FINA2003 – Assignment on Risk & Return and Portfolio Construction

FINA2003 – Assignment on Risk & Return and Portfolio Construction
Assignment Task

Learning Outcomes The Subject Learning Outcomes demonstrated by successful completion of the tasks below include:

(a) Develop a strong understanding of the principles of risk and return in the context of securities and be able to measure risk and return professionally.

(b) Use a range of models including Capital Asset Pricing Model (CAPM) and modern portfolio theory with reference to both conceptual and practical implications

arising in investment settings, asset allocation decisionmaking, the functioning of securities markets and stock indexes


The chapters in the prescribed text Essentials of Investments by Bodie are

– Risk & Return: Past & Prologue

– Efficient Diversification


The assignment will be done individually. Students will be issued with an Excel sheet including the following data on a monthly basis for a certain number of years:

(i) closing share prices for four imaginary companies plus cash dividends paid by these companies, and

(ii) closing values of an accumulation index of ordinary shares of large companies (an accumulation index incorporates dividends), and

(iii) government bond yields

Students are to perform the following tasks:

1. Compute monthly holding period returns (HPRs) for the companies and for the index.

2. Compute monthly average HPRs with and without compounding for the companies and for the market and compare the returns.

3. Compute annualised HPRs for the companies and for the market with and without compounding using the figures you computed in Question 2.

4. Compute standard deviation of share returns for the companies and for the market using monthly HPRs you calculated in Question 1 and comment on the standard deviations. Outside of standard deviation can you think of another measure that may be worthwhile considering here in terms of assessing the stand-alone risk of a particular investment versus the returns it has been generating. If so, make that calculation and provide an insightful commentary.

5. Compute annualised standard deviation of share returns for the companies and for the market. Use your calculations from Question 4.

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