Corporate Finance

  In this assignment, you will go back to 2000 and act as a team working at a wellestablished portfolio management firm. You have a new client who would like to invest in assets from UK markets to secure higher education for his/her new-born child. The client is interested in investing a saving of £100,000 for the next 17 years without making any changes to the initial portfolio. Your team is composed of five individuals with varying degree of experience in Corporate Finance and holds diverse views on risk. Thus, you decide to build multiple portfolios. Using UK markets data covering 2000-2016, you construct five separate portfolios using two major asset classes. These portfolios constitute: 1) 50% 3-month UK government bills and %50 10-year UK government bonds 2) 50% 3-month UK government bills and %50 Small market capitalization stocks 3) 50% small market capitalization stocks and 50% large market capitalization stocks 4) 100% Small market capitalization stocks 5) 100 % Large market capitalization stocks When constructing your portfolios, you will be provided a dataset named Stocks.xlsx. This file contains historical prices and market capitalisations for selected stocks. You are required to find additional data for 3-month and 10-year government bond prices. You can use any data source to obtain the additional data for your analyses. Before making a decision, the client has 10 questions for you, and you will perform the necessary analyses to write a report to answer these questions (use literature to support your findings and arguments when necessary). 1. Describe how you obtained the additional data for your analyses? 2. What are the risk characteristics of each portfolio? How do they rank in terms of their risk? 3. Calculate average portfolio returns and risk premiums for each portfolio. Explain the differences? 4. Plot the distribution of returns using a histogram and interpret each portfolio’s distribution. 5. Show the evolution of returns over the investment period. If you see any pattern or striking point on the graph, comment on it. 6. At the end of the investment period (2016), what will be the value of each portfolio? 7. Illustrate the risk and return relationship of the portfolios using a graph and compare each portfolio’s “Sharpe Ratio”. 8. Which portfolio would you recommend and Why? 9. Find the systematic risk for each individual stock using CAPM. How do they compare? 10. Calculate portfolio Betas and comment on what they mean.