Portfolio Assignment Harvard Case Solution & Analysis

Portfolio Assignment Case Solution

PART 1: PERFORMANCE MEASUREMENT

Introduction

This is basically a portfolio assignment which has been divided into four different parts. The first part basically relates to the construction of six different portfolios by taking different combinations of the stocks listed on the London Stock Exchange. Eight stocks had been chosen which are listed on the London Stock Exchange. These eight stocks are the stocks of Prudential PLC, Intercontinental Hotels Group PLC, British American Tobacco PLC, Diageo PLC, Easy Jet PLC, Shire PLC, Rolls Royce Group PLC and Vodafone PLC.

All of these stocks have been chosen and their historical prices have been extracted from Yahoo Finance and the reason for choosing this combination of the stocks is that all of these stocks belong to different industries. The risk level of each of the industry differs significantly (Black, 2014). The correlation of majority of the stocks with one another is minimal and these are the main reasons due to which these eight stocks listed on the London Stock Exchange have been chose (Bodie, 2013).By using the historical data, the target analyst prices for each stock the expected returns and the standard deviations have been calculated and the efficient frontiers have been concentrated based upon two scenarios.

Method

The entire portfolio optimization and the efficient frontier construction exercise had been performed by following some steps. First of all, the historical prices of all the eight listed stocks on London Stock Exchange as stated above had been extracted from Yahoo Finance. The closing adjusted prices had been stated as shown in the excel spreadsheet. The historical prices of all the eight stocks had been extracted for a period ranging from September 2010 to September 2015. Moreover, the historical prices had been extracted for each month for the above period. After extracting the historical prices for each of the eight stocks, the monthly returns had been computed for each of the stocks.

The historical index values and the returns for the ASX index had also been computed. After this, the variables to be used in the CAPM formula had been computed. First of all, the return on market had been computed by taking average of the market returns for the above period and similarly the risk free rate had been computed. By using the slope function on excel, the beta for all the stocks had been computed which is the representative of the systematic risk in the CAPM model.
Furthermore, the annual expected returns had been computed for all the eight stocks using the market return, the risk free rate and the respective beta equity of each of the eight stocks. In addition, the use of the other model which is the market model had also been employed in order to compute the expected return of all the eight stocks for the next 1 year. In order to compute this, first of all the target prices indicated by the estimates had been extracted from the Yahoo Finance website for each of the eight stocks.............

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