BRE582 Individual Assignment
Deadline: November 30, 2025 (Sunday)
PART A (50%): Capital Budgeting and Investment Analysis
You are the Director of New Investments at HK Real Estate Development and Investment Company. You are evaluating the acquisition of a 10-year leasehold interest in Exchange House, Wanchai, Hong Kong, for your company’s investment portfolio. The asking price is HK 300 million, with an initial rental yield of 7.73%. The projected cash flows are provided in Appendix I.
The company is considering two financing options:
• HS Bank: 70% LTV, 8% p.a. simple interest, 10-year balloon, 2 million establishment fee, 2 million prepayment penalty (if repaid in first 5 years), no refinancing.
• BC Bank: Loan based on Debt Service Ratio 1.10, 8.5% p.a., 10-year constant amortization, 2 million establishment fee, 5 million prepayment penalty.
Market Data:
• Risk-free rate: 5%
• Market return (Hang Seng Index): 10%
• Beta for commercial real estate companies: 1.2
Questions:
1. Investment Appraisal (Unleveraged) [20%]
Using the provided cash flows and market data, estimate the required rate of return for this investment using the CAPM. Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) for the acquisition of Exchange House without debt financing. Based on your analysis, is this investment attractive? Clearly state your assumptions and show all calculations.
2. Financing Analysis (Leveraged) [30%]
Assuming the company proceeds with the acquisition, compare the two loan options (HS Bank and BC Bank). For each, calculate the equity IRR and NPV to the company after accounting for all loan- related cash flows (including fees and penalties if applicable). Which financing option provides a higher return to equity holders? Discuss the risks and trade-offs associated with each financing structure. Clearly state your assumptions and show all calculations.
3. Sensitivity Analysis [Optional/Bonus: 5%]
Conduct a sensitivity analysis on one key variable (e.g., sale price, rental growth, or interest rate).
Discuss how changes in this variable affect your investment recommendation.
Note:
• This is an individual assignment.
• Submit both a Word file and an Excel file.
• Put a cover page with your name, student ID, program, etc., in the Word file.
Appendix I to Question (A)
Exchange House - Hong Kong (in $million)
ASKING PRICE: 300
ASSUMED PRICE: 360
Important Note: Assume that all cash flows occur at year-beginning (occur at t=0)
PART B (50%): Portfolio Investment Project
You are a fund manager with HK$5,000,000 to invest. Your mandate is to construct a diversified equity portfolio, primarily in Hong Kong and Mainland China listed shares, denominated in HKD. The benchmark is the Hang Seng Index.
Investment Constraints:
• No borrowing or short selling.
• No more than 15% of the fund in cash or any single holding.
• Portfolio should include 10-20 stocks from at least 5 different sectors.
• Use at least 5 years of monthly historical price data.
• Risk-free rate: 4.50% (US Treasury).
Tasks:
1. Portfolio Construction
• Select >20 stocks from different sectors, justifying your choices based on sector outlook and company fundamentals.
• Download and process historical price data to calculate monthly returns and the covariance matrix.
2. Portfolio Optimization
• Use Excel (or similar) to construct the efficient frontier.
• Identify the minimum variance portfolio and the optimal risky portfolio (tangency portfolio) using the risk-free rate.
• Calculate and report the expected return, standard deviation, and Sharpe ratio for your optimal portfolio.
3. Performance Evaluation
• Compare your optimal portfolio’s expected return and risk to the benchmark (Hang Seng Index).
• Discuss the diversification benefits and any limitations of your approach (e.g., reliance on historical data, market conditions).
Deliverables:
• Submit a Word report (max 5,000 words) including:
o Executive summary
o Portfolio factsheet (holdings, weights, sector allocation)
o Methodology and rationale for stock selection
o Portfolio optimization process and results (with charts/graphs)
o Performance comparison and discussion
o Limitations and reflections
• Submit an Excel file (or equivalent) with all calculations.
Notes: This is a group project with three students in a group. Students should select their own stocks (from different industries; with justifications), construct an optimal portfolio and evaluate portfolio performance.
• Choose >20 stocks initially; each stock should have at least 5-year historical prices;
• For diversification, the stocks should be from different sectors;
• Download monthly historical prices data from Bloomberg, Yahoo Finance or other sources;
• Calculate monthly returns and covariance matrix of the portfolio returns;
• Apply Solver in the Excel (or other tools) to obtain efficient frontier for the portfolio;
• Obtain the optimal risky portfolio based on efficient frontier and risk-free rate;
• Gen AI can be used to select sectors and stocks, or construct optimal portfolio;
• Ensure all data sources are referenced;
• Put student names, student IDs, programs in a cover page for the Word file.