# Portfolio Performance – Investing & Financial Markets

Individual Assignment Cover Sheet

Student Name: NUR SHAFAWATI BINTE MOHAMED SHIS Student ID No: 100432839

University: Derby                                                    Program Name: Accounting & Finance

Level/Award: 6/BA (Hons)                 Module Code/Module Name: 6EC501/ IFM

Candidate Declaration: “I confirm that in forwarding this assignment/project for marking, I understand and have applied the policies relating to word count, plagiarism and collusion for all tasks. This assignment/project is the result of my own independent work/investigation except where otherwise stated. Other sources are acknowledged in the body of the text/and a bibliography is appended. The work that I have submitted has not been previously accepted in substance for any other award. I further confirm that I have not shared my work with other candidates”.

Signature:                                                     Date: 3 April 2017

Date: _______________________    Name: ________________________________

Position: ____________________    Signed: _______________________________

List of Tables and Graphs. 4

List of Appendices. 5

3.1       Possible Biasness in the Selection Process through Behavioural Approach. 6

3.1.1       Overconfidence. 6

3.1.2       Hindsight Bias. 6

3.1.3       Familiarity Bias. 6

3.1.4       Regret Avoidance. 6

3.1.6       Extrapolation. 6

3.2       Performance of the Portfolio Selected Through Behavioural Approach. 6

4.1       Computation of Portfolio. 6

4.1.1    Expected rate of return (mean) and risk (standard deviation) for each asset. 6

4.1.2    Calculate the correlation matrix for the 9 assets. 6

4.1.3    Redistribute the weights between the 5 assets. 6

4.1.4    Calculate the expected portfolio return and the portfolio risk. 7

4.1.5    Calculate the portfolio beta. 7

4.1.6    Calculate the Sharpe ratio for the 5-asset portfolio. 7

4.1.7    and Markowitz equations  7

4.1.8    Give the following weights to your assets in descending order 35% (to the asset with highest return), 30%, 20%, 10% and 5% (to the asset with the lowest return) 7

4.1.9    ….. 7

4.2.      Diversification across assets. 7

4.3       Diversification within asset classes. 7

4.4       Diversification domestic and international. 7

4.5       Portfolio 9 asset performance. 7

4.6       Portfolio 9 asset performance versus naive diversification. 7

4.7       Discuss the correlations between your 9 portfolio assets. 7

4.8.      Which are your portfolio’s 5 ‘best’ assets? Why?. 7

4.9       Using the reduced 5-asset portfolio, discuss how Markowitz diversification would reduce its risk  7

4.10     Discuss the risk of your 5-asset portfolio relative to the market risk (Portfolio Beta) 7

4.11     Analyse the 3 Sharpe ratios you calculated (points 2d-f.). Which allocation is the best, and why?  8

REFERENCES. 9

APPENDICES. 10

# List of Tables and Graphs

 Table Title Page No Table 1 Table 2 Table 3

 Graph Title Page No Graph 1 Graph 2 Graph 3

# List of Appendices

 Appendix Title Page No Appendix 1 Appendix 2 Appendix 3

# 3.         Portfolio Asset Allocation using Behavioural Approach

## 3.2.1

Table 1: Initial 9 Assets Portfolio

# 4.         Portfolio Asset Allocation using Portfolio Theory

## 4.6.1

9 Assets with 1/N strategy

# APPENDICES

I&FM Assessment 1 Part 2 – Portfolio Written Assignment Details in 1500 words

1. Your starting point must be the portfolio Excel spreadsheet you have used for tracking the performance of your investment choices between 1 and 28 February 2016. Adda new worksheet in your Excel file with your portfolio of 9 assets (ignore the money market fund).
1. Look up and download historical prices for your 9 assets – use Yahoo! Finance to obtain monthly data for the last 5 years. Put these in one single Excel sheet (just like I have done for the seminars)
2. Calculate the expected rate of return for each asset (mean) and its risk (standard deviation)
3. Calculate the correlation matrix for your 9 assets.
4. Based on the correlation coefficients pick your 5 ‘best’ assets (you will need to discuss this later on).
2. For the 5 ‘best’ assets portfolio
1. Redistribute the weights between your 5 assets in a similar way to your initial allocation – i.e. increase the weights of the remaining 5 assets and maintain the proportions between them.
2. Calculate the expected portfolio return and the portfolio risk (Markowitz equations)
3. Calculate the portfolio beta
4. Calculate the Sharpe ratio for the 5-asset portfolio made above by assuming a risk free rate of return equal to 0.5%
5. Recalculate the Sharpe ratio after giving equal weights to all 5 assets (i.e. 20% each).
6. Then, order your 5 assets from the highest rate of return to the lowest. Give the following weights to your assets in descending order 35% (to the asset with highest return), 30%, 20%, 10% and 5% (to the asset with the lowest return). Calculate the Sharpe ratio for the new allocations.

Analyse the portfolio in Word document

1. You must first analyse your portfolio choices from a behavioural perspective. To discuss the biases that (may) have influenced your choice of assets. Typical biases to consider are overconfidence, representativeness, availability, ambiguity aversion, narrow framing, herding etc. You will need to cite literature sources (with references) in the discussion.
2. Next you must evaluate your portfolio asset allocation by applying portfolio theory. You will need to cite theory and literature sources (with references) in the discussion.
1. In the body of the Word document, analyse the diversification of the initial 9-asset portfolio
1. How well diversified was it across asset classes? How could you improve it?
2. How well diversified was it within the asset classes? How could you improve it?
3. How well diversified was it across international and domestic? How could you improve it?
2. How did your portfolio perform over your investment period (the month between 1-Feb and 1-Mar)? Would a 1/N strategy have yielded better a better result? (put in equal weights and the portfolio tracking sheet will automatically calculate the new return)
3. Discuss the correlations between your 9 portfolio assets – refer to the matrix in the appendix (point 1.c.)
4. If you were to reduce your portfolio to your 5 ‘best’ assets – which would these be? – refer to the matrix in the appendix (point 1.c. and 1.d.)
5. Using the reduced 5-asset portfolio, discuss how Markowitz diversification would reduce its risk (refer to the calculations in point 2.b.)
6. Look at the portfolio beta you calculated (point 2.c.) and discuss the risk of your 5-asset portfolio relative to the market risk.
7. Analyse the 3 Sharpe ratios you calculated (points 2d-f.). Which allocation is the best, and why?
8. Would this portfolio be good enough for you to meet your retirement goal? Indicate how you think your portfolio performance should be judged or benchmarked over the long-term.
9. With explicit reference to active and passive management, how would you change it?