A friend is considering investing in some companies listed on the ASX but is unsure on how to proceed. After learning about the benefits of diversification, your friend has consulted you for advice. Your friend has provided you with the following list of companies of interest, to work with:

Commonwealth Bank of Australia (CBA)

CSL Ltd (CSL)

Harvey Norman Holdings Ltd (HVN)

Qantas Airways Ltd (QAN)

Woolworths Group Ltd (WOW)

Required:

Prepare a report, using the five companies above, illustrating the effect of diversification. In doing so, first create a monthly time series of returns for each of the companies, before performing  some  numerical  analyses  which  will form  the  basis  of your  report.  You  are required   to   use   closing   prices,   and   calculate   holding   period   returns,   each   month, incorporating the effect of any corporate actions (e.g. dividends etc). It is also important that you provide some discussion and interpretation of what you find, assuming that the reader only has a passing knowledge of finance. This should involve four steps, as below:

i.      Calculate relevant statistics describing the distribution of the returns of each of the five companies over the 5-year period ending in December 2022, using monthly data. Table 5.4 in the text may be used as a guide for which statistics should be calculated. You should use diagrams and tables to present your results and ensure that you report annualised figures over the entire 5-year period, and report results for each calendar year of the period. Discuss and interpret your findings.

ii.      Next, calculate the  monthly  returns  of a  portfolio comprising the five companies, based on 1) an equally weighted index, and 2) a value weighted index. Using only one of the two portfolio return series’ (equally weighted or value weighted, your choice), calculate some statistics describing the distribution of the portfolio, and compare your findings to the Australian market overall. Your lecturer will provide you with a total return index on the Australian market, to enable you to do this. It is recommended for this part, that you express your portfolio’s returns relative to the Australian market, by subtracting the market’s returns each month.  Provide some brief discussion on your findings.

iii.      Estimate the betas for each of the companies using 60 months of historical data up to

30 December 2022, and their expected returns using the CAPM. Discuss your findings. In doing so, it is recommended you briefly discuss the reasoning behind why specific companies  may  have  presented the  betas  they  did.  Your  lecturer  will  present  a demonstration on how to do this, early in the semester.

iv.      Using all five companies, calculate the weightings which would result in the optimal risky portfolio, and the minimum variance portfolio. Additionally, provide a plot of the  portfolio frontier,  and  identify the  locations  of these  portfolios.  In  doing  so, assume  that short selling is not allowed .  Hint: Appendix A of Chapter  7  provides guidance on how to attempt this using Excel. A demonstration will also be provided by Week 4.

Additional points

• Please submit only TWO files via Wattle: A Word document containing the written report, and an Excel file1  containing any calculations undertaken within the assignment; both via the first named group member on the cover page. There is no need to show detailed workings within the report itself, but concise explanation of your methods, and usage of tables and diagrams are expected.

• Make  sure  your  written  report  is  sufficiently  complete  so  that  someone  can  easily understand your findings and interpretation/discussion without looking any further. Do not simply state “see Excel spreadsheet for the results”; make sure you include discussion throughout the report in reference to your findings. Although the spreadsheet is required as part of the submission, it will only be used to check the accuracy of calculations, if necessary, and will not be considered as substantive as the report when marking.

• Please include a reference list containing any cited articles, and use subheadings where appropriate. You may include appendices if you feel they add to your assignment, but be aware that they will not be considered as important as the content of the report, during marking.

• The reference list and any appendices are not included in the word limit, but all other content, including tables, are. Please make sure the word limit is adhered to.

• Use a 12pt font size, and 1.5 or double line spacing throughout your document.

Useful resources

You will be provided with some of the data necessary to complete the quantitative aspects of your assignment. However, you may also find the following websites useful:

• The Australian Stock Exchangehttps://www2.asx.com.au/markets/trade-our-cash market/directory .

• Morningstar DatAnalysis (accessible via the ANU library here:                                          (https://anu.primo.exlibrisgroup.com/permalink/61ANU_INST/1alil8h/alma9910080 76799707631)

• Yahoo! Finance.

There are also plenty of resources available which may assist you in report writing style:

• https://www.anu.edu.au/students/academic-skills/writing-assessment/report- writing

• https://www.business.unsw.edu.au/Students-Site/Documents/Writingareport.pdf

Please ensure that the Harvard Method is used when referencing the work of others. This is the general convention in business disciplines, and applies to finance. A guide to this style is

available at:

https://www.anu.edu.au/students/academic-skills/academic-integrity/referencing/harvard

Submission

This submission is due by 5pm Friday 12 May 2023, and is to be made electronically via Wattle. Ensure that you also complete and attach the cover page provided on Wattle.