Finance Project

Finance 3507

Group Project: Due by Tuesday

Part One: International Portfolio Management

1. Go to http://finance.yahoo.com, download monthly Adj. close prices (adjusted for dividend and stock split) from 12/01/2010 through 12/01/2017 for the following three country indexes.

Country	Ticker
USA S&P 500	^GSPC
India	^BSESN
Korea	^KS11

Note: Historical T-bill rates are provided in a separate EXCEL file.

2. Compute monthly holding period return using Adj. close prices.

3. Use the EXCEL statistical functions to compute mean (using AVERAGE) and standard deviation (using STDEV) of the monthly return for each index.

Assume that historical mean returns are good estimates of expected returns.

4. To achieve international diversification, John invests in the USA and India indexes. What are the weights on the two indexes to achieve the optimal international portfolio? What are the mean and standard deviation of returns on his optimal international portfolio? [All calculations should be done in EXCEL with clear labels.]

5. Mary instead invests in the USA and Korean indexes. What are the weights on the two indexes to achieve the optimal international portfolio? What are the mean and standard deviation of returns on her optimal international portfolio? [All calculations should be done in EXCEL with clear labels.]

6. Discuss whose optimal portfolio performs better (John or Mary), and explain why. Also discuss potential reason(s) that causes the difference. (At least a half or one page discussion, double space)

Use the following statistical functions in excel:

1. Function AVERAGE for mean

2. Function STDEV for standard deviation

3. Function COVAR for covariance

4. Function CORREL for correlation coefficient

Part Two: Estimation of Beta

Please complete the following requirements for two stocks, Dynex Capital Inc. (ticker DX); International Paper Company (ticker IP).

1. Download monthly Adj. close prices (adjusted for dividend and stock split) from 12/01/2010 through 12/01/2017for each stock.

2. Compute monthly holding period return using Adj. close prices.

3. Suppose we consider the USA S&P 500 index (^GSPC) as the market portfolio. Estimate betas of DX and IP based on the Single Index Model regressions, and show your regression output. (see chapter 7, page 203-206 of the textbook).

4. Calculate mean return, STD, and beta of the two portfolios: Portfolio A (90% in ^GSPC /10% in DX), Portfolio B (90% in ^GSPC /10% in IP). Must show your calculation with imputed formulas included in Excel.

5. Based on the regression results, which stock (DX or IP) has a larger fraction (among the total variance) of firm-specific variance (risk)? And explain why you believe so?

6. Based on the regression results, is there any arbitrage opportunity of trading the three securities, ^GSPC, DX and IP? Is the arbitrage opportunity reliable? And explain why? (At least a half page discussion, double space)

Detailed Explanation and Requirement

* You can do much of the research over the internet (e.g., http://finance.yahoo.com), and calculations should be done in EXCEL.

*The project can be completed by a group of one to five students. Group project is HIGHLY encouraged. It is your responsibility to make sure the accuracy of the work done by your colleagues. all members of your group will receive the same grade on the project. Please submit ONE copy for each group with all group members’ names listed.

No credit will be given to a student unless both his/her first and last names are included in the project.

* The hard copy and e-copy must include the following information:

1. Lists of dates, Adj. close prices, and monthly holding period returns of all the indexes and securities in Part One and Part Two.

2. Mean and standard deviation of all the indexes and securities returns.

3. Analysis for #4 through #5 in Part One.

4. Beta of DX and IP, and show your regression output.

5. Mean return, STD, and beta of the two portfolios: Portfolio A (90% in ^GSPC /10% in DX), Portfolio B (90% in ^GSPC /10% in IP). Must show your calculation.

6. Written discussions addressing the questions that are raised above in Part One and Part Two. Any data, analysis, and evidence you used to support your argument must be presented in the hard copy and e-copy.

Submission Requirement

* The assignment must be typewritten and submitted in both hard copy AND electronic copy (ONE submission per group). Hard copy of the project is due (in class). E-copy of the project (including excel sheets and WORD file) must be submitted via Canvas by 11:59pm on 11/13/2018. It’s your responsibility to make sure your submission via Canvas is completed and successful. DO NOT FORGET TO SUBMIT E-COPY! A complete submission MUST include both the hard copy AND e-copy.

You must mark on the hard copy the name of student who submitted or will submit e-copy. PLEASE DO NOT EMAIL ME THE PROJECT.

Late Submission Policy

late assignment IN HARD-COPY AND E-COPY MAY BE accepted with THE FOLLOWING PENALTY.

· If a late project is submitted within 24 hours after the due date/time, the project will automatically lose 10% grade, i.e., maximum grade is 90%.

· If a late project is submitted within 24-48 hours after the due date/time, the project will automatically lose 20% grade, i.e., maximum grade is 80%.

· If a late project is submitted more than 48 hours after the due date/time, the project will receive a ZERO grade.

Example of data presentation:

	^GSPC	^BSESN	^KS11	^GSPC	^BSESN	^KS11
Date	Adj. Closing Price	Adj. Closing Price	Adj. Closing Price	HPR	HPR	HPR
12/2/2013	1.43	77.1	6.6
11/1/2013	2.45	79.2	7.75
10/1/2013	2.48	75.4	4.72
9/2/2013	2.14	78.5	4.18
8/1/2013	2.87	74.6	10.19
7/1/2013	5.95	74.8	11.18
6/3/2013	11.44	78.4	16.86
5/2/2013	12.19	79.1	20.95
			Mean
			STD

Clarification on the date difference between the US and Korea/India

Due to the time zone difference between the US and Korea/India, finance.yahoo.com quoted monthly price of US stock as the 1st day of each month (e.g., 12/1/08) whereas it quoted international stocks as the last day of the month (e.g., 11/30/08). As such you can consider 11/30/10 in India/Korea the SAME date as 12/01/10. See below for the date clarification.

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