BUSINESS SCHOOL
FINANCIAL MODELLING-ASSESSED INDIVIDUAL ASSIGNMENT
(VALUE: 75% OF 15 CREDIT MODULE)
SET BY:
DR. JANE SHEN
Date handed out: 9th July 2010
Deadline: 12.00 Noon 30th July 2010
Maximum Word Length: 3,500
Penalties for late submission:
The policy of the School of Business and Economics is that assignments submitted 2 weeks late will be awarded a mark of 50, assignments submitted after this time will be awarded a mark of zero (see your module handbook).
BEAM046 Financial Modelling
Assessed Individual Assignment
(100 per cent of 15-credit module)
You are a manager in a mutual fund company and you have been tasked with setting up a new, actively managed fund, called the Dow-Jones Plus fund. The fund’s investments are drawn from the constituents of the current Dow-Jones Industrial Average (DJIA) Index, but can comprise no more than five individual stocks. Your task is to construct the fund portfolio (i.e. choose the stocks that the fund will invest in, and establish the investment weights in each stock). You will need to provide evidence on the fund’s performance and its risk characteristics over an evaluation period. Your objective is to (a) outperform the DJIA index over the evaluation period and (b) to outperform the appropriate style benchmark portfolio over the investment period (i.e. to outperform a passive investment in a portfolio that has the same investment style as the Dow Jones Plus fund).
Task 1
Assume that today is 1 February 2009. Construct the fund portfolio by selecting five stocks from the DJIA index constituents. (The DJIA constituents can be found on http://finance.yahoo.com under the ^DJI ticker). With these stocks, first construct an optimal passive fund, using standard portfolio theory, employing historical data to estimate the inputs to the portfolio optimisation process. Use the yield on a three month zero-coupon bond as an estimate of the risk-free rate.
Task 2
You should be aware that the use of sample estimates as the inputs to the optimisation process may lead to very noisy estimates of the true values of these inputs, and will consequently give rise to poor performance of the fund. Apply at least one technique to reduce the effect of this estimation error.
Task 3
Assume that today is 1 February 2010, one year after the Dow Jones Plus fund started. Evaluate the performance and style of (a) the fund from Task 1, (b) the fund from Task 2. In analysing the styles of the two funds, you should consider style indices for size and value/growth. As a proxy for the style indices, you should use the appropriate exchange-traded funds (ETFs) that can be found on Yahoo Finance under Investing/ETFs. In assessing the performance of the Dow Jones Plus fund, you should provide a detailed analysis of its risk.
Note
• For the purpose of this assignment, you will NOT be evaluated in terms of the fund’s performance. Instead, you will be evaluated in terms of the techniques that you employ and your justification for using those techniques. In particular, actively managing your fund simply by choosing to overweight one or more stocks that subsequently performed well during the evaluation period will NOT give you an advantage. Try and place yourself in the position of a fund manager at 1 February 2009.
• Your report should contain sufficient detail such that your results can be replicated exactly.
• You should explain and discuss the theory behind your model. You should critically discuss your results, highlighting the limitations of your approach, and make suggestions for improving the analysis.
• Your report should be professionally presented. You can find examples of research reports on the websites of a number of financial institutions. Remember, however, that this is an academic assessment and so you need to also abide by the rules on citation and referencing.
• You should not include Excel screen prints in your report. All results should be properly tabulated or charted.
• The word limit does NOT include the executive summary, tables, figures, footnotes, equations or references, but DOES include appendices. The ability to convey research findings concisely are an important skill in the real world.
• A word count must be included on the first page of your reported. Five marks will be deducted if you exceed the word limit.
• Together with your written report, you should submit a CD containing (a) your calculations and (b) your report.
Deadline: 12.00 noon Friday 30th July 2010
Please submit your completed assignment to Xfi G14 by the deadline. Each assignment must be accompanied by a BART submission form. Details about downloading this are included in the module handbook on web-ct.
Under no circumstances should assignments be left in the lecturer’s/administrator’s post box or pushed under doors. It is your responsibility to ensure that you manage you time efficiently to ensure that deadlines are met.
An electronic copy should also be submitted online via WebCT/BEAM046/Group Assignment/Turnitin by the above deadline. The instruction on how to use Turnitin can be found on the WebCT/All University – Gateways (Resources to Explore)
This is an assessed piece of work that will account for 100% of the total marks available for this course.
ASSIGNMENTS
What is being assessed?
The assignment assesses written achievement in at least one of the aims stated above in this document.
Your assignment will be assessed using the following set of criteria:
• Problem definition: Is the problem that the model is trying to solve well defined? (You could include a description in your model to explain the problem and how your model is structured to solve the problem.)
• Model integrity: Are there any logical or other errors in the model? Does the model break down when different inputs are used?
• Modelling techniques/skills: Are the techniques used appropriate for the problem? Is the model built in a proficient manner? Has the model incorporated skills/techniques covered in the course?
• Presentation: Is the model easy to use and follow? Does the model look professional?
• Level of difficulty: This criterion is included to discourage attempts to trivialise the exercise rather than to encourage the selection of difficult problems. Most models that are genuine attempts to solve a reasonable problem will not have marks added or deducted under this criterion. However, there will be a heavy penalty for models that are trivial and require minimal efforts to complete.
• Note that your assignment mark is awarded based on the written report. The spreadsheet is used simply for checking the results that presented in the report.
The Department expects all assessed Assignments to be completed by using the Computer facilities. Hand-written work is not acceptable.
CHEATING AND PLAGIARISM
Cheating and plagiarism are totally unacceptable and will result in disqualification.
‘The University treats very seriously any case of a student attempting to seek unfair academic advantage through plagiarism or cheating’. Extract from Plagiarism and Cheating issued by the Academic Secretary, August 1996.
For further information:/
and refer to Section 4, Cheating and Plagiarism, in Part 1 of your programme handbook.
Information about how to reference correctly can also be found on the School intranet