Why might the fund management be interested in diversification into emerging markets? Are they right to recommend such a diversification? Answer these questions citing some empirical evidence.
Do in this assignment?
You work for the 3 Rs Wealth Management LTD, an investment fund that specialises in financial securities investment. Your fund currently holds an international portfolio of equities including US, European, and Japanese stocks. The fund management is considering a further diversification of the fund portfolio and contemplates the possibility of investing in some emerging markets or diversifying by adding different assets types including Fixed Income Securities, Any sector sectors Indexes, Commodities and Cash equivalent securities You are asked to analyze the optimal of such a diversification in the mean-variance framework. Your manager requires you to write a report that should summarize and critically discuss your empirical findings, as well as provide a recommendation about the inclusion of emerging market stocks in the portfolio of your fund. Your manager sets very high standards and expects a professional report that he can present to the fund’s clients.
Detailed problem description
1- Why might the fund management be interested in diversification into emerging markets? Are they right to recommend such a diversification? Answer these questions citing some empirical evidence.
2- Obtain monthly total return index data for the following 5 equity markets indexes, in US dollar terms, for the 5-year period from October 2016 to September 2020, plus two financial asset indexes f your choices:
Compute monthly returns for each series. Obtain the current US risk-free rate of interest.1 Compute the mean and standard deviation of each series and the variance-covariance matrix. Obtain monthly total return index for the US dollar-based MSCI World equity index and compute its returns.3- In order to estimate expected returns, you decide to use the CAPM. Estimate the beta of the six indices listed above with respect to the MSCI All Country index. Use these estimates of beta in order to compute the CAPM expected return of these 7 indices.
4- Compute the efficient frontier for (i) the first three markets (i.e. US, Europe, Japan) and (ii) all the 7 markets considered. Assume that investors can borrow and lend at the risk free rate of interest and that they are able to take short positions. How does diversification into emerging markets or other assets affect the efficient set?
5- In the light of existing empirical evidence and your own findings, what are your recommendations? Should the fund expand on emerging markets, consider new assets or focus to its current strategy.
6- Suppose that your fund is not allowed to take short positions in any of the markets. How would such a restriction affect the conclusion you have drawn in Questions 4 and 5?
7- Critically reflect on the limitations of your analysis.
You must produce all the spread sheet and graphs in your report.