Asset and Portfolio Risk-Return Analysis - Task 1

1a. Choose five company shares

Task 1 is primarily a set of preparatory undertakings essential for the asset and portfolio risk-return analysis in tasks 2 and 3. It comprises three stages: 1a, 1 b and 1c.

1a. Choose five company shares

Choose five companies listed on the London Stock Exchange (LSE). The five must be from the FTSE350 Index but excluding investment companies. To see the list:

log into https://www.londonstockexchange.com/

On the top banner click ‘News and Prices’ then ‘Prices and Markets’

Filter by Index ? FTSE350 ? Sector

In the Sector drop down, tick every category except:

 

Closed End Investments

Mortgage Real Estate Investment Trusts

Open End and Miscellaneous Investment Vehicles

Real Estate Investment Trusts

(This removes the companies linked to those sectors. The reason is that you will be analysing the risk reduction effect associated with a five-asset portfolio. The business of companies included in the four sectors listed above is investing in other listed enterprises. They are, themselves, asset portfolios).  

• Apply the filter

This should generate a list of 263 companies. Any five can be chosen. However:

• They must be from five different business sectors. A straightforward way of ensuring sector diversity is to use the sector drop-down on the LSE website. Select a specific sector and choose one from the list of companies shown. Repeat the process for four more sectors
• Before finalising your choice of shares, check that each has a share trading track record of at least five years. This is easily done: on the London stock exchange site, click on the company and adjust the price graph to show five, or more, years. If the price schedule stretches across the whole graph, it’s OK
• Choosing companies outside of the parameters outlined will mean loss of marks.

1b. Assemble data for the market and your five companies

 On MyUnihub:

• Under the ‘My Library’ section click Databases
• Login to Capital IQ Pro
• Click Apps (top left) and open Chartbuilder

The Market

Portfolio analysis requires something to represent the market portfolio. We will use the FTSE All-Share (Ex-Investment Companies) Index.

• In Entities enter the ticker symbol for the index, ^ASXX
• In Metric click on Index Value, then the Edit cog and change the data frequency to monthly
• In the date option section, set the chart from 30^thNovember 2016 to 30^th November 2021. You should now see a chart with a schedule for the level of the index for the specified five- year period.
• Top right at ‘Export’, click Export to Excel as Data
• Save the file.

The Five Shares

Repeat the above steps for your five companies, acquiring monthly share price data for each from 30th November 2016 to 30th November 2021

It is vital that the timelines for the index and share data match

[These guidance notes focus on Capital IQ because access to Bloomberg requires presence on campus for pre-booked sessions. Capital IQ can be accessed remotely using your student log-in credentials. Please use Bloomberg if you prefer. I will not, however, be providing guidance on using Bloomberg.].

1c. Data Modelling 

Collect the FTSE index and share price data into a single Excel file. For the index and each share, separate the data into two parts:

Time Series 1: Three years of monthly data from 30^thNovember 2016 to 30^th November 2019

Time Series 2: Two years of monthly data from 30^thNovember 2019 to 30^th November 2021

[Note that the value for 30^th November 2019 will appear in both series; being the end value of series 1 and opening value for series 2]

Put the time series 2 data aside (it will require your attention in Task 2). The rest of the task focuses exclusively on time series 1; the data from 30^th November 2016 to 30^th November 2019. For this three-year term:

1b. Assemble data for the market and your five companies

Calculate the lognormal monthly market returns and lognormal monthly individual share returns

Run an ordinary least squares regression for each individual share return time series, using the monthly market return time series as the determinate variable.

From the regression outputs, highlight the following factors for each share:

 

The beta value

The total risk (sum of squares) and how it is divided between systematic and non-systematic risk

The coefficient of determination, R²

The alpha return

The statistical significance of the alpha and beta coefficients

For task 1 there are two Turnitin submission portals. One is for the main report, the other for the supporting spreadsheet.

The written report should be organized in sections corresponding to 1a, 1b and 1c above:

Present your five chosen companies, the sectors of the market from which they are drawn, size of issued share capital and market capitalisation.

There is no need for a discussion of why you chose the companies beyond the consideration of being in different sectors. Narratives on company history, headquarters, directors operating characteristics and so on are unnecessary. None of this will attract marks. (5 marks)

Present graphs of the FTSE index and share prices over the three-year period 30^thNovember 2016 to 30^th November 2019. State the start and end values for each and, briefly, assess the performance of each.

Marks depend on the quality of the graphical representations and relevance of the commentary.

Avoid:

1. Employing instructions along the lines on ‘see the excel spreadsheet for…’.

2. Simply cutting-and-pasting everything from the Excel output into Word. The onus is on you to incorporate into the report those elements of spreadsheet output relevant to the issue being tackled. Omission or inclusion of irrelevant detail will cause lost marks.

Asset performance assessment here should be summary in style, not lengthy. There are only 5 marks on offer for the entire element. (5 marks)

In tabulated form, provide the statistical outputs listed in the section 1c guidance notes. Focus on the data that offers insight into asset risk.

Analyse the scale of total risk for each asset, including its breakdown into systematic and non-systematic elements. The discussion must also include a with a comparative analysis of the risk attached to each asset.

Five of the 20 marks linked to this section are for the organization and presentation of the data from Excel. The other 15 are for the written analysis and are dependent of the level of understanding expressed regarding the individual and comparative scale of risk indicated by the statistics.

As with 1b, appeals to refer to the spreadsheet will result in marks lost.