You work with a group of people in a fund management company. The company provides portfolio

management services to clients all over the world, who are looking to maximise their wealth. You’ve

been allocated a client who is looking for a 5-year investment in any (one) equity market and would

like exposure to a diversified portfolio, invested in 20 stocks across five sectors.

a) i) Following a meeting with your colleagues, decide on which market (which country) you believe

you should invest the money for the next five years. State at least three reasons why you picked a

specific market and elaborate each of them clearly. It is recommended to include graphs and tables

where appropriate.

(10% mark)

ii) Now that you’ve decided in which market you wish to invest, you need to select five sectors and

choose four stocks in each sector. Your goal will be to create a diversified portfolio. Describe at

least three reasons why you picked each sector and explain in detail how you selected the stocks.

Use graphs and tables where appropriate.

(30% mark)

b) i) Download 10 years of historical daily data for your selected stocks; you should also obtain a proxy

for the risk-free rate and justify your choice of the risk-free asset. Form and plot the efficient frontier

and find the “tangency portfolio” (using only your 20 stocks) assuming that no short-selling is

allowed.

(15% mark)

ii) Do you believe that the composition of the “tangency portfolio” that you have found is a desirable

or practical one as an investment for your client? Explain why or why not, and present what you can

do to resolve such issues. Show the suggested (new) composition of your portfolio and discuss.

(15% mark)

c) i) Repeat the above process but this time allow for short selling. [Note: do not select new stocks to

short-sell, use your existing stocks]. Discuss whether any changes in your portfolio are necessary

and explain what these imply about your original choice of stocks.

(15% mark)

ii) Form an equally-weighted portfolio and a market capitalisation-weighted portfolio using the 20

stocks and compare the risk-adjusted performance of all portfolios (i.e. your tangency portfolio with

and without short selling, the equally-weighted portfolio and the market capitalisation-weighted

portfolio). Discuss your findings.

(15% mark)