You work for a consulting firm. The University of Exeter (UE) has just hired you

You work for a consulting firm. The University of Exeter (UE) has just hired your team to provide
recommendations regarding the composition of its endowment fund. Due to the recent pandemic,
UE has been relying heavily on its endowment fund for its budgetary needs over the past four
years. After discussions with UE’s Chief Financial Officer (CFO), your manager has identified
several key questions that require further research. Your task is to conduct relevant analyses to
address these questions.
UE and your team have decided to invest in the following five stocks: Caterpillar Inc. (CAT),
Johnson and Johnson (JNJ), Walmart (WMT), Nvidia (NVDA), and Proctor and Gamble (PG).
The analysis will be conducted assuming a risk-free rate of 0% and no exchange rate fluctuations.
Trading fees and transaction costs are negligible given the size of UE’s portfolio. Assume UE
uses historical averages as proxies for expected returns unless otherwise instructed. For portfolio
construct purpose, use historical monthly returns from January 2016 to December 2020 (note that
you need prices on 1/1/2021 to calculate returns for December 2020). For portfolio performance
evaluation purpose, use monthly returns from January 2021 to December 2022.
1. UE’s current risky portfolio invests in CAT, JNJ, and WMT. UE’s CFO is considering
expanding its investment universe to include NVDA and PG. Assuming no trading
restrictions, plot the efficient frontier using the three stocks that UE currently invests in.
Compare it with the efficient frontier generated using all five proposed stocks. Do you
recommend UE to expand its investment universe? Why or why not?
2. Assuming no trading restrictions, how should UE construct its risky portfolio using the
aforementioned five stocks? Refer to this portfolio as P1.
3. How should UE construct its risky portfolio if it is not allowed to short sell? Refer to this
portfolio as P2 and report its weights.
4. Explain whether the weights for P1 and P2 make economic sense.
5. The CFO is also considering managing its risky portfolio passively by following the market
wisdom. Utilising the market capitalisation data as of 31/12/2022, the weights for the passive
portfolio (denoted as P3 hereafter) are as follows:
CAT: 7.35% JNJ: 27.32% WMT: 22.70% NVDA: 21.40% PG: 21.23%
Based on these weights and an assumed monthly market return of 0.7%, calculate each
stock’s expected return implied by the market.
After reviewing the implied expected returns, your team believes that some adjustments
are necessary. Based on your team’s research, a downward revision of 0.15% is warranted
for WMT’s expected monthly return, given the bleak outlook for major retail chains.
Conversely, NVDA’s expected monthly return should be increased by 0.10% considering
the promising potential of graphic processing units. Form an active portfolio, denoted as P4,
that incorporates these views and report its weights.
6. Compare the weights for P3 and P4. Do their differences make economic sense?
7. Evaluate the performance of P1 ~ P4 using monthly returns from January 2021 to December
2022. Provide investment recommendations tailored to UE’s situation, taking into account
the short sale constraint.
Deliverable:
Prepare a report that addresses all of the aforementioned questions. Make sure the texts and results
are logically structured. Begin by briefly introducing the report’s purpose. Next, provide detailed
explanations of your data and methodologies, followed by numerical results and result discussions.
Conclude by summarising your recommendations for UE’s investment approach. Feel free to add
additional sections. The word count limit is 2,800 words, with a 10% margin. Tables, references,
and appendices are not included in the word count. Each group should submit one PDF file. Other
forms of document (e.g., Excel worksheet) will not be accepted.
Optional:
If you wish to earn extra credits, consider incorporating the following into your analysis:
8. As environmental, social, and governance (ESG) related concerns have grown rapidly in
recent years, UE aims to ensure that its endowment portfolio achieves a value weighted ESG
score of 6 or above. The following table summarises the ESG scores for the five firms UE
plans to invest in:
CAT JNJ WMT NVDA PG
5.4 4.2 4.3 6.5 5.5
Assuming UE cannot short sell, how should it construct its portfolio? Refer to this portfolio
as P5. Report its weights and compare its performance with P1 ~ P4. Use the 2021 and 2022
monthly returns for performance evaluation purpose, as in Question 7.
9. Question 5 gives you the weights for the passive portfolio P3. With 31/12/2022 being the
valuation day, are these given weights reasonably accurate? Provide evidence to support
your argument.
10. Should you be concerned that your analyses may be biased due to measurement errors in
expected returns and covariance matrix? Provide evidence to support your argument.
11. Do you have any suggestions on how UE can improve the performance of its risky portfolio?