Valuation of Securities and Equity Trading

Part A. – EXCEL (Data from Capitaliq.com)

Using historical share prices (in monthly frequency) for the time period 01.01.2011 – 01-05-2017 for the stocks of Standard Chartered, Tesco, British American Tobacco, BP, Ryanair and FTSE Allshare, prepare an investment report with the elements shown below:

 

1. Computation of the average monthly return for the five stocks and the market index, using the formula

𝑆_𝑡 − 𝑆_𝑡−1

𝑅_𝑡 =

𝑆𝑡−1

           where 𝑆_𝑡 is the return index in period t, and 𝑆_𝑡−1 is the return index in the previous period.

[5 marks]

2. Calculation of the compound average monthly return and risk for the 5 stocks.

[5 marks]

3. Express the annualised return and risk of these 5 stocks.

[5 marks]

4. Calculation of the Beta of each of the 5 stocks.

[5 marks]

5. Create charts showing the risk and return of 4 different portfolios of your choice that can be made by combining holdings in two of the 5 companies.

[10 marks]

6. For each of your 4 portfolios calculate proportions, risk and return of the minimum variance portfolio.

[10 marks]

7. Given a risk aversion coefficient A = 5, create charts showing the Utility for the two portfolios made from the following shares:
   1. Standard Chartered and Tesco [5 marks]
   2. British American Tobacco and BP [5 marks]
8. Calculate the combination of the shares in each of the two portfolios that maximises the investor’s Utility.

[10 marks]

 

Part B. 2500 word report

Portfolio diversification is an investment strategy that contributes to mitigation of portfolio loss and volatility. Develop a critical analysis on portfolio diversification and its key benefits for the protection of investors from the unpredictability of markets. Support your answer by academic references and your own analysis. How would you evaluate the case of Standard Chartered, Tesco, British American Tobacco, BP, and Ryanair in the light of your previous analysis? All concepts should be expressed in your own words; any material copied from another source should be clearly indicated as such and referenced. Additional marks will be awarded for original work demonstrating the impact of diversification. [40 marks]