Your client wants you to produce a minimum variance frontier/efficient frontier with and without short selling restriction, using any 20 stocks you choose.
Collect the closing monthly share prices for 61 month for 20 companies of your choice (from Datastream or Bloomberg for example). Derive the minimum variance frontier for various levels of expected returns: one without short-selling of risky assets and one with restricted short-selling of risky assets allowed. Explain the rationale behind the short-selling restriction you have chosen to apply. Plot those two minimum variance frontiers. Mark efficient frontiers on the graph. Produce a client report explaining composition of portfolios used to construct the frontiers and your main findings. Explain to the client the problems associated with short-selling equity.
Use the share price data for 20 companies you have collected for Question 1. Collect the market capitalisation for those companies for the 61st month only in your sample period. Additionally, collect the closing monthly prices for 61 months for benchmark index relevant for your dataset and answer the following:
a) Explain the choice of your benchmark index
b) Produce the correlation matrix for 20 securities and comment on diversification possibilities using your selected securities.
c) Assuming market capitalisation weighted portfolio construction process, construct 5 portfolios of your choice to show how diversification changes the value of R2 obtained when regressing portfolio returns on the selected benchmark. What are the expected returns of each of your 5 portfolios? What is the level of systematic and unsystematic risk of each of your 5 portfolios and what is their proportion in the total risk?
d) Use the change in the UK interest rates and the change in £/$ exchange rates for 60 months as well as the returns of the market portfolio and assess how well those factors explain the returns of the portfolio you’ve identified as the most diversified in section c).
Write a report which comments on and presents all your results in b), c), and d) in particular.