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Assignment portfolio

Uploaded by

fa23-baf-063
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment: Portfolio Optimization Using Historical Stock Prices (20 Marks)

Submission Type: Group Submission (Max 4 students per group)


Submission Requirements: Word Document (500–1000 words) with screen shots of Excel workings + Excel
Sheet

Objective
The goal of this assignment is to apply portfolio optimization techniques to construct a minimum-risk portfolio.
Students will:

1. Download and analyse monthly stock prices of 10 companies listed on the Pakistan Stock Exchange (PSX)
over the last 5 years.
2. Calculate monthly returns and create a variance-covariance matrix.
3. Use Excel's Analysis ToolPak and Solver to determine optimal portfolio weights based on targeted risk.
4. Justify the choice of companies from different sectors, emphasizing diversification benefits.

Assignment Tasks

Part 1: Data Collection


Select 10 companies listed on the Pakistan Stock Exchange (PSX) from different sectors. Ensure the sectors
represent a broad cross-section of the economy (e.g., banking, energy, textiles, technology, pharmaceuticals,
etc.).
Download monthly stock prices for the past 5 years (e.g., January 2019 to December 2023) using resources like:
Investing.com
PSX Official Website
Any other reliable financial data source.

Part 2: Data Analysis in Excel


Calculate Monthly Returns:
Use the formula:
Rt=Pt−Pt−1/Pt−1
where Rt is monthly return, Pt is the stock price at the end of month t, and Pt−1 is the stock price at the end of
the previous month.
Organize the monthly returns for all 10 companies in an Excel sheet.

Compute Variance-Covariance Matrix:


Use Excel's Analysis ToolPak to compute the variance-covariance matrix for the monthly returns of the
selected companies.

Construct a Portfolio:
Use Solver in Excel to find portfolio weights that minimize risk (variance of portfolio returns) for a given level
of expected return.

Formula for portfolio variance:


σ2p=wTΣw
where w is the weight vector, Σ Sigma is the variance-covariance matrix, and σ2p is the portfolio variance.

Part 3: Report Writing


Prepare a Word document that includes the following sections:

1. Introduction
Explain the concept of portfolio optimization and its relevance in financial risk management.
Highlight the importance of diversification and selecting companies from different sectors.

2. Data Collection and Methodology


Describe the process of selecting the companies and obtaining historical stock prices.
Justify the inclusion of companies from different sectors based on diversification principles.

3. Calculations and Portfolio Construction


Summarize the steps taken to compute monthly returns and variance-covariance matrix.
Explain how Solver was used to optimize portfolio weights for minimum risk.
Include screen shots of Excel calculations (monthly returns, variance-covariance matrix, Solver setup, and
optimized weights).

4. Analysis and Discussion


Discuss the portfolio weights derived from Solver.
Highlight the impact of diversification on portfolio risk and return.
Compare the risk and expected return of the optimized portfolio with an equal-weighted portfolio.

5. Conclusion
Reflect on the key learnings from the assignment, particularly regarding the relationship between risk, return,
and diversification.

Submission Requirements
Word Document:
Length: 500–1000 words.
Must include screen shots of Excel workings (monthly returns, variance-covariance matrix, Solver results).
Excel File:
Must contain all calculations (monthly returns, variance-covariance matrix, Solver optimization).

Data Sources:
Investing.com
PSX Official Website
Any reliable source for historical stock prices.
Excel Tools:
Analysis ToolPak for statistical calculations.
Solver for portfolio optimization.

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