Description of Assignment 1: Portfolio Management (20%

comprising of 15% report and 5% pre-recorded presentation)

The purpose of the assignment is for student to use real data to have an in depth understanding of
Markowitz portfolio theory and its interpretations. Students are encouraged to form group of 3 to 5
persons to complete this assignment. On Week 8 (due date for assignment 1) and Week 14 (due
date for assignment 2,) a short written report and a short pre-recorded video presentation of the
assignment is required. The assignment report should not be more than 10 pages long unless
necessary. Please follow the following steps in order to complete the assignment.

Step 1: Identify suitable members to form the group.

Step 2: Go to Yahoo Finance or any websites or databases such as DataStream to peruse 30 listed
stocks data on any stock exchanges worldwide. The data required is closing daily (or alternatively
weekly or monthly) closing prices for 30 listed stocks over 61 days (or weeks/months).

Step 3: Compute the daily (alternatively, weekly/monthly) returns (ignoring dividend) of the 30
stocks using the holding period return/yield formula

Rjt = (Pjt – Pjt-1)/Pjt-1

Where Rjt : return of stock j at time t

Pjt: Price of stock j at time t

Pjt-1: Price of stock j at time t-1 (1 period before)

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Preferably stocks with more positive periodic returns to generate positive Average/Geometric
Returns are preferable.

Example
Gamuda Bhd
No time Price(closing) HPR = (Pt-Pt-1)/Pt-1 (HPR-AVG)^2 CV
1 9/10/2012 3.57
2 10/10/2012 3.56 -0.0028011 9.18387E-06
3 11/10/2012 3.54 -0.005618 3.41915E-05
4 12/10/2012 3.52 -0.0056497 3.45637E-05
5 15/10/2012 3.44 -0.0227273 0.000527007
6 16/10/2012 3.47 0.00872093 7.21066E-05
7 17/10/2012 3.47 0 5.26106E-08
8 18/10/2012 3.47 0 5.26106E-08
9 19/10/2012 3.43 -0.0115274 0.000138221
10 22/10/2012 3.44 0.00291545 7.21504E-06
11 23/10/2012 3.45 0.00290698 7.16958E-06
12 24/10/2012 3.46 0.00289855 7.12453E-06
13 25/10/2012 3.5 0.01156069 0.000128399
14 3.5 0 5.26106E-08
15 3.57 0.02 0.000390878
16 3.57 0 5.26106E-08
17 3.61 0.01120448 0.000120453
18 3.75 0.03878116 0.001486241
19 3.58 -0.0453333 0.00207596
20 3.67 0.02513966 0.000620523
21 3.64 -0.0081744 7.06231E-05
22 3.66 0.00549451 2.77217E-05
23 3.66 0 5.26106E-08
24 3.68 0.00546448 2.74064E-05
25 3.68 0 5.26106E-08
26 3.7 0.00543478 2.70963E-05
27 3.7 0 5.26106E-08
28 3.69 -0.0027027 8.59705E-06
29 3.65 -0.0108401 0.000122533
30 3.66 0.00273973 6.30189E-06
31 3.69 0.00819672 6.34787E-05
32 3.67 -0.0054201 3.1916E-05
33 3.66 -0.0027248 8.72709E-06
34 3.67 0.00273224 6.26436E-06
35 3.57 -0.027248 0.000755003
36 3.54 -0.0084034 7.45241E-05
37 3.63 0.02542373 0.000634756
38 3.65 0.00550964 2.78813E-05
39 3.6 -0.0136986 0.000193989
40 3.6 0 5.26106E-08
41 3.57 -0.0083333 7.33199E-05

2
 42 3.57 0 5.26106E-08
43 3.57 0 5.26106E-08
44 3.58 0.00280112 6.6139E-06
45 3.57 -0.0027933 9.13651E-06
46 3.59 0.00560224 2.88677E-05
47 3.64 0.01392758 0.000187641
48 3.55 -0.0247253 0.000622734
49 3.6 0.01408451 0.000191965
50 3.62 0.00555556 2.83683E-05
51 3.64 0.00552486 2.80422E-05
52 3.63 -0.0027473 8.86028E-06
53 3.62 -0.0027548 8.9054E-06
54 3.6 -0.0055249 3.31112E-05
55 3.6 0 5.26106E-08
56 3.58 -0.0055556 3.34654E-05
57 3.64 0.01675978 0.000273254
58 3.7 0.01648352 0.000264197
59 3.6 -0.027027 0.000742911
60 31/12/2012 3.6 0 5.26106E-08

61 sum 0.01353268 0.010288081

AVG 0.00022937 0.013318435 58.06
AVG
0.000229367 (formula) 0.00022937 0.013318435

Step 4: Compute the average return and standard deviation of returns of the 30 stocks using the
following formula. Alternatively, students are encouraged to use the statistical function commands
to compute average returns and standard deviations.

