Investment Analysis of FTSE100 Listed Firms.
To understand the key concepts, approaches, evidence and models of modern financial theory and practice.
You must use five firms, they are TESCO,SKY,BURBERRY, NEXT AND ITV.
You will draw the necessary data for this coursework from Thomson Reuters Datastream (This software is available on 3 PCs behind the library helpdesk ONLY. You can find the guidance from here). Select any five firms from the FTSE100 index components (TESCO,SKY,BURBERRY, NEXT AND ITV.). Download adjusted monthly closing stock prices for each one of your five firms over the most recent period of five years (your series should end in June 2015; 60 monthly observations in total for each stock). You are free to choose whatever stocks you want, irrespective of their characteristics and historical investment performance; this will not affect your grade. Also, download adjusted monthly closing price levels for a broad stock market index proxy for the UK market portfolio over the same 5-year period.
In order to determine the risk-free rate, use the latest value of the yield for a short term UK government security (you can draw data from here).
A wealthy German investor (diversified in terms of exposure to different sectors in Germany and Austria, but not diversified in terms of international geographical exposure) is considering the strategic decision of investing in a portfolio of five FTSE100 firms. You are employed by a leading financial institution and have been asked to advise this client. You will prepare an investment report in Microsoft Word for her containing all your work, results and arguments. All the relevant tables and figures should be contained and discussed in the main body of the report, not in some appendix. The report should not exceed 4,000 words in total (without appendices) and should include all of the following five sections. You can also find the suggestions about Tables/Figures you should at least include, and textbook chapters that you could start reading from in each section.
Section 1. Following the scandals and rumours about the LIBOR and FX market in the UK, your client believes that the London Stock Exchange (LSE) may not be perfectly market and is not sure if this is good or bad for her or not as an aspiring passive investor. Discuss your arguments on the validity of her view and the implications of market efficiency for passive investors. Do not perform your own empirical analysis and testing but use the evidence from the literature.
Relevant Chapter: 11 to 13 (20 marks)
Section 2. Use your sample data to form the following four portfolios: A) equally weighted portfolio; B) value-weighted portfolio; C) global minimum-variance portfolio; and D) optimal risky portfolio. According to the five stocks and risk-free rate, build the optimal capital allocation line, minimum-variance frontier and the efficient frontier, and identify the positions of those five stocks and four portfolios (A, B, C and D) in a scatterplot of standard deviations against returns. Explain and discuss your results.
Tables: Portfolio weights, returns and standard deviations.
Figure: One scatterplot includes the optimal capital allocation line, minimum-variance frontier and efficient frontier.
Relevant Chapter: 5 and 7. (30 marks)
Section 3. Determine the proportion of the overall complete portfolio in the UK financial market that should be held in the optimal risky portfolio of the five stocks along with the proportion that should be held in the risk-free asset. Assume that your client has the same coefficient of risk aversion as yours and that you should determine this by using the Charles Schwab Investor Profile Questionnaire (you can find the questionnaire from here). Transform the questionnaire risk tolerance scores “x” (0 to 40) into risk aversion coefficients “y” (0 to 2) by using the following transformation: y = 2 – x/20. Thus, a risk tolerance score of 30 becomes a risk aversion parameter of 0.5 (= 2 –30/20). Explain and discuss your results.
Relevant Chapter: 6. (10 marks)
Section 4. On the basis of the single-factor market model CAPM, estimate the beta coefficients for each one of the five stocks you have selected. You are free to use whatever method you prefer in estimating the market model parameters (scatterplot trendline, slope function, or regression). Discuss if the beta values you have estimated are sensible given the nature of the business activities of each firm. Discuss the relationship depicted in a scatterplot between average annualised returns and beta coefficients for the five stocks.
Table: Beta coefficients and returns for the five stocks.
Figure: Scatterplot of expected returns against beta coefficients for the five stocks.
Relevant Chapter: 8 and 9. (15 marks)
Section 5. Evaluate in absolute and relative terms the investment performance of each one of the five portfolios A, B, C and D that created in Section 2 and the UK market portfolio over the five-year sample period:
(i) Compare your portfolio performances in terms of return, standard deviation, beta, Sharpe ratio, Treynor measure, Jensen’s alpha, information ratio, and M2 measure. All metric components (e.g., average return and standard deviation) should be annualised as appropriate.
(ii) Determine which portfolio is more favourable for a risk-averse and for a risk-tolerant investor, respectively. Which portfolio would you advise your client to invest in? Which portfolio do you consider the worst choice? Justify and explain your recommendations.
(iii) Compare the best and worst portfolios graphically by using wealth indices.
Table: Performance statistics for the five portfolios.
Figure: Wealth indices (i.e. cumulative return) for the best and worst portfolios.
Relevant Chapter: 24. (25 marks)
Important Coursework Requirements:
• Coursework Investment Report
• You should submit the investment report electronically using the coursework submission system before the deadline: 15:00 PM on 27/08/2015. Name your report file with your university number.
