Economics: Techniques of economics analysis

Project 1: Optimal financial portfolio decision with application of linear programming and matrix algebra

The dataset for this project is contained in an Excel file named TEA-Project1.xlsx. The file contains the monthly share prices of five companies from 2005 to 2011. Using the dataset, complete the following tasks:
i) Calculate the monthly returns, the average monthly return, and risk (as measured by the variance of the monthly returns) for each company’s shares;
(5 marks)
that are used to calculate the results, as such procedures are self-evident in the submitted Excel file. The report should contain two parts: a conceptual part and an empirical part. The conceptual part must focus on the explanation of the technical concepts and their mathematical representation. The empirical part must present, interpret, and discuss the key findings.

Project 1: Optimal financial portfolio decision with application of linear programming and matrix algebra

The dataset for this project is contained in an Excel file named TEA-Project1.xlsx. The file contains the monthly share prices of five companies from 2005 to 2011. Using the dataset, complete the following tasks:
i) Calculate the monthly returns, the average monthly return, and risk (as measured by the variance of the monthly returns) for each company’s shares;
(5 marks)

ii) Suppose that a financial portfolio consists of all the companies’ shares with equal weights (i.e. 20% of the total fund is invested in each share), calculate the average monthly return and risk for the portfolio;
(10 marks)

iii) Suppose that the manager of the portfolio has an investment strategy that aims to minimise the portfolio risk subject to the constraint that the portfolio monthly return is no less than the portfolio monthly return with equal weights for all shares. With the help of the Solver facility in Excel, determine how much of the total fund should be invested in each stock; what happens to the allocation decision if the minimum required monthly portfolio return is 0.4%? (25 marks)

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