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Part One: International Portfolio Management

  1. Go to http://finance.yahoo.com,      download monthly Adj. close prices (already adjusted for dividend and      stock split) from 09/01/2014      through 09/05/2019 for the following three country indexes.

  

Country

Ticker

 

USA S&P 500

^GSPC

 

India

^BSESN

 

France

^FCHI

Note: Historical T-bill rates are provided in a separate EXCEL file.

  1. Compute monthly holding period return using Adj. close prices.
  2. Use the EXCEL statistical functions to compute mean (using AVERAGE)      and standard deviation (using STDEV) of the monthly return for each index.

Use the following statistical functions in excel:

  1. Function AVERAGE for mean
  2. Function STDEV for standard deviation
  3. Function COVAR for covariance
  4. Function CORREL for correlation coefficient

Assume that historical mean returns are good estimates of expected returns.

  1. To achieve international      diversification, John invests in the USA and India indexes. What are the      weights on the two indexes to achieve the optimal international portfolio?      What are the mean and standard deviation of returns on his optimal      international portfolio? [All calculations should be done in EXCEL with      clear labels.]
  2. Mary instead invests in the USA and France indexes. What are      the weights on the two indexes to achieve the optimal international portfolio?      What are the mean and standard deviation of returns on her optimal      international portfolio? [All calculations should be done in EXCEL with      clear labels.]
  3. Discuss whose optimal portfolio performs better (John or Mary),      and explain why. Also discuss potential reason(s) that causes the      difference. (A half to one page discussion, double space)

Part Two: Estimation of Beta

Please complete the following requirements for two stocks, Dynex Capital Inc. (ticker DX); International Paper Company (ticker IP). 

  1. Download      monthly Adj. close prices (already adjusted for dividend and stock split) from      09/01/2014 through 09/05/2019      for each stock.
  2. Compute      monthly holding period return using Adj. close prices.
  3. Suppose      we consider the USA S&P 500 index (^GSPC) as the market portfolio. Estimate betas of DX and IP based on      the Single Index Model regressions, and MUST show your regression output. (see chapter 6      section 6.5, pages 166-171 of the textbook).
  4. Calculate      mean return, STD, and beta of the two portfolios: Portfolio A (90% in ^GSPC /10% in DX), Portfolio B (90% in ^GSPC /10% in IP). Must show your      calculation with imputed formulas included in Excel.
  5. Based on      the regression results, which stock (DX or IP) has a larger fraction (among      the total variance) of firm-specific variance (risk)? And explain why you      believe so?
  6. Based on      the regression results, is there any arbitrage opportunity of trading the      three securities, ^GSPC, DX and IP? Is      the arbitrage opportunity reliable? And explain why? (At least a half page      discussion, double space)

Detailed Explanation and Requirement

* You can do much of the research over the internet (e.g., http://finance.yahoo.com), and calculations should be done in EXCEL. 

*The project can be completed by a group of one to five students. Group project is HIGHLY encouraged. It is your responsibility to make sure the accuracy of the work done by your colleagues. all members of your group will receive the same grade on the project. Please submit ONE copy for each group with all group members’ names listed. No credit will be given to a student unless both his/her first and last names are included in the project.

* The hard copy AND e-copy must include the following information:

  1. Lists of dates, Adj. close prices, and monthly holding period      returns of all the indexes and securities in Part One and Part Two.
  2. Data must be organized as following:

  

^GSPC

^BSESN

^FCHI

^GSPC

^BSESN

^FCHI

 

Date

Adj. Closing Price

Adj. Closing Price

Adj. Closing Price

HPR

HPR

HPR

 

2/1/2012

2506.85

36068.33

4730.69

 

3/1/2012

2704.10

36256.69

4992.72

 

 

 

4/1/2012

2784.49

35867.44

5240.53

 

5/1/2012

2834.40

38672.91

5350.53

 

6/1/2012

2945.83

39031.55

5586.41

 

 

7/1/2012

2752.06

39714.20

5207.63

 

8/1/2012

2941.76

39394.64

5538.97

 

9/1/2012

2506.85

36068.33

4730.69

 

 

Mean

 

STD

  1. Report mean and standard deviation of all the indexes and securities      returns as shown in the table above.
  2. Must include the analysis for #4 through #5 in Part One.
  3. Report beta of DX and IP, and must show your regression output.
  4. For Mean return, STD, and beta of the two portfolios: Portfolio      A (90% in ^GSPC /10% in DX), Portfolio      B (90% in ^GSPC /10% in IP), must      show your calculation.
  5. Include written discussions addressing the questions that are raised      above in Part One and Part Two. Any data, analysis, and evidence you used      to support your argument must be presented in the hard copy and e-copy.

Submission Requirement

* The assignment must be typewritten and submitted in both hard copy AND electronic copy (ONE submission per group). Hard copy of the project is due by Thursday 11/14/2019 (in class). E-copy of the project (including excel sheets and WORD file) must be submitted via Canvas by 11:59pm on 11/14/2019. It’s your responsibility to make sure your submission via Canvas is completed and successful. DO NOT FORGET TO SUBMIT E-COPY! A complete submission MUST include both the hard copy AND e-copy.

You must mark on the hard copy the name of student who submitted or will submit e-copy. PLEASE DO NOT EMAIL ME THE PROJECT. 

Late Submission Policy

late assignment IN HARD-COPY AND E-COPY MAY BE accepted with THE FOLLOWING PENALTY.

  • If a late      project is submitted within 24 hours after the due date/time, the project      will automatically lose 20% of the grade, i.e., maximum grade is 80%.
  • If a late      project is submitted within 24-48 hours after the due date/time, the      project will automatically lose 40% of the grade, i.e., maximum grade is 60%.
  • If a late      project is submitted more than 48 hours after the due date/time, the      project will receive a ZERO grade.
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