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Coursework Assignment Cover Personal Finance and Investment Analysis

Coursework Assignment 1 (CW1 has 2 parts comprising 50% of the total module mark)

Coursework 1 comprises 2 parts: 40% computer-based test and 60% portfolio report. The test score (CW1 part 1) will be combined with the written portfolio analysis grade (CW1 part 2) to give you the final grade for CW1.

 

CW1 grade (out of 100%) = 40% * Test score + 60%* Portfolio report grade If you fail one part of coursework 1, it will be averaged with the other part of coursework 1, whatever the grade.

 

CW1 Part 1 (40% of CW1 and 20% of the total overall module mark)

 

You will take the computer test in a computer lab in the University, in week 6 of the spring semester, during the first 1 hour of the seminar. The test is open-book, takes 50 minutes and has 8 exercises that cover personal finance and investment analysis:

- Basics of time and money

- Bonds and stocks

- Property investment and mortgages

- Pensions annuities

You will be given a full practice test in UDo to try as many times as you want in the week leading to the test. Use it to identify what areas you need to do more work on and go through the associated seminar activities which are designed to ensure you can answer the test questions. Use the recommended reading to support your revision. The test is invigilated, and you cannot access the internet or communicate externally during the trial. The test is marked out of 100%.

CW1 part 1 feedback

You will receive the test grade instantly upon submission. You will also receive more detailed feedback by e-mail on the questions you answered incorrectly within 2 weeks of the final test. You can arrange to see me after the tests to look at your answers for more detailed feedback.

CW1 Part 2 (60% of CW1 and 30% of the total overall module mark)

The portfolio report will give you a chance to pick your portfolio of equity investments, explore the rationale behind your choices and evaluate its performance during the first 6 weeks of the semester. You must track the performance of your investments and keep an eye on market developments. You will use the Bloomberg terminals in our Bloomberg Finance Lab to inform your choices (when off-campus, use sources like Bloomberg www.bloomberg.com/markets/, Yahoo! Finance uk.finance.yahoo.com/investing and Ft.com.

You need to imagine that you have borrowed a total of £1,000,000 at 2% interest p.a. in perpetuity and that you need to invest this money with the aim of funding your retirement. You must build a portfolio with nine investments only (sorry, no forex). If you are investing in individual shares, choose stocks with a market capitalization of at least £500 million each and five years of price and dividend data. You will be charged commissions/bid-offer spread of 0.25% of the stock’s purchase price. If you are investing in funds, choose mutual funds with at least £500 million in total assets and a 5-year history of returns. You will be charged fund-specific fees (initial and administration).  An Excel worksheet is available on Blackboard to help you keep track of your portfolio and its performance.

  1. For the initial entry on 01/02/2017
  • Complete rows 8 through 13 for your positions in columns B through K. Use the commission rates indicated above for row 13.  Automatically, column L will invest any amount left from your £1 million (that you do not use to invest) in a money market account that yields 0.5% pa.  Column M will calculate your totals automatically.
  1. For the 28/02/2017 update:
  • Enter the new closing price and enter any dividends received. You will need to submit your initial investment positions with a few words with your reasons using the Turnitin link provided before the deadline of 1st February 2017. You will need to submit final update along with the portfolio analysis report before the deadline of 14th March 2017 midnight 11.59pm.

In the report (1500 words) you will have to

  • Analyse your portfolio choices from a behavioural perspective and
  • Evaluate the asset allocation adopted applying the portfolio theory concepts studied.

Include a discussion of the purpose of the portfolio (i.e., long-term personal retirement savings) and how you believe that your portfolio fulfils the stated aim better than other possible portfolios. The report must discuss the biases that may have influenced your choice of assets. You must then make explicit reference to portfolio theory and analyze the portfolio allocation. Indicate how you think that your portfolio performance should be judged or benchmarked over the long-term and address whether the portfolio in its reduced state (see details below) will serve your retirement goal after paying back the loan with interest. Below is a step-by-step guide to the report including the marking criteria.

Build your Excel spreadsheet

  1. Your starting point must be the portfolio Excel spreadsheet you have used for tracking the performance of your investment choices between 1 and 28 February 2017. Add a new worksheet in your Excel file with your portfolio of 9 assets (ignore the money market fund).
  • Use the Bloomberg terminal (or Yahoo! Finance) to look up and download,d historical prices for your 9 assets – monthly data for the last 5 years. Put these in one single Excel sheet (just like I have done for the seminars)
  • Calculate the expected rate of return for each asset (mean) and its risk (standard deviation)
  • Calculate the correlation matrix for your 9 assets.
  • Based on the correlation coefficients pick your 5 ‘best’ assets (you will need to discuss this, later on).

