Requirements- 1500 words strict Download the spreadsheet from Blackboard that contains the monthly returns on five equity securities between January 2007 and July 2012. All returns are measured monthly, and are expressed in decimals (not percentages). The current risk-free rate is 3.5% per annum. Expected returns are to be calculated using a historical average over the full sample. Assume that utility functions are of the form: U = E(R)??As2. There are two investors. Harry has a risk aversion coefficient (A) of 5, and Eugene has a risk aversion coefficient of 12. You are required to determine the composition of the portfolio that will maximise each investor?s utility if there is unrestricted investment in the five stocks. You are also able to borrow and lend at the risk-free rate. You will need to undertake additional analysis to determine how the portfolio weights change if short-selling is not permitted. Furthermore, how do the portfolio weights change if the expected return is 1% per month for WOW and is 1% per month for RIO, rather than those estimated from historical returns? Report Structure Your report will need to address the following questions, at a minimum, ensuring you explain how you achieved the result:? What are the expected returns, variance and covariance estimates for the five stocks?? What are the optimal weights of the securities in each investor?s optimal portfolio under the different scenarios?? How do you determine these portfolio weights?? Discuss the differences in the weights among the different portfolios. Why do these differences exist?? Discuss the limitations of the mean-variance optimization to portfolio construction that your results identify.? Marks will be awarded for the clarity of your discussion and the structure of your report. Please use graphs and tables to support your discussion. Please paste a?picture? of your excel workings in an appendix to the report. Please do not include the raw data in the appendix. Please use 12pt font with 2cm margins and include all references in a bibliography. Excel spreadsheets need to be submitted via the link in Blackboard.
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