In this assignment you will implement an index tracking investment strategy. In order to help you
do this you will find an Excel workbook called AssignmentData2.xlsx which I have uploaded. It contains
weekly stock price data for the 10 largest capitalised companies on the Australian stock market
along with the levels of the ASX200 index. The ‘Sample Data’ will be used for Questions 1.
The company is thinking of adding an index tracking fund to their investment offerings and your
boss wants you to investigate the different methods of constructing such a tracking portfolio. To
do this you should perform the following preliminary analysis:
(a) Transform the stock prices and index values in the ‘Sample Data’ tab into simple weekly
returns (you do not need to report these in your submission).
(b) Using the resulting returns data, estimate (and report) the vector of expected returns
for the 10 stocks and the index. You should also report the variance-covariance matrix
for the 10 stocks as well as the variance of the index. The expected returns etc. should
be annualised (i.e., in annual units).
(c) Using the ASX200 index as a proxy for the market portfolio (MP), estimate and report
the betas of the 10 stocks.
(d) Decompose the total risk (variance) of each asset into its systematic and unsystematic
components, i.e. report all three values (variance, systematic risk, unsystematic risk)
along with the diversification ratio (R2
) for each stock and the index.
(e) Assuming risk-free borrowing and lending at rF = 3% per annum, plot the capital
market line (CML), and indicate the positions of the 10 stocks as well as the MP.
(f)Plot the security market line (SML), and indicate the positions of the 10 stocks as well
as that of the MP. Based on this graph, discuss which stocks look over-valued, and
which stocks look under-valued?
Also there is a screenshot for the questions, you can see the screenshot to answer the question which is more distinct.
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