Financial
Modelling Assessment 1 (2012-13 Semester 2)
The table below shows the expected annual return (%) and
standard deviation of the return (%) on the shares of 10 companies:
|
Company
|
Expected
Return
|
Standard
Deviation
|
|
A
|
25%
|
84%
|
|
B
|
8%
|
24%
|
|
C
|
10%
|
36%
|
|
D
|
3%
|
27%
|
|
E
|
15%
|
51%
|
|
F
|
12%
|
31%
|
|
G
|
16%
|
37%
|
|
H
|
4%
|
20%
|
|
I
|
18%
|
60%
|
|
J
|
12%
|
28%
|
The returns on the different shares are correlated as
follows:
|
Correlation Matrix
|
|
|
|
|||||||
|
A
|
B
|
C
|
D
|
E
|
F
|
G
|
H
|
I
|
J
|
|
|
A
|
1.00
|
0.22
|
0.37
|
-0.20
|
0.51
|
0.30
|
0.38
|
-0.10
|
0.20
|
0.25
|
|
B
|
0.22
|
1.00
|
0.40
|
-0.29
|
0.27
|
0.40
|
0.33
|
0.00
|
0.25
|
0.30
|
|
C
|
0.37
|
0.40
|
1.00
|
-0.28
|
0.45
|
0.44
|
0.53
|
0.20
|
0.15
|
0.40
|
|
D
|
-0.20
|
-0.29
|
-0.28
|
1.00
|
-0.15
|
-0.15
|
-0.23
|
0.30
|
-0.20
|
-0.10
|
|
E
|
0.51
|
0.27
|
0.45
|
-0.15
|
1.00
|
0.34
|
0.39
|
0.00
|
0.05
|
0.20
|
|
F
|
0.30
|
0.40
|
0.44
|
-0.15
|
0.34
|
1.00
|
0.46
|
-0.15
|
0.23
|
0.25
|
|
G
|
0.38
|
0.33
|
0.53
|
-0.23
|
0.39
|
0.46
|
1.00
|
0.20
|
0.15
|
0.30
|
|
H
|
-0.10
|
0.00
|
0.20
|
0.30
|
0.00
|
-0.15
|
0.20
|
1.00
|
-0.20
|
-0.20
|
|
I
|
0.20
|
0.25
|
0.15
|
-0.20
|
0.05
|
0.23
|
0.15
|
-0.20
|
1.00
|
0.10
|
|
J
|
0.25
|
0.30
|
0.40
|
-0.10
|
0.20
|
0.25
|
0.30
|
-0.20
|
0.10
|
1.00
|
You are required to set up a spreadsheet model which can be used to
find efficient portfolios of these ten shares, and answer
the following:...Click here to get more on this essay.....
1. Identify a portfolio with the
minimum risk that gives an expected return of at least 15%. Discuss the
relationship between risk and return in the context of share portfolios.
2. Identify a portfolio which
gives the maximum return but whose combined risk is lower than the risk for any
of the individual shares within the portfolio. Explain how diversification
reduces risk.
3. Create a chart showing the
efficient frontier.
4. Introduce a risk-free asset into
the model and find the optimal portfolio of risky shares. Explain what happens
to the optimal portfolio as the risk-free return increases.
5. Introduce a risk aversion
factor into the model and discuss its effect upon the optimal complete
portfolio.
Write a report explaining each part of the answer, including the
mathematical programming formulation (variables, objective, constraints) as
well as the results. Credit will be given for a correct explanation and
interpretation of the models and the answers. The word limit is 1000 to 1200 words.
Click here to get more on this essay.....
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