25503 Investment Analysis

Assignment Part I (Due 11 May 2016 at 5pm)

Student ID

Last Name

First Name(s)

Assessment
Item
Question 1
Question 2
Question 3
Question 4
Total
Percentage

Mark

Signature

25503 Investment Analysis

Assignment Part 1 Autumn 2016
1. (b)
Variance-Covariance:

0.20575
0.12176
0.16230
0.13320
0.18582

0.12176
0.16270
0.09734
0.06211
0.11574

0.16230
0.09734
0.28964
0.20524
0.23241

0.13320
0.06211
0.20524
0.64263
0.17280

Expected Return:
mu
0.02642
0.06294
0.01501
0.06064

AE
Aus Real Estate
EE
US Equity
Emerging Market
Equity

-0.03175

1. ( c )
Green = Australian Real Estate
Yellow = Australian Equity
Red = European Equity
Orange = Emerging Markets
Blue = US Equity
0.4
0.3
0.2
MVS

0.1
0.0
0.2
-0.1
-0.2

Securities

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.18582
0.11574
0.23241
0.17280
0.34173

Dominant vs. efficient:

1.
2.
3.
4.
5.

Australian Real Estate dominates US Equity.

Australian Real Estate and Australian Equity dominate European Equity.
Australian Real Estate dominates Australian Equity.
Australian Real Estate, Australian Equity and European Equity dominate Emerging Markets .
Australian Real Estate is the only efficient asset class.

1. (d)

A
B
C

7.15472
0.38414
0.05861

Target up

0.15000

Delta

0.27176

Lambda
Gamma

0.00363
2.53555

1. (e)
MVS with short sales allowed for expected (annual) returns ranging between -10% and 35%.
0.4
0.3
0.2
MVS

0.1
0.0
0.2

Securities

0.4

0.6

0.8

1.0

1.2

1.4

1.6

-0.1
-0.2

x*

AE

0.04051

1.8

Aus Real Estate

EE
US Equity
Emerging Market
Equity
total

1.45934
0.30093
0.29364
-1.09442
1.00000

mup
sigma^2(p)
sigmap

0.15000
0.38396
0.61965

1. (f)
Expected return = 0.05369
Variance = 0.13977
Weights for the 5 securities
0.16382
0.64578
0.14668
0.08552
-0.04180
1. (g)

Weights

Target mu Portfolio
AE
Aus Real Estate
Commodities
US Equity
Emerging Market Equity

2. (a)
Expected returns:

AE
Aus Real Estate
EE
US Equity
Emerging Market Equity
Gold

Variance-Covariance matrix:

0.02642
0.06294
0.01501
0.06064
-0.03175
-0.02575

0.04051
1.45934
0.30093
0.29364
-1.09442

0.15000
0.04051
1.45934
0.30093
0.29364
-1.09442

0.20575
0.12176
0.16230
0.13320
0.18582
0.04400

0.1217
6
0.1627
0
0.0973
4
0.0621
1
0.1157
4
0.0228
4

0.16230

0.13320

0.09734

0.06211

0.28964

0.20524

0.20524

0.64263

0.23241
0.01082

0.17280
-0.02780

0.1858
2
0.1157
4
0.2324
1
0.1728
0
0.3417
3
0.1312
1

0.04400
0.02284
-0.01082
-0.02780
0.13121
1.53745

2. (b)

A
B
C

7.74325
0.39815
0.05894

Target
up

0.15000

Delta

0.29788

Lambda
Gamma

-0.00262
2.56258

2. ( c )
0.4
0.3
0.2
new MVS
0.1

old MVS
Securities

0.0
0.2

0.4

0.6

0.8

1.0

1.2

-0.1
-0.2

Securities
AE
Aus Real Estate
EE
US Equity
Emerging Market
Equity

0.026
42
0.062
94
0.015
01
0.060
64
0.031

0.453
60
0.403
36
0.538
18
0.801
64
0.584
57

0.205
75
0.162
70
0.289
64
0.642
63
0.341
73

1.4

1.6

75
0.025
75

Gold

1.239
94

1.537
45

2. (d)

Expected return = 0.05142

Variance = 0.12914
Weights for the securities
0.14618
0.60450
0.19605
0.08393
-0.11414
0.08347
G MVP x*
0.14618
0.60450
0.19605
mu G

0.05142

0.08393
-0.11414

Sigma^2(G)

0.12914

e)

0.08347

target mup
AE
Aus Real Estate
Commodities
US Equity
Emerging Market
Equity

Weights

Gold

f)

