Portfolio management

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1. You construct a portfolio by allocating assets into stock industry indexes and a risk-free asset.
2. You can borrow or lend money at the risk-free rate but cannot short stock indexes.
3. You have a budget of £100,000 to invest.
*****4. Construct the portfolio on 31/12/2012 and manage it until 31/12/2013.*****
5. You may either hold the same portfolio until the end of 2013 or adjust it during the period.
6. Use the data up to 31/12/2012 to estimate the expected returns and covariances.

Must address at least all the points below. The empirical result itself has little meaning; evaluation and discussion must follow.
Points to be addressed:
1. Describe your investment objective, risk appetite, and constraints.
2. Perform basic statistical analysis of the return time series of the asset classes given in the
data file.
3. Estimate the expected returns and covariance matrix of the asset classes.
4. Construct an efficient frontier subject to constraints.
5. Find the optimal risky portfolio.
6. Choose a utility function and the value of its risk aversion parameter that suits your risk
appetite.
7. Find the optimal portfolio. Evaluate its expected return and risk.
8. Evaluate the performance of your investment portfolio.

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