portfolio optimization

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Group Coursework

This coursework explores portfolio optimization using Python. Students are free to organize their own groups. Each group should consist of at least 5 students and cannot exceed 6 students. The assignment will be uploaded on the LearningMall on March 31. The assignment will due on May

11. The late submission penalty will follow University guidance. When submitting your assignment, you need to submit a compressed file with your Python code and all the data files. You need to ensure that your program can be directly executed by changing the file directives. Please rename your file as ECO308_Group Number.

Part 1: Optimal Portfolio with Two Assets

1. Calculate the optimal allocation of assets , Hong Kong Hang Seng Index and S&P500, in a portfolio for a given risk-free rate using daily data. Assume the risk-free rate is 2.5%. (20 points)

a. You need to download the historical daily closing prices for the Hang Seng Index and S&P500 Index through Wind API using WindPy package from January 1, 2000 to December 31, 2023. The ticker for S&P500 is SPX.GI and ticker for Hang Seng Index is HSI.HI. When you submit your code, please ensure data can be correctly extracted through WindPy.

b. Calculate return and covariance matrix and plot the efficient frontier of these two assets.

c. Find the optimal portfolio weights that maximize the Sharp Ratio when risk-free rate is 2.5%. The portfolio only consists S&P500 and Hang Seng Index.

You can use trading floor to access WindPy. Please ask trading floor assistant for WindPy access.

The TF assistant will help you install WindPy API.

2. Find the Fed Funds rate data and divide the sample period into rising Fed Funds rate period and declining Fed Funds rate period. Recalculate the optimal allocation for each sub-period using the same risk-free rate, 2.5%. Analyze how changing interest rateenvironments impact the optimal allocation. (20 points)

Part 2: Adding a Third Asset

3. Add a third asset like gold into your portfolio. (The ticker in Wind for gold is SPTAUUSDOZ.IDC) Plot the efficient frontier for these three assets. Compare with the two assets case, explain how adding another asset changes the efficient frontier. (20 points)

4. Find the optimal portfolio allocation with the same risk-free rate, 2.5%. Conduct your analysis based on full sample period without dividing your sample into two sub periods. (20 points)

Part 3: Yale Endowment Funds

5. David F. Swensen was the chief investment officer at Yale University from 1985 to May 2021. Mr. Swensen was responsible for managing and investing Yale's endowment assets and investment funds, which totaled $25.4 billion as of September 2016. Mr. Swensenpioneered the alternative investments. Please explain the benefit of alternative investments. (20 points) (Notice you can use graphs to help your explanations, please keep your answer less than 300 words.)

Marking Rubric
Replicability (30%):
1. Code clarity, correctness, and proper documentation.

2. Clear instructions for code execution and clear instructions for replication.

3. Functionality can be reproduced by the instructor.

The WindPy package should enable the instructor to replicate your results without downloading your dataset.

Soundness & Quality of Analysis (70%):

4. Calculations & Technique: Accurate returns, covariance calculations, optimal portfolio weights, Sharp ratio of optimal portfolio, and optimization methodologies.
5. Interpretations: Explanations on the impact of interest rates, diversification benefits, and the role of alternative investments.
6. Communication: Clear report structure, explanations, and visualizations.
7. Complaints of free-riding problems by other team members will be investigated and the points awarded to a verified free-rider will be adjusted according to the severity of the problem.

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