[SOLVED] 07 40063 LM Economics of Financial Markets and InstitutionsR

Assignment Remit

Module Learning Outcomes:

This assignment is designed to assess the following module learning outcomes. Your submission will be marked using the Grading Criteria given in the section below.

• Portfolio Analysis and Optimization: Students will be able to perform portfolio optimization using Stata, demonstrating proficiency in the practical application of financial econometrics to construct portfolios that meet specific risk-return criteria, including the Global Minimum Variance Portfolio and the Optimal Risky Portfolio.

• Critical Evaluation of Financial Models: Develop the ability to critically analyse and interpret the results from financial models such as the CAPM, assessing their implications in the real-world setting of financial markets and institutions.

• Data Analysis Skills: Gain hands-on experience in handling real-world data by downloading, analysing, and interpreting financial data from sources like Yahoo Finance, using tools to compute descriptive statistics, correlations, and regression analyses pertinent to financial markets.

• Communication of Financial Analysis: Enhance the ability to clearly articulate financial analysis and recommendations through structured reporting, including the proper presentation of statistical data, graphs, and investment strategies in a professional report format.

LM Economics of Financial Markets and Institutions

Project Report

1 Introduction

● Your report should show the optimal allocation of assets (risk-free and risky assets) based on the optimizations.

● Choose five companies of your choice, making up your portfolio.

● This is an individual project so I expect that you work independently.  Please do not choose the same portfolios or report very similar comments; any cooperative work will be penalised.

● You must upload TWO files on Canvas:

1. Your report in Word or PDF format.

2. The Stata do file so that I can replicate your results.

● The report should not exceed 750 words; tables and graphs are not included in the word count. Please include the word count at the top of your document. A penalty of 5

● The report counts for 25% of the final mark.

● The deadline for submitting the project is clearly indicated on Canvas and on the remit.

2    Report Organization

● You should analyze your data using Stata. During Week 6, which is the  assessment support week, the lecture will focus on preparing for the project. A ”do file” containing necessary commands, along with a recording of the Week 6 lecture that explains how to execute these commands, will be available on Canvas in the ’Project’ section.

● The report that you submit should be organized as a literate response to the questions, divided in paragraphs that can be understood by someone who didn’t just read the questions.

● Include your basic numerical results and graphs in your paragraphs along with the ap- propriate analysis and interpretation of them.

● Providing solely the calculations is NOT acceptable. A discussion of your  findings, comparisons of the results, possible explanations for any differences found, and finally your recommendations for an investor wanting to hold this portfolio are essential.

● Please edit tables and graphs from Stata before inserting them in the document.

● Tables and graphs should be numbered, have a meaningful title, and an explanatory note at the bottom.

● The significance level of the coefficients must be indicated with an asterisk next to the coefficient, according to the significance level: * 10%, ** 5%, *** 1%.

3 Points to Discuss in the Report

1.  Download monthly prices, from January 2014 through December 2023, on the market as a whole and on five individual stocks (for different industries) of your choice from Yahoo Finance. Briefly describe the stocks that you have selected.

2.  Graph the time series of the prices.

3.  Compute the returns using the closing prices:

rt = ln (Pt-1/Pt) × 100

4.  Compute descriptive statistics (mean, standard deviation, maximum, and minimum) of the returns and report them in a table.

5.  Look at the correlation and report the results in a table with the significance levels.

6.  Get the frequency histograms of your returns.

7.  Estimate and plot the linear relationship between each of your assets’ returns and the market returns.

8. Estimate the CAPM (reporting the results in a table):

E(˜(r)j) = rf  + βj  [E(˜(r)M) − rf]

The annual risk-free rate is 2.4%.

9.  Compute the following portfolios and report them in a table (one portfolio per column) indicating the weights, the expected return of the portfolio, the standard deviation of the portfolio, and the Sharpe ratio:

● The Global Minimum Variance Portfolio (GMVP), i.e., the portfolio that lies to the far left of the efficient frontier and is made up of a portfolio of risky assets that produces the minimum risk for an investor.

● Compute four portfolios: three choosing appropriate increments of the required re- turn above the GMVP and one with the maximum return.

● The optimal risky portfolio, i.e., the one at tangency between the efficient frontier and the capital market line.

10. Plot the efficient frontier on a return-risk diagram for a long-only constraint, not for long-short (where short selling is permitted).

11. Plot the optimal risky portfolio tangent to the capital market line.  Do so for both a long-only constraint .