Models of modern financial theory and practice.

Sample Data:


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You will draw the necessary data for this coursework from databases such as Yahoo Finance, FAME, and Thomson Reuters Datastream.

Select any five firms from the FTSE 100 index components, and download adjusted monthly closing stock prices for each one of your five firms over the recent period of five years.

  • Your 61 monthly price observations should be from the end of January 2015 to the end of January 2020 so that you can then obtain 60 discrete monthly return observations in total for each stock from the end of February 2015 to the end of January 2020.
  • You are free to choose whatever stocks you want, irrespective of their characteristics and historical investment performance as this will not affect your grade.

Also, download adjusted monthly closing price levels for the FTSE 100 Index as a proxy for the UK market portfolio over the same 5-year period.

In order to determine the risk-free rate of return, assume a constant 3-month UK Treasury Bills monthly rate of 0.08% for the whole sample period.

Investment Analysis Description:

A young risk-averse investor in Norfolk is considering the strategic decision of investing in a portfolio of five FTSE 100 firms. She has not invested in any common stocks before and this investment of £50,000 would be her entire risky investment.

Considering the above investor’s background, 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 and record your data analysis work in an Excel file.

  • The report, includes all of the following five sections, should not exceed 4,000 words in total apart from references and appendices.
  • All the relevant tables and figures should be contained and discussed in the main body of the report, not in some appendix.
  • Each section provides requirement on the tables and figures you should at least include. Feel free to provide any additional table and figure that would be useful for your investment report.
  • Collect your sample data to construct the following four portfolios with short sales allowed:
  • Determine the proportion of the overall optimal complete portfolio (C) in the UK financial market that should be held in the optimal risky portfolio (P) of the five stocks along with the proportion that should be held in the risk-free asset (F).
  • On the basis of the single-factor market model CAPM, estimate the alpha and beta coefficients for each one of the four portfolios that created in Section 1 (EWP, VWP, GMVP and P).
  • Evaluate in absolute and relative terms the investment performance of each one of the four portfolios that created in Section 1 (EWP, VWP, GMVP and P) with the FTSE 100 benchmark over the five-year sample period:
  • Acknowledge three limitations of your investment report and explain why your client should be aware of these limitations when considering the investment decision.
  • equal-weighted portfolio (EWP);
  • market-value-weighted portfolio (VWP);
  • global minimum-variance portfolio (GMVP); and
  • optimal risky portfolio (P).

According to your choice of five stocks and the given risk-free rate of return, build and draw the three items below in a single graph (type: scatter with smooth lines) of expected returns against standard deviations:

  • the optimal capital allocation line;
  • the minimum-variance frontier; and
  • the efficient frontier.

Further, mark the positions of the five stocks and four portfolios in that graph.

Finally, discuss the features and characteristics of the four portfolios with the table and figure results obtained from the above steps.

Table: Four portfolios’ weights, returns, standard deviations, and Sharpe ratios.

Figure: A single graph includes the optimal capital allocation line, the minimum-variance frontier, the efficient frontier, the five stocks and four portfolios.

(30 marks)

Then draw a graph (type: scatter with smooth lines) to illustrate the relevant indifference curve, capital allocation line, risk-free asset (F), optimal risky portfolio (P), and optimal complete portfolio (C).

Finally, discuss the features and characteristics of the overall optimal complete portfolio (C) with the table and figure results obtained from the above steps.

Table: Portfolio C’s weights, returns, and standard deviations.

Figure: A single graph includes indifference curve, capital allocation line, risk-free asset (F), optimal risky portfolio (P), and optimal complete portfolio (C).

(15 marks)

  • Feel free to use whatever method you prefer in estimating the market model parameters (e.g. scatterplot trendline, intercept and slope functions, or regression analysis).

Then compute the fair return of each portfolio predicted by the CAPM, draw the security market line (SML) (type: scatter with smooth lines) and show the fair returns and expected returns (from Section 1) of the four portfolios on the graph.

Finally, explain which of the four portfolios is the most attractive investment based on the SML graph.

Table: Alpha and beta estimates, fair returns and expected returns for the four portfolios.

Figure: A single graph includes the security market line (SML), the fair returns and the expected returns of the four portfolios.

(15 marks)

  • Calculate and compare the performance of the four portfolios based on the following statistics. Note that all these performance statistics should be annualised as appropriate.
1) Time-weighted return 2) Standard deviation 3) Beta 4) Jensen’s alpha
5) Treynor measure 6) Sharpe ratio 7) M2 measure 8) Information ratio

According to the role of the portfolio in your client’s overall investment context, which portfolio would be the best for her to invest in? Which portfolio do you consider the worst choice to your client? Justify and explain your recommendations.

Finally, 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 wealth starting with an investment of £1) for the best and worst portfolios to your client.

(25 marks)



You should justify the importance of each limitation by using supporting references such as theories and empirical evidence from academic research literature and news articles.

(15 marks)



Important Coursework Requirements:

Part 1: Coursework Investment Report

  • You should submit the investment report electronically by naming your report file with your student number.
  • Report must be word processed in Microsoft Word (or equivalent software). Font must be Times New Roman with a size of 12 points; character scale must be 100% and spacing and position should be normal (the default options); use normal margins (2.5cm on top, bottom, left and right); line spacing must be 1.5 lines with an extra line between paragraphs and headings; alignment must be justified; edit your graphs to distinguish the relevant items.
  • All sections, tables and figures must be clearly titled and sequentially numbered. All tables and figures should self-explanatory and should include necessary axis definitions and legends. Apply appropriate formatting for the tables and figures. Numbers in the text, tables and figures should have a reasonable number of decimal points in order to allow an accurate representation and comparisons (usually between 2 and 4 decimal points). For more details on successful presentation see:…
  • Provide a contents list and an abstract in the beginning of the report (we do not require you to write an executive summary). Add page numbers on all pages. Include a reference list.
  • In each section of the report, you should also include important details about the relevant data and calculations. Try to be brief and clear in your explanations. Do not include Excel functions in your report.
  • In line with normal practice in investment banking and consulting industries, you can assume that the report you will prepare may be used for both background reading and presentation purposes. You may include an appendix if you like but this is optional.
  • Include at least 6 references to articles in credible academic journals or professional magazines/newspapers. Do not include articles that you do not cite within your report or that you have not at least partly read. Do not use material that exists exclusively on the internet (e.g., websites, blogs, etc) or module lecture notes/slides as sources in your references.
  • Any questions related to the coursework should be submitted to the “Coursework Q&A Forum” within the “Coursework Information” Section on the Blackboard Site of the module. The link to this forum is within the list on the left. To ask a question, click on “Create Thread” and post your question. You should also click on “Subscribe” to receive an email when a new question is posted. You should visit the forum regularly.
  • You should submit the relevant Excel file electronically by naming the Excel file with your student number.
  • The calculations and data analysis should be performed using Microsoft Excel in a single workbook with multiple worksheets.
  • The Excel file should contain the data used along with the relevant analysis, results, and section titles.
  • Failure to submit this file will cost your marks and may mean that you fail the coursework.

Part 2: Coursework Excel File


Word Length: 4,000 words

Penalties for exceeding the word limit


Less than 10% over word limit No Penalty
10% or more over the word limit Deduction of 10 marks off original mark
Failure to provide an electronic copy when requested Mark capped to the pass mark
Intentional misrepresentation of the word count on the coversheet Mark capped to the pass mark

1. When the original mark is within 10 marks of the pass mark, the penalty will be capped at the pass mark

2. Original marks below the pass mark will not be penalised


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