Apply the principles of modern portfolio theory when making a rational investment decision

MBA7006 – Finance of International Business

PORT1 – Portfolio Creation S2 2020 (70%)

AIMS

The aim of the assessment is to provide students with a working understanding of the portfolio theory through creating and managing a portfolio from internationally traded assets. The students are also required to critically evaluate the portfolio performance from the knowledge and skills learned from the module.

LEARNING OUTCOMES

On completion of this coursework, students will be able to:

1. Apply the principles of modern portfolio theory when making a rational investment decision.
2. Critically evaluate the effectiveness of portfolio evaluation techniques and apply the various approaches to the portfolio.
3. Demonstrate an ability to access, analyse and interpret data.
4. Create an investment portfolio and confidently present their work to prospective investors.
5. Develop critical and analytical skills and the ability to work independently.

ASSESSMENT REQUIREMENTS AND INSTRUCTIONS

1. There are THREE sections on the assessment. You must attempt all sections. The total mark for all sections is 100 marks.
2. You must show all appropriate working using EXCEL and present all spreadsheets as an Appendix in the report. There must be a clear reference made to the content of your work.
3. The report can only be completed by you. An assignment feedback form must be attached at the front page after the cover sheet of your report. A copy of the assignment feedback form can be downloaded from:

http://www.cardiffmet.ac.uk/registry/academichandbook/Documents/AH1_04_02.doc

1. The University takes unfair practice seriously. Unfair practice can take many different forms. Plagiarism is only one example. The University defines plagiarism as using without acknowledgement another person’s words or ideas and submitting them for assessment as though it were one’s own work, for instance by copying, translating from one language to another or unacknowledged paraphrasing. Further information on plagiarism can be found in:

https://www.cardiffmet.ac.uk/registry/Pages/Plagiarism.aspx

The other examples of unfair practice are collusion and fabrication of data. The University defines collusion as when work that has been undertaken by or with others is submitted and passed off as solely as the work of one person. This also applies where the work of one candidate is submitted in the name of another. Where this is done with the knowledge of the originator both parties can be considered to be at fault. Fabrication of data can be defined as making false claims to have carried out experiments, observations, interviews or other forms of data collection and analysis, or acting dishonestly in any other way.

Unfair Practice is regulated under the Academic Handbook that are explained in:

http://www.cardiffmet.ac.uk/registry/academichandbook/Pages/Ah1_08.aspx

1. The report must be submitted as a single Word file. It must be uploaded to the Moodle on 4 May 2020 (Monday), 3pm.

All sources of references cited in the text should be acknowledged (preferably using Harvard style of referencing). Paper size is A4 with margin in all directions of 2.54cm and font size 12. Line spacing may be single or 1.5 times. Format of the report:

1. Section Heading

                                      i.      The numbering of headings will be in Arabic numerals.

                                    ii.      Headings will be located at the left margin.

                                  iii.      Headings may be in capitals or a combination of upper and lower case (i.e. Capitalise the First Letter of Main Words).

1. Table /Figure Heading

                                      i.      Tables /Figures must be numbered (e.g. Figure 1 or Table 1).

                                    ii.      Every table /figure will have a title.

                                  iii.      The title will be located at the left margin.

                                   iv.      The title may be in capitals or a combination of upper and lower case (i.e. Capitalise the First Letter of Main Words.

The report (including text, formulas, all tables and diagrams; excluding cover page, content page and list of references) must not exceed 3000 words.  A word count must be stated at the end of your report. Anything beyond this will be ignored in the assessment process.

GUIDANCE ON ASSESSMENT MARKING

The postgraduate general band descriptors for guidance on assessment marking can be found in:

https://www.cardiffmet.ac.uk/registry/academichandbook/Documents/AH1_04_03.pdf

ASSESSMENT TASKS

You are a fund manager of an investment bank in the UK. You are planning to construct a portfolio using the following currencies: USD/GBP, EUR/GBP and AUD/GBP. You wish to examine and critically evaluate the performance of these currencies for the past three year. For this purpose, you are required to conduct some analyses and write a 3000-word report.

PART A (40%)

1. Use Bloomberg or Bank of England and any other websites that offer historical spot foreign exchange data to extract the daily closing currency values for the most recent three year (e.g. 31 January 2017 to 31 January 2020).
2. Calculate the following:

(a)   The daily rate of returns for each of the currencies. Visually examine the performance of the value of the currency and the daily rate of returns for each of the currencies by showing the data on graphs or charts as appropriate.

(b)   The mean returns for each of the currencies.

(c)    The variance and standard deviation of returns for each of the currencies.

(d)   The covariance of returns between each pair of the currencies.

(e)   The correlation coefficients of returns between each pair of the currencies.

1. Based on your results from (a) to (e) and any further analysis you may wish to do, compare and comment the risk and return patterns and characteristics for each of the currencies. Your comments should draw on materials and theories you have learnt in this module. Relate the performance of the currencies to relevant events (e.g. economic, financial or political events) that took place during this period and discuss how they had influenced the performance for each of the currencies. You must give bibliographic references to the sources of your information.

PART B (40%)

This section requires you to construct an equally weighted portfolio of the currencies selected above.

1. Calculate the following:

(a)   The daily rate of returns of the portfolio. Visually examine the performance of the returns for the portfolio and each of the currencies by showing the data on graphs or charts as appropriate.

(b)   The mean, variance and the standard deviation of the portfolio returns.

(c)    The covariance and correlation coefficients of returns between each currency and the portfolio.

(d)   The coefficient of variation of returns for each currency and the portfolio.

1. Based on your results from (a) to (d), examine and compare the performance of your equally weighted portfolio returns with those of the individual currencies. Comment on your observations, relating to the portfolio theory, and discuss the benefits of diversification across these currencies. You may also apply the portfolio evaluation techniques to evaluate critically the performance of your portfolio with those of the individual currencies.

PART C (20%)

This section requires you to draw a conclusion of the portfolio construction and analysis above.

From the viewpoint of a fund manager who wishes to determine whether the currencies that you examined are worth investing in, how useful is the portfolio analysis that you carried out? What limitations do you see in your analysis and results? What further analysis would you wish to carry out?

~ THE END ~

MBA7006 – Finance of International Business