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Module Title: Advanced Financial and Investment Management
Investment Analysis of the FTSE 100 Listed Firms.
To understand the key concepts, approaches, evidence and models of modern financial theory and practice.
You will draw the necessary data for this coursework from databases such as Yahoo Finance, FAME, and Thomson Reuters Datastream (This software is available on 3 PCs behind the library helpdesk ONLY. You can find the guidance from here).
Select any five firms from the FTSE 100 index components (you can find the eligible firms from here). Download adjusted monthly closing stock prices for each one of your five firms over the most recent period of five years (your price series should from June 2011 to June 2016 so that you can then obtain 60 monthly return observations in total for each stock). You are free to choose whatever stocks you want, irrespective of their characteristics and historical investment performance; this will not affect your grade. Also, download adjusted monthly closing price levels for the FTSE 100 as a proxy for the UK market portfolio over the same 5-year period.
In order to determine the risk-free rate, download the 3-month UK Treasury Bills monthly rates: open the Bank of England website, then select Statistics, Interest and Exchange Rates Data, Wholesale interest and discount rates, Treasury Bills (3 month) Sterling, End month – IUMAJNB – Monthly.
A wealthy UAE investor (diversified in terms of exposure to different sectors in the Middle East and North Africa region, but not diversified in terms of international geographical exposure) is considering the strategic decision of investing in a portfolio of five FTSE 100 firms.
You are employed by a leading financial institution and have been asked to advise this client. You will prepare an investment report in Microsoft Word for her containing all your work, results and arguments. All the relevant tables and figures should be contained and discussed in the main bodyof the report, not in some appendix. The report, which includes all of the following five sections, should not exceed 4,000 words in total apart from references and appendices. You can also find the suggestions about Tables/Figures you should at least include, and the relevant textbook chapters that you could start reading from in each section.
Relevant Chapters: 11 to 13 (20 marks)
Table: Portfolio weights, returns, standard deviations, and Sharpe ratios.
Figure: One graph includes the optimal capital allocation line, the minimum-variance frontier, the efficient frontier, the five stocks and four portfolios.
Relevant Chapters: 5 to 7. (25 marks)
Table: Portfolio weights, returns, and standard deviations.
Figure: One graph includes indifference curve, capital allocation line, optimal risky portfolio (P), and optimal complete portfolio (C).
Relevant Chapter: 6. (15 marks)
Table: Alpha & beta coefficients, and expected returns for the five stocks.
Figure: One scatterplot of expected returns against beta coefficients for the five stocks.
Relevant Chapters: 8 and 9. (15 marks)
(i) Compare the performance of the four portfolios in terms of return, standard deviation, beta, Sharpe ratio, Treynor measure, Jensen’s alpha, information ratio, and M2 measure. All metric components (e.g., average return and standard deviation) should be annualised as appropriate.
(ii) Determine which portfolio is more favourable for a most risk-averse and for a most risk-tolerant investor, respectively. Which portfolio would be the best for your client to invest in? Which portfolio do you consider the worst choice to your client? Justify and explain your recommendations.
(iii) Compare the best and worst portfolios to your client graphically by using wealth indices.
Table: Performance statistics for the four portfolios with the FTSE 100 benchmark.
Figure: Wealth indices (i.e. cumulative return) for the best and worst portfolios to your client.
Relevant Chapters: 24. (25 marks)
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