AAF040-6 Financial Markets and Portfolio Management Assignment Brief

Learning Outcomes of AAF040-6:

On completion of this unit you should be able to:

1.1 Demonstrate the following knowledge and understanding

A deep and systematic understanding of the structure and role of financial markets, the role of intermediaries, and determine optimal portfolio selection balancing risks and return.

2.2 Demonstrate the following skills and abilities

Manifest the ability to review, critique and evaluate knowledge of financial markets and portfolio selection in order to meet the required return and minimise the risk

AAF040-6 Assignment:

This assessment is primarily on applied portfolio diversification using real data sets from FTSE 100 constituents in London Stock Exchange. You are required to download and assess the last three to five years of daily time series of stock prices data and trading volume for two listed companies from preferably diverse and less-correlated industries for an efficient analysis.

The UK 10 year gilts yield (UK10YG) is currently 4%

• 1. Provide rationale for selection of your two companies from FTSE 100 constituents in London Stock Exchange with special reference to their respective industries, size, market share, market capitalization, functionality and other relevant company-specific characteristics and traits.
• Provide a graphical representation of daily time series data with trading volume and calculate the key summary statistics for each company with a critical and comprehensive comparison. Calculate the expected annual return on each company using the annualized returns and the Single-Index Model.
• Calculate the optimum investment weights for each company providing the mean-variance efficient portfolio and graphically present the combination of risk-return characteristics of portfolios with different weights in each company; .i.e., the efficient frontier. Briefly interpret your applied findings for a clearer and enhanced understanding in the domain.
• Mathematically express and critically evaluate the relationships among the standard deviation of any stock i (i), its beta coefficient (i), the standard deviation of the market portfolio (m), the covariance (Covi,m) and the correlation of stock i with the market portfolio (i,m). Show the decomposition of total risk into systematic and specific risk components. Explain why investors should consider systematic risk of asset classes. Please provide recommendations through market assessment as to which company should be chosen for investment from an investor’s point of view and why do you think the chosen company for investment is suitable and valuable.

AAF040-6 Assignment 2