Markowitz Application on Ftse All Share Index

Part A

For this project a time-series of 40 years was selected to calculate the nominal and real

prices / returns of the broad-based FTSE All-Share Index. Due to the fact that in the late

1990’s and especially in the years after 2000, the world economy was hit by some major

shocks, which might give a subjective view of real prices and returns, a rather long period of

40 years of quarterly data was seen sufficient enough to give an objective view of the past

stock market development. As it can be observed from the graph below, there was a huge

increase in nominal prices of the FTSE All-share index. However, if inflation is taken out of

the equation by using the quarterly GDP Deflator, the picture appears to be different. The red

line indicates the development of the FTSE All-share index based on real prices, which hardly

changed throughout the past years. Adjusted for inflation, the real index grew only by about

33% during the past 40 years. Therefore most of the growth in the index can be attributed to

inflation.

By analyzing the statistical figures from the nominal returns in the scatter plot below, it is

observable that it does not follow the normal distribution. With a skewness of about 1.53 and

a kurtosis of 15.37 the distribution for the time-series between 1972 and 2012 follows a

leptokurtic distribution with fat-tails. This goes in line with Eugene Fama’s Research (1965)

who stated that stock returns do have a tendency towards fat-tails.

40

Series: NOMINAL_RETURN

Sample 1 160

Observations 160

30

Mean

Median

Maximum

Minimum

Std. Dev.

Skewness

Kurtosis

20

10

0.022190

0.030141

0.768311

-0.280150

0.109732

1.538019

15.36556

Jarque-Bera

Probability

Figure 3

1082.460

0.000000

0

-0.2

0.0

0.2

0.4

0.6

0.8

Giving an outlook of the development of the UK stock market was probably never harder as it

is at the moment. From the early 1970’s onwards it could be observed that stock prices were

continuously rising with only small declines in prices occasionally....