2.  For the 5 ‘best’ assets portfolio

  • Redistribute the weights between your 5 assets in a similar way to your initial allocation – i.e., increase the weights of the remaining 5 assets and maintain the proportions between them.
  • Calculate the expected portfolio return and the portfolio risk (Markowitz equations)
  • Calculate the portfolio beta
  • Calculate the Sharpe ratio for the 5-asset portfolio made above by assuming a risk-free rate of return equal to 0.5%
  • Recalculate the Sharpe ratio after giving equal weights to all 5 assets (i.e., 20% each).
  • Then, order your 5 assets from the highest rate of return to the lowest. Give the following weights to your assets in descending order 35% (to the asset with the highest return), 30%, 20%, 10% and 5% (to the asset with the lowest return). Calculate the Sharpe ratio for the new allocations.

Analyse the portfolio in Word document

3.  You must first analyze your portfolio choices from a behavioral perspective. Use around 500 words to discuss the biases that (may) have influenced your choice of assets. Typical biases to consider are overconfidence, representativeness, availability, ambiguity aversion, narrow framing, herding, etc. You will need to cite literature sources (with references) in the discussion.

4.  Next, you must evaluate your portfolio asset allocation by applying portfolio theory (around 1000 words). You will need to cite theory and literature sources (with references) in the discussion.

5.  In the body of the Word document, analyze the diversification of the initial 9-asset portfolio

  • How well diversified was it across asset classes? How could you improve it?
  • How well diversified was it within the asset classes? How could you improve it?
  • How well diversified was it across international and domestic? How could you improve it?

6.  How did your portfolio perform over your investment period (the month between 1-Feb and 1-Mar)? Would a 1/N strategy have yielded better a better result? (put in equal weights, and the portfolio tracking sheet will automatically calculate the new return)

7.  Discuss the correlations between your 9 portfolio assets – refer to the matrix in the appendix (point 1.c.)

8.  If you were to reduce your portfolio to your 5 ‘best’ assets – which would these be? – refer to the matrix in the appendix (point 1.c. and 1.d.)

9.  Using the reduced 5-asset portfolio, discuss how Markowitz diversification would reduce its risk (refer to the calculations in point 2.b.)

10.  Look at the portfolio beta you calculated (point 2.c.) and discuss the risk of your 5-asset portfolio relative to the market risk.

11.  Analyse the 3 Sharpe ratios you calculated (points 2d-f.). Which allocation is the best, and why?

12. Would this portfolio be good enough for you to meet your retirement goal? Indicate how you think your portfolio performance should be judged or benchmarked over the long-term.