Rj = (Rjt)/n = AVERAGE RETURN OF STOCK J

2
 = √{[(Rjt-RJ) ]/n-1} = STANDARD DEVIATION RETURN OF STOCK J

Step 5: Compute the Coefficient of Variation (CVj) of each stock j. Rank the CVj from lowest
to highest. Write a brief description of the distribution of the CVs of the 30 stocks.

CVj = /Rj

Step 6: Choose any two stocks with positive average returns and standard deviation of
returns. The two stocks must meet the following criteria;

If AR1 > AR2, then 

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Or alternatively

If AR1 < AR2, then 

Step 7: Compute the correlation coefficient of the two stocks (you may also use the
covariance formula) using the following formula or alternatively using the CORREL statistical
command in excel.

Correlation coefficient rij = Covij/(sisj)

CORREL where COVij is the covariance between
stock I and stock j
si: standard deviation of stock i
sj: standard deviation of stock j

n
Cov ij   [R i - E(R i )][R j - E(R j )]/n
i 1
The value of the correlation coefficient must be between -1 to +1. (you can also use sample
covariance formula by using n-1.

Step 8: Complete the following table to compute portfolio return (comprising of two chosen
assets that met criteria in step 6), portfolio standard deviation, portfolio CV.
Table 0

Weights of Weights of Portfolio Variance of Standard Coefficient

Stock i Stock j Return (Rp) Portfolio deviation of of Variation
comprising Returns Portfolio of Portfolio
of Stock I (VARp) Return (column 5/3)
and Stock j (STDp)
(Square root
of column 4)
1 0
0.9 0.1
0.8 0.2
0.7 0.3
0.6 0.4
0.5 0.5

4
 0.4 0.6
0.3 0.7
0.2 0.8
0.1 0.9
0 1

Portfolio Return formula Rp= w1 R1 + w2 R2

2 = w 2 2 + w 2 2 + 2W W Correl(1,2)* 
p 1 1 2 2 1 2 1 2
…….. (VAR Formula)

2
p = √p ……… (STD)

Or

Step 9: Plot using line graph in excel the relationship between return (Y axis) and risk (X-axis)
Using inputs from Table 0: Column 3 (Return data) and Column 5 (Standard deviation data).
In general, the risk return relationship via the graph looks as follow provided the correlation
value between the two stock is between -1 and +1:

5
 return risk graph
0.12

0.1

0.08

0.06
return risk graph
0.04

0.02

0
0 0.02 0.04 0.06 0.08 0.1 0.12

Step 10: The minimum variance portfolio can be computed using the following formula:

w1 = (2^2 – Correl 1 2)/(1^2 + 2^2 - 2 Correl 1 2) and w2 = 1 – w1. Show the
minimum variance in Table 0. Ensure that the minimum variance portfolio exhibits minimum
variance and standard deviation.

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Example

min var portfolio

w(x) w(y) Rp VARp STDp CVp

1 0 0.14 0.01 0.1 0.71428

6

0.9 0.1 0.136 0.00801 0.08954 0.65844

9 9 8

0.8 0.2 0.132 0.00643 0.08022 0.60776

6 5 3

0.7 0.3 0.128 0.00525 0.07246 0.56612

1 4 3

0.6 0.4 0.124 0.00446 0.06681 0.53881

4 3 6

0.5 0.5 0.12 0.00407 0.06383 0.53196

5 6 4

0.45226 0.54774 0.1180 0.00403 0.06348 0.53755 min var

9 portfolio

0.4 0.6 0.116 0.00408 0.06390 0.55091

4 6 5

0.3 0.7 0.112 0.00449 0.06701 0.59834

1 5 8

0.2 0.8 0.108 0.00529 0.07277 0.67383

6 4

0.1 0.9 0.104 0.00649 0.08061 0.77515

9 6 7

0 1 0.1 0.0081 0.09 0.9

Step 11: Look at the average return of the two stocks as in Step 4. Assume a risk free rate
asset value lower than AR1 (average return of stock 1) and AR2 (average return of stock 2).
Complete the following 3 tables for the case of one risk free asset and one risky
asset/portfolio (Table 1 for case of 1 risk free and Stock 1; Table 2 case of 1 risk free and
Stock 2 and Table 3 – case of 1 risk free and minimum variance portfolio).
The following formula applies

