FIN 320: Fall 2020
Data: The data you need to complete this project can be obtained from any financial web
site (e.g., http://finance.yahoo.com). Another useful data source is Ken French’s Data Library (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data library.html).
I Portfolio Construction: Three Stock Portfolios
Suppose you had $100,000 to invest. Construct three stock portfolios, where each portfolio
contains at least 5 stocks:
1. A “näıve” portfolio: Construct a portfolio without utilizing any investment principles.
Please discuss briefly (Discussion 1) how you constructed the näıve” portfolio. Please
limit your discussion to one page of double-spaced text.
2. A “practical” portfolio: use the ideas discussed in Peter Lynch’s book to construct a
second portfolio. Explain clearly (but briefly) the ideas which motivated your decisions.
You must at least indicate the chapters and/or the page numbers from the text. For
full credit, you must indicate the “rules” (e.g., buy small stocks, never buy stocks with
high analyst coverage, etc.) you derived from Peter Lynch’s ideas. Please limit your
discussion (Discussion 2) to 3 pages of double-spaced text.
3. A “theoretical” portfolio: Applying the basic concepts from portfolio theory, construct
a theoretical stock portfolio. For simplicity, use the stocks from the “näıve” and the
“practical” portfolios to perform this analysis. You can use the mean-variance analysis
or you can construct the theoretical portfolio by simply observing the correlations
among the stocks in the “näıve” and the “practical” portfolios.
After obtaining the theoretical portfolio, compute the correlation matrix separately for
each of the three (näıve, practical, and theoretical) portfolios and attach the results as
Exhibit 1. Please discuss briefly (Discussion 3) how you constructed the theoretical
portfolio and comment on the structure of the three correlation matrices. Please limit
your discussion to one page of double-spaced text.
For each stock in the three portfolios, provide the following information:
1. Name of the company,
2. Ticker symbol,
3. Stock price at the end of the most recent month,
4. Return in the most recent month,
5. Annual return in 2019,
6. Number of analysts covering the stock,
7. Consensus analyst recommendation, and
8. Price-To-Earnings (P/E) ratio using the price and earnings information from the most
Present this information in a tabular form (Exhibit 2) so that I can easily compare the key
characteristics of your portfolios.
II Risk Measurement
Compute the following three risk measures for each of your three portfolios:
1. Total risk (or portfolio variance),
2. Systematic risk, and
3. Idiosyncratic risk using CAPM.
You can use either daily, weekly or monthly data to compute these risk measures. Please
justify your choice and mention clearly the time-period you used to estimate the three risk
measures. Attach your calculations and results as Exhibit 3. Please highlight the final
III Performance Evaluation
Compute the following performance measures for each of your three portfolios:
1. Mean monthly return,
2. Sharpe ratio,
3. Relative Sharpe ratio (SR of a portfolio relative to the SR of the market),
4. Jensen’s alpha,
5. Four-factor alpha,
6. Treynor-Mazuy ratio,
7. M2 measure, and
8. T 2 measure.
You can use either daily, weekly or monthly data to obtain the performance measures.
Please justify your choice and mention clearly the time-period you used to estimate the
three performance measures. Attach your calculations and results as Exhibit 4. Please
highlight the final results.
IV Additional Discussions
In light of your findings, please discuss your views on:
1. Benefits of security selection, i.e., can investors successfully pick stocks? (Discussion
2. Relation between portfolio diversification and portfolio performance, i.e., does diversi-
fication lead to better risk-adjusted performance? (Discussion 5);
3. Market efficiency, i.e., are financial markets efficient or inefficient? (Discussion 6).
Please limit each of your discussions to one page of double-spaced text.
Note: Please prepare your report in a professional manner because 10% of the grade for the
project will be based on your presentation style. Please attach additional material (data,
formulas, calculations, etc.) in an appendix and only present your discussions and exhibits
in the main part. Obviously, the appendix is optional.