You are working in the investment team of a wealth management company “Invest ‘Em All Asset Management”. Your team is developing some trading strategies for a mutual fund. The strategies are based on Markowitz’s mean-variance portfolio optimisation. You are constructing several portfolios in your analysis. Write a report of your findings to the senior management.
Use the data file provided in the following analysis. The data file contains daily adjusted closing prices of ASX50 Index and its constituents from Jan 2019 to Dec 2020. Prices are dividend adjusted. Write a report of your findings to the senior management. Address the following. Tasks:
1. Discuss background information of Markowitz’s mean-variance portfolio optimisation framework, including model assumptions, economic theories, etc.
2. Using the data provided, calculate daily log returns and estimate the model parameters. Ignore any non-trading days. Assume there are 252 trading days in one year.
3. Construct the following portfolios:
a. Global Minimum Variance (GMV) portfolio using the 50 constituents (Short selling allowed);
b. Optimal portfolio using the 50 constituents (Short selling allowed); Assume the risk-free rate in the analysis period is % . flat.
4. Graph the followings:
a. The efficient frontier of portfolios containing risky assets only.
b. The efficient frontier of portfolios containing risky and risk-free assets.
5. Report the weightings, expected returns, standard deviations and Sharpe ratios of the portfolios in task 4. The performance statistics should be annualised. Comment on the results.
6. Discuss the difficulty of practical implementation of the above portfolios.
7. Conclusion, suggestions, and recommendations.