7
 Portfolio return and risk involving

Table 1

Weights of Weights of Portfolio Variance of Standard Coefficient

Risk free Stock 1 Return (Rp) Portfolio deviation of of Variation
asset comprising Returns Portfolio of Portfolio
of risk free (VARp) Return (column 5/3)
asset and (STDp)
Stock 1 (Square root
of column 4)
1 0
0.9 0.1
0.8 0.2
0.7 0.3
0.6 0.4
0.5 0.5
0.4 0.6
0.3 0.7
0.2 0.8
0.1 0.9
0 1

Table 2

Weights of Weights of Portfolio Variance of Standard Coefficient

risk free Stock 2 Return (Rp) Portfolio deviation of of Variation
asset comprising Returns Portfolio of Portfolio
of risk free (VARp) Return (column 5/3)

8
 asset and (STDp)
Stock 2 (Square root
of column 4)
1 0
0.9 0.1
0.8 0.2
0.7 0.3
0.6 0.4
0.5 0.5
0.4 0.6
0.3 0.7
0.2 0.8
0.1 0.9
0 1

Table 3

Weights of Weights of Portfolio Variance of Standard Coefficient

risk free Stock 2 Return (Rp) Portfolio deviation of of Variation
asset comprising Returns Portfolio of Portfolio
of risk free (VARp) Return (column 5/3)
asset and (STDp)
Minimum (Square root
variance of column 4)
portfolio
1 0
0.9 0.1
0.8 0.2
0.7 0.3
0.6 0.4
0.5 0.5
0.4 0.6
0.3 0.7
0.2 0.8
0.1 0.9
0 1

Step 11a: Identify optimum portfolio using case of two risky stocks using the following
formula.

9
Given

Stock D E risk
free
Return 8 13 5
Risk 12 20
correl 0.3
cov 72

Or

10
To check if the optimal portfolio weights are correct, compute the Sharpe ratio

11
 Assuming Rf = 5%

Complete Table 4. Compute Sharpe Ratio based on results shown in Table 0. Show that the
optimal portfolio has the highest Sharpe ratio in Table 0.
Example
min var port and optimal tangency port
w(x) w(y) Rp VARp STDp CVp slope = Rp-Rf/Stdp
1 0 0.14 0.01 0.1 0.714286 0.9
0.9 0.1 0.136 0.008019 0.089549 0.658448 0.960369468
0.8 0.2 0.132 0.006436 0.080225 0.607763 1.022129293
0.7 0.3 0.128 0.005251 0.072464 0.566123 1.076399763
0.6 0.4 0.124 0.004464 0.066813 0.538816 1.107566029
0.571218 0.428782288 0.122849 0.004311 0.06566 0.534479 1.109482533 highest slope
0.5 0.5 0.12 0.004075 0.063836 0.531964 1.09656463
0.45226 0.54774 0.11809 0.00403 0.06348 0.53755 1.072635872 min var portfolio
0.4 0.6 0.116 0.004084 0.063906 0.550915 1.032763947
0.3 0.7 0.112 0.004491 0.067015 0.598348 0.925167061
0.2 0.8 0.108 0.005296 0.072774 0.67383 0.796992079
0.1 0.9 0.104 0.006499 0.080616 0.775157 0.669839095
0 1 0.1 0.0081 0.09 0.9 0.555555556

Table 4

Weights of Weights of Portfolio Variance of Standard Coefficient

risk free Stock 2 Return (Rp) Portfolio deviation of of Variation
asset comprising Returns Portfolio of Portfolio

12
 of risk free (VARp) Return (column 5/3)
asset and (STDp)
optimum (Square root
portfolio of column 4)
1 0
0.9 0.1
0.8 0.2
0.7 0.3
0.6 0.4
0.5 0.5
0.4 0.6
0.3 0.7
0.2 0.8
0.1 0.9
0 1

Step 11: Plot the risk return relationship based on the data in Tables 0, 1, 2, 3 and 4
(columns 3 and 5). Example 1 risk free plus minimum variance portfolio.
Example 1: 1 risk free + min var portpolio

1 risk free + 1 risky asset (portfolio - min variance)

0.14

0.12

0.1

0.08
Series1
0.06 Series2

0.04

0.02

0
0 0.05 0.1 0.15 0.2 0.25

13
Example 2: 1 risk free plus optimal portfolio (portfolio tangent to curve – highest Sharpe
Ratio). Compare the Sharpe ratio for the 4 combinations.

