Task 1 is a set of preparatory exercises to facilitate portfolio risk-return analysis in tasks 2 and 3. Application of portfolio theory, in particular the Capital Asset Pricing Model, to investment decision-making is the guiding principle behind the exercises.
Choosing shares, establishing a market portfolio, assembling data, and employing statistical techniques to generate risk parameters and other information are the key elements of task 1.
The guidelines for each element are very precise. Study them carefully and follow them precisely. There are many ‘moving parts’ that require careful calibration. A rushed, half attentive, approach is certain to result in errors that will not only adversely affect the mark you achieve but will later require correcting to prevent a knock-on effect for the quality of work done for the later tasks.
Task 1 accounts for 30 marks out of a total of 100 for the coursework.
1a. Choose five shares to incorporate into a portfolio
The five shares should be chosen 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
We remove these companies because their business is to invest in shares of other companies. They are, themselves, equity portfolios.
This will generate a list of 261 companies. Any five can be chosen. However, they should be from five different business sectors.
You could clear the sector drop-down and choose a specific sector. This will reveal the list of FTSE350 companies in that sector. Select one company and repeat the process for four other sectors
Before finalising your choice of shares, check there is 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 five years. If the price line stretches across the whole graph it’s OK.
1b. Assemble data for the market portfolio and your five companies
Under the ‘My Library’ section click Databases
Login to Capital IQ
The market portfolio is the FTSE All-Share (Ex Investment Companies) Index. Type this title (or its ticker ^ASXX) into the search box. A chart should appear, together with summary information.
Beneath the chart is a box, ‘Type’, with two options: Price Return or Total Return Gross.
Choose Price Return (probably already the default) and click ‘Go’.
This takes you to an interactive chart of the index, based on daily values over one year to the current date. You require monthly index data for a five-year period from 30th November 2015 to 30th November 2020. Adjust the dates accordingly using the date setting function above the graph on the right-hand side.
Scroll below the chart to ‘Pane1’ and click on the ‘Edit’ icon for Index Value. Alter the data frequency from Daily to Monthly and apply the change
Scroll up to top right and click the Excel download icon
The downloaded file contains the graph plus the list of monthly index values. Double-check that the dates tally with the instruction above.
Save the file.
Repeat the steps used to obtain monthly index data to acquire five years of monthly price data for your five company shares.
It is vital that the timelines for the index and the shares 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, provide guidance notes].
1c. Data Modelling
Assemble the 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 from 30th November 2015 to 30th November 2018
Time Series 2: Two years from 30th November 2018 to 30th November 2020
Note that the values for 30th November 2018 should appear in both components (the end value of series 1 and opening value for series 2)
With time series 1:
Calculate the lognormal monthly market returns and monthly individual share returns the market
Run a regression for each individual share time series, using monthly market returns 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
You do not need to do anything with the time series 2 data for Task 1.
Submitting the Task 1 Report
For task 1 there will be two Turnitin submission portals. One will be for your spreadsheet, the other for your written report.
The written report should be organized in sections corresponding to 1a, 1b and 1c above:
1a. Include a list of your five chosen companies, the sectors of the market from which they are drawn, size of issued share capital and market capitalisation. Avoid explanations of any motives you had for choosing a company and narratives on company history, headquarters, directors and so on. None of this will attract any marks.
1b. Provide graphs of market index and share price developments over the five-year period. State and briefly compare the start and end values for each. Marks will be awarded for the clarity of the graphical representations. Appeals along the lines on ‘see the excel spreadsheet for…’ will attract a mark of zero. The onus is on you to incorporate into the written report elements of spreadsheet work you wish to discuss.
1c. Provide, in tabulated form, the statistical outputs listed in section 1c above. Use the data as the basis for a short discussion on each asset’s risk, emphasizing the scale of total risk as well as its breakdown into systematic and non-systematic elements. The discussion should conclude with a comparison of the risk attached to each asset.
As with 1b, appeals to refer to the spreadsheet will result in lost marks rather than gained marks.