FIN4934 Financial Modeling & Analytics Group Project Due: April 26, 2018 @ 5pm Please submit only one Excel file for your group project. 1. You graduated from USF and got a job at MetLife pension department. Your supervisor needs your help with some of its liabilities and risk control. The pension fund has a series of liabilities to be paid to the pension plan beneficiaries: In 6 months: $2,000,000, In 1 year: $2,200,000, In 1.5 years: $2,500,000, In 2 years: $3,200,000, In 2.5 years: $3,700,000, In 3 years: $4,300,000, In 3.5 years: $4,700,000, In 4 years: $5,100,000. Your company wishes to construct a portfolio of assets to cover this series of liabilities, such that it is immunized against interest rate risk right now. The company is considering investing in four different bonds: (1) a 1-year Treasury Bill with a face value of $1,000 and no coupon, (2) a 2-year Treasury note with a face value of $1,000 and an annual coupon rate of 1.5%, (3) a 3-year Treasury note with a face value of $1,000 and an annual coupon rate of 1.90%, and (4) a 5-year Treasury note with a face value of $1,000 and an annual coupon rate of 2.30%. All Treasury notes make 2 (semiannual) coupon payments per year. The current yield on all bonds is 1.45%. Your supervisor wants you to find out how many of each of these four Treasury bonds the fund should buy to fully fund the liability and be immunized against interest rate risk right now? 2. Pick a stock (It can be any stock, as long as it is a common stock traded in NYSE/Nasdaq/Amex). (1) Obtain its 5-year historical daily prices (1/1/2013 – 12/31-2017) on Yahoo finance and calculate its daily holding period returns. (2) Generate a summary statistics report on its holding period returns. (3) Create a Histogram chart on its holding period returns. (4) Estimate its annualized volatility using all the holding period returns. (5) Use the S&P 500 holding period returns during the same period as market return, run a regression to estimate the beta of this stock. Y: stock return minus risk-free rate. X: market return minus risk-free rate. You can find risk-free rate from any online source. (6) Once beta is estimated, calculate the expected return of this stock using CAPM. Accroding to CAPM, Expected return = Rf + beta*(Rm-Rf). Note that Rf should be an annual return, Rm should also be an annualized return, which can be calculated using S&P 500 data from part (5). (7) Use the expected return and annualized volatility you estimated, simulate daily stock prices for the next 252 days, assuming stock prices follow Geometric Brownian Motion. (8) Pick another 3 stocks, and repeat (1)-(7) for these 3 stocks. If your group only has 3 members, you may pick another 2 stocks instead of 3 stocks for this part. (9) Form a portfolio with all 4 (or 3) stocks above. Estimate the correlation coefficients among all stock returns. Use =CORREL(HPRi, HPRj) function to get ρ for each pair of stocks. (10) Set a target portfolio return, use Solver to estimate the optimal weights for all stocks in your portfolio. (Tip: If your solver is unable to give you a solution, consider changing your target portfolio return to a more realistic number, for example, if all your stocks have expected returns around 10% based on CAPM, setting a target portfolio return of 20% will probably not work.) 1. You graduated from USF and got a job at MetLife pension department. Your supervisor needs your help with some of its liabilities and risk control. The pension fund has a series of liabilities to be paid to the pension plan beneficiaries: In 6 months: $2,000,000, In 1 year: $2,200,000, In 1.5 years: $2,500,000, In 2 years: $3,200,000, In 2.5 years: $3,700,000, In 3 years: $4,300,000, In 3.5 years: $4,700,000, In 4 years: $5,100,000. Your company wishes to construct a portfolio of assets to cover this series of liabilities, such that it is immunized against interest rate risk right now. The company is considering investing in four different bonds: (1) a 1-year Treasury Bill with a face value of $1,000 and no coupon, (2) a 2year Treasury note with a face value of $1,000 and an annual coupon rate of 1.5%, (3) a 3-year Treasury note with a face value of $1,000 and an annual coupon rate of 1.90%, and (4) a 5-year Treasury note with a face value of $1,000 and an annual coupon rate of 2.30%. All Treasury notes make 2 (semiannual) coupon payments per year. The current yield on all bonds is 1.45%. Your supervisor wants you to find out how many of each of these four Treasury bonds the fund should buy to fully fund the liability and be immunized against interest rate risk right now? 2. Pick a stock (It can be any stock, as long as it is a common stock traded in NYSE/Nasdaq/Amex). (1) Obtain its 5-year historical daily prices (1/1/2013 – 12/31-2017) on Yahoo finance and calculate its daily holding period returns. (2) Generate a summary statistics report on its holding period returns. (3) Create a Histogram chart on its holding period returns. (4) Estimate its annualized volatility using all the holding period returns. (5) Use the S&P 500 holding period returns during the same period as market return, run a Regression to estimate the beta of this stock. Y: stock return minus risk-free rate. X: market return minus risk-free rate. You can find risk-free rate from any online source. (6) Once beta is estimated, calculate the expected return of this stock using CAPM. According to CAPM, Expected return = Rf + beta*(Rm-Rf). Note that Rf should be an annual return, Rm should Also be an annualized return, which can be calculated using S&P 500 data from part (5). (7) Use the expected return and annualized volatility you estimated, simulate daily stock prices for The next 252 days, assuming stock prices follow Geometric Brownian Motion. (8) Pick another 3 stocks, and repeat (1)-(7) for these 3 stocks. (9) Form a portfolio with all 4 (or 3) stocks above. Estimate the correlation coefficients among all Stock returns. Use =CORREL(HPRi, HPRj) function to get ρ for each pair of stocks. (10) Set a target portfolio return, use Solver to estimate the optimal weights for all stocks in your Portfolio. (Tip: If your solver is unable to give you a solution, consider changing your target Portfolio return to a more realistic number, for example, if all your stocks have expected returns Around 10% based on CAPM, setting a target portfolio return of 20% will probably not work.)
Purchase answer to see full attachment