1 risk free + 1 risky asset (portfolio - optimal)

0.2
0.18
0.16
0.14
0.12
0.1 Series1

0.08 Series2

0.06
0.04
0.02
0
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45

Step 12: Compute beta of the 30 stocks by running simple regression.

Y=a+bX
Y = 60 observation of stock return j ( j = 1, 2 ……20)
X = 60 observations of market return (Collect any 61 observations of market index and
convert into 60 observation of market return). The same market return may be used for the
rest of the remaining 29 stocks.

Write a short report on the results and portfolio principles learned.

The report covers, among others:
(i)executive summary
(ii) Table of contents
(iii) Theoretical framework
(iv) Data and Methodology
(v) Main Findings
(v) Conclusion

14
(vi) References
(vii) Appendices

Description of Assignment 2: Portfolio Management (20%

comprising of 15% report and 5% pre-recorded presentation)

15
The purpose of the assignment is for students to understand how to conduct portfolio performance
evaluation and attribution analysis, an important component of portfolio management and to use
unit trust data/mutual funds as proxy for portfolios performance evaluation exercise. Students are
encouraged to form group of 3 to 5 students to complete this assignment and retained the same
group members as in Assignment 1. On Week 14, a short 3-minute recorded video presentation of
the assignment is required. The assignment should not be more than 10 pages long. Please act
according to the following steps in order to complete the assignment.

Step 1: Go to any unit trusts or mutual funds websites to identify and later gather 30 units trust
funds or mutual funds data. An example is myunittrust.com website which provide list of unit trust
data for Malaysia. For each unit trust or mutual fund, collect 61 daily buy and sell (alternatively
weekly or monthly) Net Asset Value (NAV). Refer to Chapter 17 of text on the definition of NAV.

16
17
Step 2: Compute the daily (alternatively, weekly/monthly) returns (ignoring dividend) of the 30 unit
trust funds or mutual funds using the formula. For more information on Net Asset Value, refer to
NAV extra notes on Week 1 lecture.

Rjt = (NAVjt – NAVjt-1)/NAVjt-1

Where Rjt : return of unit trust (or mutual fund) j at time t

NAVjt: Average (of buy and sell) Net Asset value of unit trust fund j at time t

NAVjt-1: Average (of buy and sell) Net Asset value of unit trust fund j at time
t-1 (1 period before)

Preferably unit trust funds with more positive periodic returns to generate positive Average Returns
are preferable.

Name of unit
trust (or mutual NAV
fund) prices
convert to
time buy sell average return
ABC 1
2
3
4
5
6
.
.
.
.

18
 .
.
.
.
61
Average Return
Std deviation
MNO
PQR
STU
XYZ

Step 3: Compute the average return and standard deviation of returns of the 30 unit trusts (mutual
funds) using the following formula. Alternatively, students are encouraged to use the statistical
function commands to compute average returns and standard deviations.

Rj = (Rjt)/n = AVERAGE RETURN OF UNIT TRUST J

2
 = √{[(Rjt-RJ) ]/n-1} = STANDARD DEVIATION RETURN OF UNIT TRUST J

Step 4: Collect daily (or alternatively weekly/monthly) market index data (for example KLCI
for Malaysia) and daily (or alternatively weekly or monthly) risk free rate (proxy by savings
rate or equivalent). Convert the market index data to daily (or weekly/monthly) market
return and then followed by computing the average return of the market and standard
deviation of the market. For risk free rate just compute the average return using the average
return formula.

