Assume you were approached by a client five years ago with £1000,000 to
invest in the portfolio of equities and corporate bonds. As an asset manager
working for a reputable company in the city, you asked various questions
related to risk appetite and investment objectives of the client who agreed to
invest the fund passively for the first five-year period.
This year you decided to invest the money actively for the 10-week period
from teaching week 3 to week 12*. In teaching week 3, you are therefore
required to reinvest the realised money from passive investment in an active
manner for which you have decided to make a thorough economic
environment analysis and forecasting including a reassessment of your
client’s risk tolerance and investment objectives. In this active investment
period, your client is happy to continue investment in a new portfolio that is
comprised of Equities (stocks) and Fixed-Income securities (corporate bonds).
The client has surplus fund so if the money available from the realization of
passive portfolio is less than £1000,000, the client will fund the difference
amount to invest in the active portfolio i.e., you will have a minimum of
£1,000,000 to invest in the new portfolio.
During the active portfolio management period of 10 weeks, you are
instructed to select a range of suitable equities and bonds (only corporate
bonds) for inclusion in the portfolio. In this period, you can buy, hold or sell
securities. However, such decisions should be based on the findings of
appropriate investment theory, models and relevant analysis. You are
encouraged to make use of the Bloomberg trading terminals for portfolio
functionalities where available (but excel may be used).
*you may decide to shorten the active investment period, but a minimum of
4-week is required.
Required:
1. Demonstrating the application of appropriate theory (supported by
reference to academic literature), you should supply a detailed analysis of
how your portfolio was constructed and managed. You must include the key
theories and principles of valuation, yield and volatility. Additionally, you
should compare your portfolio performance with suitable benchmark(s) and
provide narrative interpretation of the evaluation. (40 marks, 2000 words)
2. You must supply as an Appendix to the assignment (outside of the word
limit), the required client information set out in A to C below. This is to enable
the client to review your performance with a view to retaining your services.
(40 marks, Appendix)
A. Construction of the portfolio (for both passive and active investment
strategy): Proposed overall allocation with justification demonstrating how the
asset allocation match the investor profiling.
B. Management of the stocks and bond portfolio (active portfolio only): Details
of changes made including reflection on strategy selected and reasons for
portfolio restructuring. Your rebalancing strategies should be supported by
relevant investment theories and assets pricing models.
C. A final evaluation of overall performance (for both the active and passive
portfolio) as at the end of Teaching Week 12 carried out using suitable
quantitative measures. These calculations should motivate your discussion of
portfolio performance evaluation in requirement 1 above.
3. In line with the Value at Risk method of risk measurement, explain the risk
exposure faced by your portfolio. Your client should be provided with the
results of your calculated risk at 95% confidence interval. Client has also
requested information about hedging risk using derivative instruments. As
such, this section of your report should include relevant literature for VaR, risk
exposure, and an illustrative example of hedging using Derivatives.
(20 marks, 1000 words)