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Capital Asset Pricing Model Critique and Portfolio Optimization

Analytical and Critical Discussions

Critically discuss the Capital Asset Pricing Model (CAPM) the underlying assumptions, its validity, and the criticism against CAPM. Explain the proposed models by the literature as alternatives to the CAPM? Utilise arguments from the theoretical and empirical literature to support your discussions. Structure your answer for this question into three subsections: I) introduction; II) analytical and critical discussions; III) Conclusion

Collect monthly prices for 7 (seven) stocks/assets of your choice for the last 10 (ten) years traded in a market (of your choice). Use the data to construct one portfolio (i.e. same stocks/assets). However, use it to generate three objectives the first is to maximise returns and the second is to minimise risk, the third is to maximise sharp ratio. In other words, same stocks three portfolio-scenarios/objectives one is profit maximisation and the second is risk minimisation, the third is maximising sharp ratio. For each scenario/objective report the annualised optimised portfolio weights, the expected returns, and risks in addition to any other necessary performance indicators. Report the weighted average portfolio-beta for each portfolio scenario/objective. Use available data that can be easily obtained online or via Bloomberg. Use dividend adjusted close prices.

  1. Utilise your knowledge of the underlying theories, assumptions, limitations, and criticism of the Capital Asset Pricing Model (CAPM and the alternative models)
  2. Utilise argument and findings from updated literature to support your discussions.
  3. Support the answers with graphs and formulae where appropriate.
  4. Graphs are allowed within the text. Extra graphs can be moved to the Appendix at the end.
  5. Formulae should be written using the equation function in Word. Students may include the formulae in the footnote of the page to or move to the appendix at the end to save space.
  6. Support the answer with relevant academic references using Harvard Style (Please refer to the University of Leicester guidance regarding Harvard referencing).

1.Use the knowledge gained from Transferable Skills documents of estimating CAPM or Estimate Market model using regression analysis and other functions in Excel.

2.Calculate each stock monthly return using Excel

3.Calculate each stock variance and standard deviation using Excel

4.Use the SOLVER functions in Excel to optimise portfolio return, risk and sharp ratio

5.Present the work in a professional investment report and provide comments on the results.

6.Provide sufficient justification for the choice of stocks/assets and the market.

7.Make sure to collect stock/asset prices that are dividends adjusted.

8.Provide sufficient justification on the choice of the proxy (index) of the market portfolio.

Present Tables in an organised manner with captions. Maximum four Tables are allowed within the text. Extra Tables can be moved to the appendix at the end.

Support the answers with graphs and formulae where appropriate. Maximum three to four graphs are allowed within the text. Extra graphs can be moved to the Appendix at the end.

Formulae should be written using the equation function in Word. Students may include the formulae in the footnote of the page or move it to the appendix at the end to save space.

Support the answer with relevant academic references using Harvard Style.

Submission Deadline:

The assignment carries 100% of the total marks for this module. Failing to submit an assignment result in a zero mark for the assignment. Late submission is subject to the standard penalty results in deducting marks according to the University Rules and Regulations.

  • Evidence of reading beyond standard textbooks and lecture notes.
  • Coherent, comprehensive, and reflective critique of existing ideas and literature.
  • An accurate understanding of key concepts and ideas.
  • Imagination and originality.
  • Clear development of the argument(s) contained in the essay. The essay should flow in a way that enables any reader to follow the argument(s) and see how the various points made are being used to answer the question.
  • Before writing the essay, work out on paper a detailed outline of your argument.
  • In the essay introduction, you should set out your main themes and intentions: describe the issue you are addressing, identify its main components, and indicate what you are going to do in the body of your essay.
  • Break down your arguments into main parts - use this as a basis of your essay that will then be divided up into several sections (you may want to have a section title for each section).
  • Build up your argument point-by-point, section-by-section, so that you develop a picture that slowly develops in the reader’s mind.
  • Always try to put yourself in the position of a critical reader, ask yourself how s/he would react to your essay, how s/he would understand it, be persuaded by it.
  • Do not simply describe the ideas and literature you’re dealing with, provide a critical evaluation.
  • Summarise your arguments in conclusion. What is the main significance of what you have been saying?

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