Anly 515 Risk Modeling Homework 2 100 Points Remember To Upl

Anly 515 Risk Modeling Homework 2 100 Points Remember To Upload Yo

Anly 515 Risk Modeling Homework 2 (100 points) Remember to upload your answers by the due date. There will be a penalty of 10 points for each day the homework is late. The homework report must include all charts and answers required. Upload 2 PDF files (answers, code). A file with the R code you developed must be included as an appendix. Please label each section of the code based on the question that you are answering. For example, the code to download and create the subsets should be under “Create the data files.” Students should have a five-year portfolio. The calculations for this homework will be based on the data from the third year of your portfolio. Identify the five-year period of your portfolio. Use only 4 stocks from your portfolio.

Paper For Above instruction

This paper tackles the given risk modeling homework, focusing on analyzing a five-year investment portfolio with four selected stocks over a specified period, with an emphasis on the third year for calculations. The assignment involves calculating individual security returns, constructing portfolio returns, and comparing different portfolio strategies, all using R programming for analysis and visualization.

Part A – Individual Security Returns

The first step involves calculating the returns for individual securities and the overall portfolio. To do this, historical price data for the selected four stocks within the specified five-year period is necessary. The period should be precisely identified, with particular focus on the third year of the portfolio, which is used as the basis for subsequent calculations. Using R, the price data can be imported, cleaned, and prepared for return calculations.

Portfolio price returns are computed by calculating the percentage change of each stock's price over time, typically using the formula: Price Return = (Current Price / Previous Price) - 1. The overall portfolio's price return is a weighted average of individual stock returns, assuming equal weights or specified allocations.

The dividend reinvestment strategy involves calculating gross returns, which include dividends reinvested into the stocks. The total gross returns for the period combine capital appreciation and dividend yields. These are calculated sequentially in R, with total gross returns representing the growth of $1 invested, including dividends reinvested at each dividend date.

Logarithmic gross returns provide an alternative view, calculated as the natural logarithm of total gross returns. This measure is useful for assessing continuous growth and is additive over time. When comparing total price returns and total gross returns, note that, though they may appear similar over small intervals, differences emerge when dividends are reinvested.

Plotting these two return measures over the period helps visualize their relationship. Typically, total gross returns account for dividends and are thus generally higher than simple price returns.

Part B – Portfolio Returns

Using the same period and stocks, create two types of portfolios: an equally-weighted (EW) and a value-weighted (VW) portfolio, rebalanced quarterly.

For the equally-weighted portfolio, assign each stock an equal share of the total investment at each quarter's start. Rebalancing involves adjusting holdings to maintain equal weights, regardless of stock price changes.

The value-weighted portfolio allocates weights based on each stock’s market capitalization at each rebalancing date. This requires calculating the market value of each stock, then deriving weights as the proportion of each stock's market value relative to the total portfolio value.

For each quarter, create pie charts illustrating the asset allocation of both portfolios, highlighting how weights shift over time due to stock price movements.

Finally, compare the performance of the EW and VW portfolios by plotting their cumulative returns over the investment period. This comparison reveals differences attributable to weighting schemes, illustrating the impact of market capitalization versus equal distribution strategies.

References

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