EFN515 Economic and Financial Modelling

Subject Code :
EFN515
Country :
AU
University :
Queensland University of Technology

1. Construct returns series and estimate means, variances and covariances between the stocks using matrix operations.

2. Estimate the returns correlation matrix using the diagonal model. Use as index an equally weighted portfolio of the eight assets.

3. Using the variance-covariance matrix from part 1 construct the envelope for portfolios of shares assuming that there are no restrictions on forming portfolios and a risk-free rate is not available. Using 10 basis point differences build the envelope without short sales. Plot the envelope with and without short sales on the same graph. Identify and discuss why there are differences and the implications for an investor.

4. Assume that the investor can borrow and lend at 5.2% pa. What portfolio generates the investment return of 9:1% per year with minimum risk? What is the Sharpe ratio of this portfolio? What is its interpretation?

5. Assume that a risk-free asset is not available. What combination of investments generates the return of 13% per year? Answer this question with Solver and analytically. Verify and provide evidence that you get the same answer.

6. Find the global minimum variance portfolio if no risk-free rate is available. Given this portfolio, what is the benefit of introducing an annual risk-free rate Rf = 5%? Show how you can increase the expected return for the same risk and how you can decrease the risk for the same expected return.

7. Find the optimal portfolio with expected return of 10% per annum, if the lending rate is 5%, the borrowing rate is 7% and we want to invest at least 10% in each asset to insure a good degree of diversification. Are you lending or are you borrowing?

Posted on : January 10th, 2020

EFN515 Economic and Financial Modelling

Have any Query? Contact with us