Major Assignment

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The University of Sydney Business School

FINC 5001

Capital Markets & Corporate Finance

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Major Assignment

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Outline

Summary………………………………………………………………………………3 1 Introduction………………………………………………………………………….3 2. Mean-Variance Approach……………………………...……………………………4 2.1 Methodology……………………………………………………………………4 2.1.1 Sample Horizon…………………………………………………………….4 2.1.2 Measurement Interval………………………………………………………5 2.1.3 Portfolio Construction……………………………………………………...5 2.2 Results…………………………………………………………………………..5 2.2.1 Individual Stock Performance……………………………………………...5 2.2.2 Portfolio Performance……………………………………………………...6 2.3 Portfolio Theory Assumptions …………………………………………….……7 2.4 Criticize about Portfolio Theory…………………………………………….…..7 3. CAPM Approach……………………………………………………………………9 3.1 Methodology……………………………………………………………………9 3.1.1 Sample Horizon…………………………………………………………….9 3.1.2 Portfolio Construction—dividend inclusion……………………………….9 3.1.3 Market Index and Risk Free Variable……………………………………..10 3.1.4 Market Risk Premium…………………………………………………….10 3.2 Results…………………………………………………………………………10 3.2.1 Beta…………………………………………………………………….….10 3.2.2 Portfolio Results……………………………………………………….….11 3.3 Assumptions and Critical ……………………………………………………..11 3.3.1 Rational Expectations- Pandora's Box...………………………………….12 3.3.2 No Inflation on Interest ………………………………………..…………12 3.3.3 β is Valid or Not.. ...…….……...………………………………………….13 4. Recommendation…………………………………………………………………..13 References..…………….………………………………………………………….…15 Appendix 1 Mean-Variance Approach……………………………………………….18 Appendix 2 Portfolio Constructions…………………………………………………20 Appendix 3 BETA Calculations……………………………………………………...21

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GROUP NAME: RED WHALE

GROUP SID: 311142338, 311257267, 312011539, 420026686, 420022655

Summary

This paper examines the expected risks and returns of a two-stock portfolio with a variance interval of 2.5% in respective weight of the individual stock through two approaches (i.e. Mean-Variance Model and Capital Asset Pricing Model...