Asx Portfolio Assignment

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Executive Summary

The objective of this report is to construct and evaluate two portfolios, index tracking portfolio and speculative capital growth portfolio both began their lives on 21st April 2008 and ended on 20th May 2008. The purpose of the former portfolio is to replicate the return on the ASX/S&P 500 New All Ordinaries price index and the latter one is formed aiming at outperforming the market and maximizing the capital gains.

11 stocks have been selected for the tracker portfolio. The criteria for such selection are through capitalization-based sampling and stratified sampling. For capital growth portfolio, 8 stocks representing five major Australian industry sectors have been selected. Brief overview of all selected companies can be found in the appendix.

Next, both portfolios are evaluated using three performance measures: Sharpe’s Index, Treynor’s Index and Jensen’s Alpha. Over the observation period, the both portfolio has modestly replicated the AOI and the performance of capital growth portfolio is relatively better than Index portfolio.

Part 1 Comparison of Growth Rate of the portfolios and the market

Index Tracking Portfolio
Overview
The purpose of Index Tracking Portfolio is to find a selection of shares, within a manageable number, where the performance of the portfolio can match with or out perform the performance of whole market. Three major aspects, market capitalization ratio, company’s historical share price performance and industry’s performance, were used to decide the portfolio composition. Eleven shares were selected from ASX50 and this portfolio will be analyzed, discussed and compared with ASX All Ordinaries Index performance in this report.

Portfolio Composition

Steps to construct the Index Tracking Portfolio
Portfolio was developed with following steps:
1.Collected ASX50 companies’ market capitalization rate and industries information for each company. 2.Briefly analyzed each company’s financial information, divided the companies into separate industry group, and sorted them in the order of market capitalization rate. 3.Calculated daily compound rate of return for all ASX50 stocks for the period of 2nd April 2007 to 18th May 2008 4.Calculated the annual average return for each of the ASX50 and the market annual average return. 5.Base on the information found from previous steps, eleven shares have been chosen for the Index Tracking Portfolio. 6.Used portfolio function, BCOVARIANCE, to build a covariance matrix for the selected shares. 7.At last, used portfolio function, BWSSN, to find the weighting of each stock in the portfolio.

Capital Growth Portfolio
Overview
The aim of setup a capital growth portfolio is to maximize the total capital in the projected period, one month in this report. In order to achieve this goal, different approach was carried out, by analyzed shorter period of historical data to provide more sensitive result; disregarded the industry grouping information; ignored the market capitalization rate; and chose the shares will highest annual average return in the period. Ten shares have been selected to comprise the Capital Growth Portfolio.

Portfolio Composition

Steps to construct the Capital Growth Portfolio
Portfolio was developed with following steps:
1.Calculated daily compound rate of return for all ASX50 stocks for the period of 1st December 2007 to 18th May 2008 2.Calculated the annual average return for each of the ASX50 and the market annual average return. 3.Base on the information found from previous steps, chose ten shares with highest annual average return in the ASX50 to form the portfolio. 4.Used portfolio function, BCOVARIANCE, to build a covariance matrix for the selected shares. 5.At last, used portfolio function, BWSSN, to find the weighting of each stock in the portfolio.

Part 2 The daily value of the portfolio; growth in the dollar value of each you’re your...
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