Portfolio Risk & Diversification Analysis: FTSE 100 Equities and a Probabilistic Equity Report on British American Tobacco

Overview

A two-part quantitative finance project combining applied portfolio theory with probability-based equity analysis. The first half assumed the role of a portfolio manager, using 20 years of monthly price data for four FTSE 100 constituents (Barclays, Marks & Spencer, United Utilities, Vodafone) and the FTSE 100 index itself to build and evaluate diversified portfolios. The second half assumed the role of a financial analyst, using conditional probability to assess whether British American Tobacco shares were a sound short-term investment.

What I did

• •Sourced and cleaned 20 years of monthly closing price data from Bloomberg and calculated holding period returns for each stock
• •Computed descriptive statistics (mean, standard deviation, skewness, kurtosis) for each company and interpreted the shape and risk profile of each return distribution
• •Calculated covariance and correlation across all possible two-asset combinations to assess diversification potential
• •Selected and justified four two-asset portfolios, then derived minimum-variance portfolio weights using Markowitz's optimal weighting formula
• •Calculated expected return and standard deviation for each portfolio and benchmarked performance against the FTSE 100 index
• •Plotted the Investment Opportunity Set to visualise the risk-return trade-off and identify the most efficient portfolio
• •Applied Bayes' theorem to derive unconditional probabilities of BATS stock returns from conditional probabilities across three economic scenarios
• •Compared the weighted mean, volatility, skewness and kurtosis of BATS against the wider market to assess relative risk
• •Used conditional probability to establish the directional relationship between market movements and BATS returns
• •Synthesised the statistical findings into a concise buy/no-buy investment recommendation

Skills & tools