Asset Pricing

QUESTION

Select any 10 stocks from the FTSE 100 Constituent List (Data is available on the Learning Central).

1. Use the cut-off rate (C*) approach to construct the optimal portfolios for the period from 01/01/2011 to 31/12/2012.

You are required to calculate the percentage invested in each stock (X_i), the expected return (R ¯_P) and the standard deviation (σ_P)of the optimal portfolio under each of the following scenarios:

1. Risk-free lending and borrowing is allowed, but short-selling is not allowed.
2. Risk-free lending and borrowing as well as short sales (standard definition) are allowed.
3. Risk-free lending and borrowing as well as short sales (Lintner's definition) are allowed.

2. Use the single-index model to assess the performance of each of the three optimal portfolios in part (1) over the period from 01/01/2013 to 31/12/2013. Discuss your results.

3. Assume that at least one of the three optimal portfolios in (2) generates a significantly positive abnormal return. Can this finding be used as evidence against market efficiency? Support your answer with the relevant theoretical and empirical literature.

4. Use the single-index model to estimate the Betas for each of the 10 stocks in your sample for the periods from 01/01/2010 to 31/12/2010 and from 01/01/2011 to 31/12/2011.

5. Use Blume's (1975) technique to predict the stock Betas for the period from 01/01/2012 to 31/12/2013.

6. Compare the Betas generate from Blume's technique (part 6.) with those obtained from the single-index model for the period from 01/01/2012 to 31/12/2013. Discuss your results.

Attachment:- Coursework Assignment.rar