Plot the Capital Allocation Line (CAL) - Case Study Assignment

Answer the following case study and submit your response and workings in Word (PDF) and Excel file. Excel file should ONLY contain calculation (functions and formulae). You MUST tabulate these calculation results and present your response to theoretical questions in Word (PDF) file. The Word (PDF) submission can be formatted as Q&A or essay. 

The submission requires both Word (PDF) and Excel files. Submisson with either Word (PDF) or Excel file will lose marks for corresponding parts.

It is important that you conduct this work on your own as you will submit to Turnitin. High similarity rate will be investigated and penalized accordingly.

Case Study:

Choose any two stocks from Table 1 that you like. Make sure that the two stocks you chose are in different industries. Assume that the risk-free rate is 2.5% per year and the forward-looking market return is expected to be 9.5% per year. Consider the following:

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Table 1 Stock list

A. Go to Yahoo Finance Links to an external site.and download their daily historical adjusted closing prices between 30 September 2020 to 30 September 2022. Make sure that you use the adjusted closeprice, as it incorporates dividends and stock split. Also, go to S&P website Links to an external site.to download the total return index of S&P500 (click here for an example from Australian Market. Choose 'total return' and click 'export' to download) as of the same period. Note that these are prices/index levels from which you need to calculate returns.

1. Based on the daily adjusted closing prices or index levels, calculate the daily returns, standard deviations, and correlationsof these two stocks and S&P500, i.e. the market portfolio, during the same period.
2. Using the daily returns over the sample period, calculate the betas of the two stocks.
3. Using CAPM, calculate the expected returns of these two stocks, using betas you calculated above. (8 marks)

B. Use the annualizedstandard deviations and correlation of these two stocks from Section A Part I, as well as the annual expected returns of two stocks produced in Section A Part III as parameters to construct an efficient frontier with 12 - 14 portfolios. You need to identify the minimum variance portfolio and optimal (tangent) portfolio. For all portfolios, you need to tabulate weights in each stock, portfolio's return, standard deviation, and Sharpe ratio. Be as exact as you can. (12 marks)

C. Plot the capital allocation line (CAL). Briefly explain the implication of your CAL, using numbers and values created from your findings above. (6 marks)

D. Compare relevant risk and return metrices of these two individual stocks and the tangent portfolio. Based on your findings, are you able to achieve diversification benefits and why? (4 marks)