• Report must be word processed in Microsoft Word (or equivalent software). Font must be Times New Roman with a size of 12 points; character scale must be 100% and spacing and position should be normal (the default options); use normal margins (2.5cm on top, bottom, left and right); line spacing must be 1.5 lines with an extra line between paragraphs and headings; alignment must be justified; do not use colour in your graphs and text since the printout will be in grayscale.
• All sections, tables and figures must be clearly titled and sequentially numbered. All tables and figures should self-explanatory and should include necessary axis definitions and legends. Do not copy-paste tables and figures directly from excel into your report; apply appropriate formatting instead. Numbers in the text, tables and figures should have a reasonable number of decimal points in order to allow an accurate representation and comparisons (usually between 2 and 4 decimal points). For more details on successful presentation see:
• Use a contents list and an executive summary in the beginning of the report. Add page numbers on all pages. Include a reference list.
• In each section of the report, you should also include the details about the relevant data and calculations. Try to be brief and clear in your explanations.
• In line with normal practice in investment banking and consulting, you can assume that the report you will prepare may be used for both background reading and presentation purposes. You may include an appendix if you like but this is optional. Your arguments should be sharp, clear and supported by facts, quantitative & qualitative analysis, figures, tables and appropriately cited sources.
• Include at least 10 references to articles in credible professional magazines or academic journals. Do not include articles that you do not cite within your report or that you have not at least partly read. Do not use material that exists exclusively on the internet (e.g., websites, blogs, etc) or module lecture notes/slides as sources in your references.
• Coursework Excel File
• You should submit the relevant excel file electronically using the link “Submit Coursework Excel File” in the Coursework Section of this module on Blackboard before the deadline: 15:00 PM on 27/08/2015. Name your excel file with your university number.
• The calculations and data analysis should be performed using Microsoft Excel in a single workbook with multiple worksheets.
• The excel file should contain the data used along with all the relevant analysis, results, and section titles. Failure to submit this file will cost your marks and may mean that you fail the coursework.
Other Coursework Guidelines:
• Please preserve anonymity by using your university number, not your name.
• Your coursework should clearly distinguish between your original words and ideas, and those of others. When referring to the work of others, from books, journals or any other source (including the internet), it is essential that you make this clear by acknowledging your source and referencing correctly. Failure to reference correctly will lose you marks and may constitute plagiarism or collusion. For more details on the use of the Harvard System of referencing see:
As a general principle, you should always cite your source whenever you are reporting someone else’s work, using their terminology or quoting directly from their work. You lose no marks for borrowing their concepts or terminology. On the contrary, you probably will gain marks, as you are demonstrating to the reader that you have read the literature and assimilated the ideas of others. In fact, you may well lose marks for not citing, as the reader/assessor is usually familiar with most of the relevant literature in a given area, and may be concerned that you have not cited the relevant literature. It is important that you avoid plagiarism and collusion. You must be fully aware of the relevant UEA rules and regulations can be found at: http://www.uea.ac.uk/plagiarism
• Individual study skills support and advice on referencing is also provided by the Learning Enhancement Service at the Dean of Students Office. The digital copy of your coursework might be used with plagiarism detection software. Instances where plagiarism is suspected will be investigated by the NBS Plagiarism Officer. Students who are found to have plagiarised will be penalised. In proven cases offenders will be punished and the punishment may extend to degree failure, temporary suspension or expulsion from further study if the case comes before a Discipline Committee of the University.
• In line with UEA policy, the word count for coursework, written assignments, projects, reports and dissertations shall include: Footnotes and endnotes, references (in the main text), tables and illustrations and if applicable the abstract, executive summary, recommendations, title page and contents page. Any appendicised material and the bibliography or reference list shall be excluded from the word count. You should declare the word count of the text of their assignment on the coversheet (electronic or hard copy) submitted with their piece of work. Markers who suspect an assignment is over the word limit should assign it an unpenalised mark, and return it to the Learning and Teaching Hub, flagged appropriately, for investigation and application of any resulting penalty. Penalties will be applied if work exceeds the word limit, with a 10% tolerance allowance. Cases of intentional misrepresentation of the word count will result in the mark being capped at the pass mark. When an assignment is excessively over the word limit, the marker is obliged to read up to the limit but is not obliged to read beyond it. It is recommended that a 10% allowance is made in determining the cut-off point, which should be clearly identified on the script by the marker. The awarded mark will reflect the assignment content up to that cut-off point. In addition, this awarded mark will have a 10 mark deduction penalty applied by Learning and Teaching Service staff. For Pass/Fail assignments where the word count is found to exceed the word limit plus 10%, the judgement on whether the grade is a pass or a fail should made only on the text up to the word limit plus 10%. The penalties for exceeding the word limit are: Up to 10% over word limit (No Penalty), 10% or more over the word limit (Deduction of 10 marks off original mark), Failure to provide an electronic copy when requested (Mark capped to the pass mark), Intentional misrepresentation of the word count on the coversheet (Mark capped to the pass mark). When the original mark is within 10 marks of the pass mark, the penalty will be capped at the pass mark. Original marks below the pass mark will not be penalised. See also:
• See also “Guidance for Students on the Procedures for Coursework Submission and Return” 2013/4:
The table below shows how numerical grades relate to class of performance and gives some of the criteria used in the determination of grades. A close study of the descriptors will enable you to understand the standards that you should be aiming at in coursework and to interpret the marks that you are awarded.
