# Identify the Optimum Risky Portfolio

### Question:

Allocate one of your 3-4 stocks in each category to each group member such that each group member has one unique stock from both “recovered well” category and one from the recovered poorly” category. Two members of the group should not analyze the same stock. For example, if you have well recovered stocks A, B, C, D and poorly recovered tocks W, X, Y, Z, group member 1 could take stocks A&W, member 2 B&X, member 3 C&Y and member 4 D&Z. Any pair of stocks allocated to each group member should not be identical to the pair C of stocks used in Q4 of the group report. Answer the following questions on your own:

1. Follow the same approach and use the same dataset applied in your group report, construct the investment opportunity set for the two selected stocks. Identify the optimum risky portfolio (X). Compared with the best optimum risky portfolio (Y) identified in Q5 of Group Report, which portfolio offers better risk/return tradeoff, portfolio X or portfolio Y? Explain why.

-In your word file, present a graph with one investment opportunity set; present the weights, expected return and standard deviation of optimum risky portfolio (no details of working steps needed) ; Explain

1. Combine the optimum risky portfolio X with one additional stock Z (at your own choice) to achieve more diversification benefits. It can be any stock that is traded in the market except for those used in the group report. Explain why this stock is selected. Draw a new investment opportunity set by varying weights in X and Z from 0 to 100% in 5% increments. What is the best Sharpe Ratio that can be achieved on this investment opportunity set? How does it compare with the Sharpe Ratio of portfolio X? Explain whether and why adding the stock you have selected is a good investment decision.

-In your word file, use 1-2 sentences to explain which stock is added (2 mark); present this investment opportunity set separately or combine it with Q1 (1marks); present the weights, expected return and standard deviation of the new optimum risky portfolio, as well as Sharpe ratio (no details of working steps needed) (3 marks); Explain.

Assume a client of yours had a bullet loan (inclusive of the principal and interest) due 1 year from 02/09/2020. In order to meet the liability, she wanted to invested in a combination of a risk free and risky assets, and let it accumulate until the loan maturity. She informed you she would like the daily standard deviation of returns of her portfolio not to exceed 2%. What is the best investment strategy that could be taken assuming the three stocks you have picked (two from the group report, one from your own choice) are the only risky assets that can be invested.

–show key steps to find out the weights in each of the three stocks.

–Explain why this is the best investment strategy

1. Compare the optimum risky portfolio identified in Q2 with the ASX200 index by using appropriate performance measures. What would be your recommendation to your client in Q3 if an index fund can be invested to track the performance of ASX200?

–show the measure to compare performance (2); compare values (1)

–recommendation (2)

1. Forthe period between 3/9/2020 and 3/9/2021 (inclusive), use the price data from Yahoo Finance (use the ‘adjusted close’ price). Calculate the holding period return (HPR) for your selected two stocks from group report. Compare the actual holding period returns with the forecasted expected returns calculated based CAPM (daily return needs to be annualized to compare with annual HPR). Is the actually HPR lower or higher than CAPM forecasted return? What could be the reasons? Please provide at least 2 reasons.

In your word file, briefly explain the steps to calculate the HPR (5); identify which return is higher and explain why (5).