practicing asset pricing models.

Investment. Portfolio construction and optimisation

Part A

You are required to select 10 stocks from FTSE100 constituent companies to construct an optimal portfolio[1]:

1. Construct two efficient portfolios, with

a. Short sales allowed

b. Short sales not allowed

c. Short sales not allowed and the maximum weight of any individual stock in the portfolio is restricted to 25%

(30 marks)

2. Solve for and plot the efficient frontier

(10 marks)

3. Solve for the optimal portfolio, its return and risk, and the weights of the 10 stocks (some can be zero) in the portfolio; plot the “Capital Market Line”

(20 marks)

Part B

You are required to support your selection of stocks with the learned theories. In particular:

1. Discuss how you may incorporate and apply various equity portfolio management strategies with regard to the above exercise.

(20 marks)

2. Discuss how you may apply industry analysis and security analysis to your portfolio construction and active management.

Due to the economic downturn, recent data may not fit rational portfolios properly. The student can choose a time period she or he regards appropriate for this work.


Part A is for reflecting the general knowledge in portfolio theory and portfolio construction in terms of Markowitz and Sharpe. It is also for practising the student’s implementing and technical skills, including matrix operations and the use of Excel for financial and investment analysis. A1 is the most basic but can be rather problematic, as bizarre weights can common encounters. While A1 may have reminded the student of the way of implementing this kind of study, A2 tests the ability of the student to apply the theory skilfully, so the task can be fulfilled efficiently. A3 leads the student from performing portfolio construction

The student is required to support her or his selection of stocks with the learned theories in Part B. The student may discuss how to incorporate and apply various equity portfolio management strategies, industry analysis and security selection techniques, to her or his work in Part A. The student may recommend a way in which the portfolio’s performance may be improved under various circumstances without further empirical work with new and/or additional data. The student may also actually implement the strategy or apply the approach, e.g., replacing some of the stocks in the portfolio by some newly selected stocks on FTSE100. While the student is encouraged to support her or his work in Part B empirically, additional data analysis does not necessarily warrant a higher mark.


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