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BEAM046 Financial Modelling

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You are an analyst in a US fund management company that specialises in domestic equity investment. The company is considering launching a new passive fund that will invest in a broad selection of equities in a limited number of industries. These industries are Real Estate, Pharmaceuticals, Natural resources, Technology, Utilities and Communications. Establish the optimal investment weight in each of these industries, given the current risk free rate. The fund is not able to short sell and is restricted to investing no more than 25 percent of the fund’s capital in any one industry.
As part of the analysis, you should evaluate the costs of these constraints. As a proxy for the different industries, you should use appropriate exchange traded funds (ETFs).you are a fund manager in an investment company that operates a US equity fund. The fund aims to approximately track the market portfolio but to add value through active management applied to a small selection of stocks. You have decided to focus on the following stocks: Pfizer (PFE),
Verizon (VZ), General Electric (GE), Walt Disney (DIS) and Microsoft (MSFT). Construct an optimal active portfolio of these five stocks using information that was available to you one year ago.
Your views about the future performance of the five stocks should be based on recent past stock price performance up to the portfolio construction date (you might, for example, take a 'momentum' view that stocks that have done well in the recent past are likely to continue to do well, and vice versa). Evaluate the performance of the active portfolio over the subsequent year and compare it to the performance of (a) the tangency portfolio of the five stocks, and (b)
the market value weighted portfolio of the five stocks. (Note that the relative performance of the active portfolio will not affect your mark for the assignment).

You are a risk analyst for an investment bank and have been tasked with analyzing the risk of an investment in options on Procter and Gamble (PG) stock. Compute the VaR at a confidence level of 75% for a position in a call option on PG stock with a maturity that is as close as possible to three months, and for a strike price that is about 90% of the current stock price. The VaR horizon is the maturity of the option. You should also estimate the corresponding VaR for a position in the underlying stock. You should incorporate the expected return of the stock, and any dividends that it pays, in the simulation.
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