Assignment BE313 – Portfolio Analysis
LEARNING OUTCOMES MODULE
Understand what is meant by an
efficient portfolio and how to identify
Explain how investors may fully exploit
the benefits of diversification.
Understand the importance of the
CAPM and APT.
Examined in course work assignment
Evaluate competing measures of bond
Understand the concept of market
Evaluate Portfolio Performance
Coursework (100 marks)
The objectives of this assignment are to familiarize you in applying Capital Asset Pricing
Model (CAPM) and beta concepts to the real market condition, in determining the
expected stock returns and evaluate the actual stock performance.
Instructions to students:
a. Go to http://finance.yahoo.com. In the search area, type ^IRX to search for
the historical data for the T-bills. Do the same by using ^GSPC for S&P 500
index. Choose three US companies from different industries in the US market.
Download 10 years of monthly data for these three US companies. The
benchmark index is S&P 500 index. Use the adjusted closing price to account
for any share splits and dividend payments. Note that the T-Bill data is
already in the form of return.
Use the Excel "average" and "stdev" functions to determine the historical
average monthly return and the historical standard deviation in monthly
returns for each stock, the S&P500 index and T-Bills.
Use the Excel "correl" function to determine the correlation coefficient
between monthly returns for each stock and T-bills with the S&P500. These
correlation coefficients will be the historical betas (name this raw) for the
Calculate the adjusted betas from the correlation coefficients determined
above by using the equation adjusted = 1/3 + 2/3xraw.
b. At http://finance.yahoo.com, look up betas for each stock on Yahoo from the
Using the betas obtained in (a), compare and contrasts the betas you get
from each method. Answer the following questions:
i. Are the results from both methods close to each other? What gives
rise to these differences, if any.
ii. Comment on the betas for each industry. Is there a big difference, and
if so, provide explanations for why this is so.
iii. Given the information you have obtained, are betas stable enough
when applying the CAPM?
Provided detailed discussion and justify your answers for (i) and (ii) with
theoretical evidence. Can Arbitrage Pricing Theory (APT) rectify the problems
c. Using the betas obtained in (a), calculate the required rate of returns on each
stock using the CAPM equation.
Use the information in (a), determine the annualised return on each stock.
These are the historical annualised average return of the stock. Compare
these results with the required return determined using CAPM equation.
Subtract the CAPM predicted return from the historical annualised average
return of the stock. This is the amount by which the stock outperformed (+)
or underperformed (-) the required return as predicted by CAPM over the
historical time period, which is known as the stocks "alpha."
Graph the Security Market Line (relationship between beta and the required
rate of return) using the risk free rate and the risk premium. On this graph,
also graph the historical annualised average return and betas for each of the
three stocks. Show the stocks’ alphas on the graph. According to the stocks'
alphas, which stocks outperformed or underperformed historically? Explain
why each stock either outperformed or underperformed? Were there special
circumstances for any of the companies? Do you think the historical
performance will continue? Do you think any of the companies face special
circumstances now that will enable them to outperform in the future? Are
there any special circumstances that would cause them to under-perform?
[Total 100 marks] 学霸联盟