Finance

FINC5001 Major Assignment — Group Report

1. Executive summary This report will focus on two stocks from different industries, National Australia Bank (NAB) and Woolworths (WOW), which are selected from the list of the Australian Securities Exchange (ASX). The report will firstly calculate the data selected, and then analyse the expected returns and risk of various portfolio combinations, using two different approaches, Mean Variance approach and Capital Asset Pricing Model approach. Referring to academic literature with theoretical knowledge, this report will critique both approaches after analysing the assumptions behind each model. Finally, the report aims to recommend an optimum portfolio from the portfolio combinations considering minimizing the risk and maximizing the return for the investors.

2. Justification of the data under both approaches 2.1 The selection of the stocks In order to constitute an optimum portfolio, stocks from different industries should be considered, which leads to the low correlation between the two stocks, thus the risk can be spread. Therefore, NAB and WOW are selected. NAB is one of the ‘Big four’ banks in Australia, with the activities of banking services as well as investment and wealth management. However, WOW is one of the leading retailers, with the operations including food, liquor, petrol, and consumer electronics. 2.2 The period and sample horizon In order to generate the optimum result of analysis, the data from October 2001 to August 2011 are collected. Brailsford, Faff and Oliver (1997) indicates that sufficiently large samples are needed for the purpose of reliable estimation, however, they states that historical data of many years should be avoid because that samples from the past years will lessen the relevance of the entire data to the current market. Therefore, they suggest that approximate 50 data can be considered, which equals that samples can be collected monthly for the previous five years (Brailsford et al.,...