0.03123
1.44936
0.32488
0.29514

-1.13833 -1.13833
0.03772 0.03772

with gold
X*

Mu

0.15000
0.03123
1.44936
0.32488
0.29514

without gold
0.03123
1.44936
0.32488
0.29514
-1.13833
0.03772

0.15000

X*

0.04051
1.45934
0.30093
0.29364
-1.09442

0.15000

Sigma P

0.61787

reduction (sd)

0.61965
0.00178

The Reduction in risk that can be achieved by adding gold is 0.00178 (0.178%).
3. (a)
0.40000
0.30000
0.20000
MVS
0.10000

OLD MVS
Tangency Portfolio

0.00000
0.00000

0.50000

1.00000

1.50000

2.00000

-0.10000
-0.20000

3. (b)

Tangency Portfolio
mu(Tangency Portfolio)
x*T AE

Weights

0.00631

Aus Real Estate

1.63249

EE

0.35280

US Equity
Target Mu P
Emerging Market
AE Equity
AusGold
Real Estate
EE

x0

Riskfree

3. ( c )

0.34091

US Equity
Emerging Marketsigma^2(T)
Equity
sigma(T)
Gold

3.( d )

0.17137

0.15000

0.00547
-1.36032
1.41632
0.02781

0.00547

0.30609
0.00000
0.29577
-1.18019
0.50315

0.30609
0.29577

1.41632

0.70933
0.02412

-1.18019
0.02412

0.13241

0.13241

With Rf
X*

0.00547
1.41632
0.30609
0.29577
-1.18019
0.02412

Mu
sigmap
Reduction
Standard
Deviation

0.15000
0.61540

Without RF
X*

0.03123
1.44936
0.32488
0.29514
-1.13833

0.15000
0.61787
0.00247

The reduction in risk that can be achieved by adding the risk-free asset bond to the portfolio
of six risky assets is 0.247%.

4. (a) and (b)

0.40000

0.30000

0.20000
MVS with SS allowed
0.10000

MVS without SS allowed

Securities

0.00000
0.00000

0.50000

1.00000

1.50000

2.00000

-0.10000

-0.20000

4.( c )
Target
mu(p)

-0.0318

AE

AUS RE

EE

US Equity
EME
Gold

Sigma P
Target
mu(p)

-0.0300 -0.0200
-0.0100
0.01771 0.136681
0.20323
71
3
77
0.001248
0.05964
6
66
0.063548
0.07709
1
32

1.0000
000
0.5561
467

0.198123
7
0.153659
3
0.107555
1

0.0100
0.19301
04
0.24767
17
0.13801
66

0.86204
85
0.12023
44

0.679999
3
0.118522
8

0.54736
37
0.11265
87

0.432949
5
0.107712
5

0.31853
52
0.10276
61

0.55614
67

0.514532
9

0.47797
44

0.445255
4

0.41683
55

0.0300
0.17115
70
0.42093
97
0.16805
44
0.03804
41
0.10838
94
0.09341
55

0.0400
0.15949
60
0.50664
18
0.18112
31
0.05946
85
0.00449
62
0.08877
44

0.0500
0.05602
90
0.67551
04
0.10022
27
0.10219
17

0.0600

Gold

0.0200
0.18281
82
0.33523
74
0.15498
56
0.01661
96
0.21228
27
0.09805
65

Sigma P
Securities

0.39345
29
Mu

0.37559
31

0.36405
24
sigma

AE
AUS RE
EE
US Equity
EME

0.0629
4

0.8281
868

0.00000

0.1423
205

0.00000

0.06604
62

0.0294
927

0.00000

0.36274
60

0.3761
300

1.00000

0.00000

0.00000

0.40336

AE
Aus Real Estate

0.02642
0.06294

0.45360
0.40336

0.20575
0.16270

EE
US Equity
Emerging
Market Equity
Gold

0.01501
0.06064

0.53818
0.80164

0.28964
0.64263

-0.03175
-0.02575

0.58457
1.23994

0.34173
1.53745

4.(d)

Range
Security

Emerging market
Aus RE

Lowest

Highest
-0.03175
0.06294

The range of value where the short selling constraint is not binding is shown by these two
curves. The range of the lower boundary of returns for which the short sales constraint is not
binding is approximately between -3.175% to 6.294%.
4.(e)
End points are
100%
investment in:
Emerging Market
Aus RE
One cant achieve higher or lower expected return, than the highest or lower expected
return among the securities without short selling, this means that the end points on the MVS
becomes 100% investment in the security with the highest and lowest expected return. In
this case this is Aus RE and Emerging Market.