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Portfolio Project 1 Case Solution & Answer

Portfolio Project 1 Case Solution

Investment Policy Statement

The investment philosophy of the portfolio is to buy and hold the long term equity market strategies in order to maximize the wealth by spending less. Furthermore, there are multiple objectives that an individual needs to maintain before going to invest in a portfolio. These objectives are to invest in the long term portfolio of around 2 million dollars with the expected annual rate of return around 10 percent. In addition to this, the objective is to invest in reducing the complex equities in order to promote simplicity. The main objective of an individual is to become a financially independent person at his or her retirement age.

In addition to this, there is a need to invest most of the amount in the equities and some of the investment in the London Stock Exchange, just because of re-balancing the amount for the retirement purpose. Other considerations are dividend payments, which are the additional benefits and considerations from the company’s side in which an individual is investing.

Expected Economic Outlook and Assumptions

There are some assumptions made, which are as follows:

  1. Portfolio weight‘s sum must be equal to one.
  2. All the securities must have a contribution of at least 5 percent in the portfolio.
  3. And, the portfolio return must be equal to or greater than 10 percent.

The expected economic outlook leads to the analysis of the global growth rate. The research shows that the global projected growth rate is 3.4 percent for the year 2021 as compared to the global growth rate of 3.3 percent in the year 2019 and 2.9 percent in the year 2019. This outlook shows that the economic outlook will increase by 0.1 percentage points in the year 2021 as compared to the year 2020, which shows an increasing trend of economy.

Initial Portfolio Holdings and Asset Mix

One of the popular approaches adopted by the famous investor-sis value investing, which involves finding the organizations with the strong fundamentals that the market does not appreciate as of yet. The investor could beat the market by buying the stock at the bargain prices and providing a higher valuation on the market’s stability, following which the investor should sell the stocks at higher prices.(Light, 2012)

There are four (4) securities that are chosen for the analysis, which are:

  1. Unilever Group Plc.
  2. Tesco Group Plc.
  3. Glaxo Smith Kline Plc.
  4. Anglo American Group Plc.

All of these companies are registered on London Stock Exchange. Along with these four securities; the share price data of the London Stock Exchange has been collected.

For each of the four (4) securities chosen for the analysis; the single-index model is estimated in excess form by using the returns from 15th of October 2017 through the 16th of October 2020, 760 observations. The simple index model is used to measure both risk as well as return on the stock. The simple index model refers to the simple asset pricing model, which helps in estimating the risk premium of the security, thereby highlighting the diversification power.

Benchmark for the Portfolio

The benchmark for the portfolio is the mean-variance efficient portfolio, which identifies the portfolio of investment and minimizes the standard deviation (risk) for the given return on the stock. After using the four (4) securities; the single index model has been built in part of the question along with the mean variance efficient portfolio model by using geometric mean and excess return. The mean variance efficient portfolio has been identified by using the solver analysis in which the three constraints are focused.

  1. Portfolio weight sum must be equal to one.
  2. All the securities must have a contribution of at least 5 percent in the portfolio.
  3. And, the portfolio return must be equal to or greater than 10 percent

To build a mean-variance efficient portfolio; the average of each security is calculated by using the average function in excel. The average of each security is calculated by taking daily rates of return for each security. In addition to this, to build a mean-variance efficient portfolio; the standard deviation of each security is calculated by using the standard deviation function in excel. The standard deviation of each security is calculated by taking daily rates of return for each security.

The variance of the portfolio is the measure of portfolio returns’ dispersion. The variance of the portfolio is calculated by taking the square of the risk identified in the previous step.Similarly, the coefficient correlation of each security is calculated by using the correlation function in excel. The two lists of the data that are used to find the coefficient correlation between the two variables, include: daily rates of return of each security and the London Stock Exchange daily rate of returns from 15th of October 2017 through 16th of October 2020.

In addition to this, the covariance coefficient of each security is calculated by using the covariance function in excel. The two lists of the data that are used to find the covariance coefficient between the two variables, including: daily rates of return of each security and the London Stock Exchange daily rate of returns from 15th of October 2017 to the 16th of October 2020.

Rationale for Holdings and Asset Mix

The securities that have been selected to construct a portfolio, provide the constant positive returns. The highest positive returns provided by the security is Anglo American with the mean return of 34.89 percent and the standard deviation of 0.473 (which is also the highest standard deviation of the security in the portfolio). The asset mix consists of the 5 percent weight for the Anglo American, GSK and Tesco each and remaining 85 percent for the Unilever, because it is providing the least possible variance which is suitable for the risk averse individual.

Portfolio Statistical Information

Table 1 shows the descriptive analysis of the London Stock Exchange Security, in which it has been identified that the mean stock price of the London Stock Exchange is 5678.33 with the minimum stock price of 3521.47 and the maximum stock price of 9216. The standard deviation of the stock price is 1760.57, while the standard error and median are 63.86 and 4826.91, respectively. The standard deviation of the stock is high and the difference between the minimum and maximum London Stock Exchange stock price is also high, which shows that the daily and yearly dispersion between the returns and stock prices is higher in this case.

Table 1: Descriptive Statistics of the London Stock Exchange

London Stock Exchange
Mean 5,678.33
Standard Error 63.86
Median 4,826.91
Mode 4,379.97
Standard Deviation 1,760.57
Sample Variance 3,099,604.97
Kurtosis (1.33)
Skewness 0.46
Range 5,694.53
Minimum 3,521.47
Maximum 9,216.00
Sum 4,315,533.34
Count 760.00

Table 2 shows the descriptive analysis of the Unilever Group Plc Security, in which it has been identified that the mean stock price of Unilever Group Plc is 4139.16 with the minimum stock price of 3384.27 and the maximum stock price of 5114.68. The standard deviation of the stock price is 388.49, while the standard error and median are 14.09 and 4064.56, respectively. The standard deviation of the stock is moderate and the difference between the minimum and maximum Unilever Group Plc stock price is also moderate,indicating that the daily and yearly dispersion between the returns and stock prices is moderate in this case………………………….

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