagiarism or cheating’. Extract from Plagiarism and Cheating issued by the Academic Secretary, August 1996. For further information, see the following website: http://admin.exeter.ac.uk/academic/tls/tqa/Part%208/8Lplag1.pdf See also the notes in your programme handbook on “Cheating and Plagiarism”, which is also accessible via the Business School Intranet – Information for Students.