Also compute the covariance between each of the 30 unit trusts with the market return
using the following formula (or alternatively using the covariance statistical command in
excel).

n
Cov ij   [R i - E(R i )][R j - E(R j )]/n
i 1

Market
Index
time Index convert to return Rf
1
2

19
 3
4
5
6
.
.
.
.
.
.
.
61
Average Market Average risk
Covariance return free
Unit trust
return and STD market
market
return

Step 5: Compute the beta for each unit trust using the formula:-

Cov i, M
 2
M
Or alternatively using the formula (Correl * Std deviation of unit trust)/(std deviation of
market or using regression analysis)
Step 6: Assemble of the data in steps 1 to 5 as follows.
Average
Unit trust return STD Beta
ABC
MNO
PQR
STU
XYZ

Market 1
Risk free 0 0

20
 Step 7: Conduct performance evaluation based on the following performance evaluation
tools. An example is illustrated.

Performance Risk Adjusted Treynor = Jensen

measure Sharpe = SI Performance/M2 TI alpha
Asset pricing
model CML CML CAPM CAPM
Rj - {Rf +
RAP = Rf + (Rm -
Equation (Rp - Rf)/STDp STDm(Sharpe Index) (Rj - Rf)/Bj Rf)Bj}
b = Rm - alpha
Benchmark b = (Rm - Rf)STDm Rm Rf value
Superior SI > b RAP > Rm TI > b positive
Average SI = b RAP = Rm TI = b zero
Inferior SI < b RAP < Rm TI < b negative

Rf = 6%

A 0.6 15.6 12 0
B 0.6 15.6 12 0
C 0.8 18.8 16 4
Benchmark 0.75 18 12 0
Conclusion
A inferior inferior average average mixed
B inferior inferior average average mixed
C superior superior superior superior consistently S

Extend the analysis by using two more performance measurement tools namely Information
Ratio (IR), Sortino Index and M2 (which is equivalent to RAP). Refer to lecture notes on
performance evaluation and attribution analysis.

Step 8: Conduct Fama’s Attribution Analysis. Fama decomposes overall performance into
attribution as a result of risk taking and selectivity where
Overall Portfolio Performance = Excess Return = Rp – Rf
Excess Return = Risk + Selectivity (Gross)
where Risk = R(CAPM) - Rf
and Selectivity (Gross) = Rp – R(CAPM)

21
Combining Risk and Selectivity = Rp – R(CAPM) + (R(CAPM) – Rf = Rp – Rf = Excess Return.
Net selectivity = Selectivity – diversification (example)

Step 9: Write a short report on the principle of portfolio performance evaluation and
attribution analysis learned.
The report covers, among others:
(i) executive summary
(ii) Table of contents
(iii) Theoretical framework
(iv) Data and Methodology
(v) Main Findings
(v) Conclusion
(vi) References
(vii) Appendices
Marking Rubrics for Assignments 1 (15%)

22
 Percentage
Component Title
(%)
Score and Descriptors
Need Weight
Criteria Excellent Good Average Poor Marks
Improvement (%)
(5) (4) (3) (1)
(2)
Appropriate
Clear Correct Inappropria No
computation
analysis with analysis te results
1-5 of 15 15
necessary with some computatio provide
results/analy
details details n. d
sis/graph
TOTAL 100 15

Marking Rubrics for Assignments 2 (15%)

Percentage
Component Title
(%)
Score and Descriptors
Need Weight
Criteria Excellent Good Average Poor Marks
Improvement (%)
(5) (4) (3) (1)
(2)
Appropriate
Clear Correct Inappropria No
computation
analysis with analysis te results 15
1-5 of 15%
necessary with some computatio provide %
results/analy
details details n. d
sis/graph
TOTAL 100 15%

Marking rubric for presentation (5%)

Percentage (5
Component Title Presentation Rubric
%)
Score and Descriptors
Need Weight
Criteria Excellent Good Average Poor Marks
Improvement (%)
(5) (4) (3) (1)
(2)
Clear Appropriate
Correct Inappropria
presentation presentation No
presentatio te
1-5 with of presentati 5% 5%
n with some presentatio
necessary results/analy on
details n
details sis/graph
TOTAL 100 5%

23
Format of assignment

XIAMEN UNIVERSITY MALAYSIA

Course Code : FIN305

Course Name : Portfolio Management
Prof. Annuar Md Nassir
Lecturer : A. Prof. Wong Wang Li

24
Academic Session : 202104
Assessment Title : Assignment 1 or 2 Mark:
Submission Due Date : Week 8 or Week 14

Prepared by : Student ID Student Name

Date Received :

Feedback from Lecturer:

Pages
Executive summary

Theoretical framework

Data and methodology

Main findings

25
Conclusion

Appendix

26