• 80-100% = outstanding work at distinction level: A mark in this range will be given for work which shows the qualities described below (70-79% range). In addition it will show evidence of intellectual rigour, independence of judgement and inventiveness, and will convey a firm impression of originality of mind. It should demonstrate insight which forces reconsideration of existing knowledge and understanding in the reader.
• 70-79% = excellent work at distinction level: Work in this range will display a full understanding of its subject, a firm grasp of factual details and of the relevant theory and literature and techniques. It will be clearly argued and presented, with evidence of insight and some originality of thought and expression. It will demonstrate wider reading, and draw upon relevant source material which goes beyond the core material required for the module. Application of appropriate theory and techniques to management situations is anticipated, with evidence of the ability to critically evaluate their relevance.
• 65-69% = work of a very high standard: Work in this range will show a thorough grasp of the topic (though a lesser ability to apply theory and techniques) and will be clearly argued and presented. It should demonstrate wider reading, and draw upon relevant source material which goes beyond the core material required for the module. It will show an appropriate awareness of the relevant theory, literature, and techniques without quite achieving that intellectual independence and originality that distinguishes distinction level work. It should demonstrate the ability to use theory to transfer learning from one context or situation to another.
• 60-64% = very good work: Work in this range will be intelligently argued, although there may be flaws in the structure or in the use of information. There may also be some unevenness in the quality of the work, and theory and techniques may be less well applied than in work of a very high standard.
• 55-59% = good work: Work in this range will show a broad knowledge and understanding of its subject. It may lack sophistication in its argument or be somewhat too descriptive in its treatment, and consequently ignores relevant theoretical foundations and technical applications. It should demonstrate accurate and a more complete recycling of the material covered.
• 50-54% = acceptable work to an adequate level: Work in this range will show a satisfactory knowledge but may be vague or very descriptive in its interpretation of the subject. It may also be structurally weak, and lack a sense of argumentative purpose, and be less extensively argued. There will be little evidence of managerial applicability. It should demonstrate accurate recycling of the material covered. Pass Mark is 50%.
• 40-49% = Marginal fail; work which does not reach an acceptable level: Work in this range will only partly address the question there will be a lack in synthesis of ideas and a tendency to description rather than analysis. The work shows a restricted range of sources consulted, only a basic understanding of evidence, a limited range of examples, sometimes inappropriate ones and a limited understanding of key concepts. There will also be poor typography and layout, a considerable number of grammatical errors, a limited vocabulary, inaccurate citation and a bibliography with significant omissions. Given a mark in this category, the Exam Board may require the student to re-sit / resubmit the assessment.
• 30-39% = Clear Fail: Work in the range will have a weak structure, be largely irrelevant to the set question and contain considerable misunderstanding of key concepts. A minimal range of sources will have been consulted, very limited understanding of evidence, minimal range use of examples; little use of sources beyond direct paraphrase of lectures, easily available texts or web pages. The work will show poor presentation; numerous and significant grammatical errors; highly restricted vocabulary; inadequate citation and bibliography.
• 20-29% = Well below passable standard: Work in this range only marginally addresses the question; contains a fundamental misunderstanding of key concepts; is mostly irrelevant; and contains no line of argument. There will be little attempt to support any assertions; no use of sources beyond direct paraphrase of lectures or easily available texts or web pages. Poor grammar and vocabulary makes it difficult to decipher any intended meaning; no citation; no relevant bibliography.
• 10-19% = Very few learning outcomes met: Work in this range will contain few relevant elements; only fragmentary arguments; only slight evidence of understanding of key concepts. There will be no attempt to support assertions. Poor grammar and vocabulary makes it very difficult to understand the intended meaning.
• 1-9% = Far from meeting any learning outcome: Work in this range will have no evidence of learning anything from the module, although there may be elements derived from general knowledge. Short answer; note form; mostly incomprehensible.
• 0% = No work submitted: The correct citation practices should be adopted for all coursework and references should be correctly and consistently structured. The Harvard System of Referencing is the preferred model in the school and should always be used unless you have been explicitly told otherwise in writing by the module organiser. Further information about these requirements, and general help on how to write reports and essays, can be found on the Dean of Students website at: http://www.uea.ac.uk/dos
In preparing your coursework, you should be aware that you will be assessed by the extent to which your report meets the following criteria (indicative weights for each criterion are also given):
The video presentation will be evaluated on the basis of clarity, effectiveness, professionalism, enthusiasm, etiquette relevance, style, and timing.
Further details on these criteria for different levels of performance can be found on the UEA Senate scale:
Although this matrix refers to UG, the information about the description of criteria is largely applicable to this module also, although the pass rate is obviously 50% (rather than 40%) in the case of MC8X.
Investment Analysis of FTSE100 Listed Firms.