Individual Task Based Investment Project
Detailed problem description
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.
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 (the names of the corresponding indices provided in parentheses), plus two financial asset indexes f your choices: (Bonds, Commodities, Derivatives, Cash indexes etc)
US (MSCI USA)
Europe (MSCI EUROPE U$)
Japan (MSCI JAPAN U$)
Pacific, excl. Japan (MSCI PACIFIC EX JP U$)
Latin America (MSCI EM LATIN AMERICA U$)
Index 1
Index 2
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 (MSCI WORLD U$) 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.
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?
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.
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?
Critically reflect on the limitations of your analysis.