13.  With explicit reference to active and passive management, how would you change it?

EXCEL WORKINGS IN APPENDIX
  Criterion Weight Missing – 0% mark Poor – 25% mark OK – 50% mark Good – 100% mark
Excel workings in Appendix 2% Missing. N/A N/A Task Done
1b. Expected rate of return (mean) and risk (standard deviation) for each asset. 3% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
1c. Calculate the correlation matrix for your 9 assets 3% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2a. Redistribute the weights between your 5 assets 1% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2b. Calculate the expected portfolio return and the portfolio risk 5% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2c. Calculate the portfolio beta 3% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2d.Calculate the Sharpe ratio for the 5-asset portfolio 1% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2e. Recalculate the Sharpe ratio after giving equal weights to all 5 assets 1% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
2f. Give the following weights to your assets in descending order 35% (to the asset with highest return), 30%, 20%, 10% and 5% (to the asset with the lowest return) 1% Missing. Incorrect method applied – check formulas in the seminar sheets 5 and 6 Correct method applied but incorrect answer. Check the seminar sheets 5 and 6. Correct method and calculation result
MAIN REPORT
  Criterion Weight Missing – 0% mark Poor – 25% mark OK – 50% mark Good – 100% mark
3. You must first analyse your portfolio choices from a behavioural perspective. 20% Missing. Unsatisfactory  discussion. Analyse your choices and identify the biases and heuristics that might have influenced you. See Redhead Chapter 2 and the articles provided. OK discussion but review the literature and references. See Redhead Chapter 2 and the articles provided. Good discussion of point.
4a. Diversification across assets 4% Missing. Unsatisfactory discussion. See Redhead chapter 13, Armstrong (2008), Kiplinger’s (2011) and Kristof (2013). OK discussion but review literature. See Redhead chapter 13, Armstrong (2008) and Kristof (2013). Good discussion of point.
4b. Diversification within asset classes 4% Missing. Unsatisfactory discussion. See Redhead chapter 13, Armstrong (2008), Kiplinger’s (2011) and Kristof (2013). OK discussion but review literature. See Redhead chapter 13, Armstrong (2008) and Kristof (2013). Good discussion of point.
4c. Diversification domestic and international. 4% Missing. Unsatisfactory discussion. See Redhead chapter 13, Armstrong (2008), Kiplinger’s (2011) and Kristof (2013). OK discussion but review literature. See Redhead chapter 13, Armstrong (2008) and Kristof (2013). Good discussion of point.
5. Portfolio 9 asset performance. 4% Missing. Unsatisfactory  discussion. Discuss the performance in context – in relation to the past individual asset performance and the current environment. Further, consider the importance you can place on this one month return. OK discussion of performance in context – in relation to the past individual asset performance and the current environment but elements are missing. Good discussion of point.
5. Portfolio 9 asset performance versus naive diversification. 4% Missing. Go back to the initial portfolio allocation tracking sheet and distribute the £1m equally. Discuss how the annualised rate of return compares with the initial one. See Redhead p.262. Unsatisfactory  discussion. Discuss how the annualised rate of return compares with the initial one. See Redhead p262. OK discussion but elements missing. See Redhead p262. Good discussion of point.
6. Discuss the correlations between your 9 portfolio assets 5% Missing. Unsatisfactory  discussion. See Redhead p266 and Coaker (2007). OK discussion but review theory. See Redhead p266 and Coaker (2007). Good discussion of point.
7. Which are your portfolio’s 5 ‘best’ assets? Why? 5% Missing. Unsatisfactory  discussion. See Redhead p.269-275 and Coaker (2007). OK discussion but review theory. See Redhead p269-275 and Coaker (2007). Good discussion of point.
8. Using the reduced 5-asset portfolio, discuss how Markowitz diversification would reduce its risk. 5% Missing. Unsatisfactory  discussion. Must define mean-variance portfolio analysis. See Redhead p.266. OK discussion but review theory. Elements missing or needs revision for clarity. See Redhead p266. Good discussion of point.
9. Discuss the risk of your 5-asset portfolio relative to the market risk (Portfolio Beta) 5% Missing. Unsatisfactory  discussion. Review the definition of the Beta and interpret the calculation for your portfolio. See Redhead p.301. OK discussion but elements are missing /unclear. Review theory. See Redhead p.301. Good discussion of point.
10. Analyse the 3 Sharpe ratios you calculated (points 2d-f.). Which allocation is the best, and why? 5% Missing. Unsatisfactory  discussion. Review Sharpe ratio formula/definition and interpretation. See Thorp (2013) and Hodges et al (1997). OK discussion but elements are missing /unclear. See Thorp (2013) and Hodges et al (1997). Good discussion of point.
11a. Would this portfolio be good enough for you to meet your retirement goal? 5% Missing. Unsatisfactory  discussion. Remember that you have to pay back the £1m borrowed which will accrue 2% interest p.a. The pension will be funded from whatever is left after that. Discuss the assumptions you make about the performance of your portfolio over a long investment horizon. See Redhead p8-12. OK discussion but unclear/elements missing. Remember that you have to pay back the £1m borrowed which will accrue 2% interest p.a. The pension will be funded from whatever is left after that. Discuss the assumptions you make about the performance of your portfolio over a long investment horizon. See Redhead p8-12. Good discussion of point.
11b. How you think your portfolio performance should be judged or benchmarked over the long-term? 5% Missing. Unsatisfactory  discussion. Discuss your choice of a benchmark for measuring the performance of the portfolio. See Redhead p139-143. OK discussion but review choice of a benchmark for measuring the performance of the portfolio. See Redhead p139-143. Good discussion of point.
12. With explicit reference to active and passive management, how would you change it? 5% Missing. Unsatisfactory  discussion. See Redhead p. 331. OK discussion but review theory. See Redhead p. 331. Good discussion of point.
  100%

 

 

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