Tutorial 2 Solutions

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Swinburne University of Technology *

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FIN30020

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Finance

Date

Jun 1, 2024

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pdf

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Uploaded by ElderCat3253

Q1: Which of the following statements reﬂects the importance of the asset allocation decision to the investment process? The asset allocation decision: A. helps the investor decide on realistic investment goals. B. identifies the specific securities to include in a portfolio. C. determines most of the portfolio’s returns and volatility over time. D. creates a standard by which to establish an appropriate investment time horizon. Q2: Use data provided , consider the following tasks: Data preparation: 1. Inspect the data and firstly compute the monthly log returns based on the formula below: ret_t = log(adj_price_t/adj_price_(t -1)) See the Excel workings. 2. Compute the monthly average returns for each asset given and annualise by multiplying by 12. Which asset has delivered the best return? See the Excel workings. 3. Compute the monthly standard deviation for each asset given and annualise by multiplying by sqrt(12). Which asset has delivered the least risk? See the Excel workings. 4. Prepare the correlation matrix (exclude the IVV) and comments on how each asset return is correlated? Are there any benefits of adding Bitcoin into equities? Use the correlation function within the Data Analysis Add -in. Based on the correlation, it seems that Bitcoin has relatively low correlations with equities, therefore there is a diversification benefits by including Bitcoin. 5. Examine the return distributions of each asset over the sample period using histograms, do they look normal to you? Which asset stands out in terms of non- normal behaviour and how skewed is the return?

All individual equity returns are not normal (not bell- shaped). BHP – Left Skewed (negative skewness) CSL – Left Skewed (negative skewness) DIS – Right Skewed (positive skewness) AAPL – Left Skewed (negative skewness) AMZN - Left Skewed (negative skewness) TSLA - Right Skewed (positive skewness) NVDA - Left Skewed (negative skewness) BTC - Left Skewed (negative skewness) NVDA is mostly skewed Asset allocation: 6. Construct two 1/n strategy portfolios based on the Australian shares and U.S shares and evaluate the performance of these portfolio over the sample period . How much will you get by the end of the sample period if you invested $10, 000 at the beginning? See the Excel workings. 7. Compute the Sharpe Ratio for each portfolio . See the Excel workings. 8. Based on the Sharpe Ratio, which portfolio is the best choice from the mean- variance optimal perspective? Based on the results from Q5, is the Sharpe Ratio the best decision criteria? See the Excel workings. See the lecture slides and discussions on how skewness and kurtosis should also be considered when looking at the risks of assets. Q3: Construct a diversified portfolio consisting of three stocks, and one market index. Please refer to the spreadsheet for detailed Questions . See the Excel workings.

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