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The aim of the portfolio report is to follow the changes in the way you pick investments, the rationale behind them and your evaluation of their performance between now and the end of the first half of the semester. You must track the performance of your investments and keep an eye on market developments.
1.Imagine you have borrowed a total of £1,000,000 at 2% p.a. (you will have to give the money back)
2.You will invest this money with the aim of funding your retirement.
3.Invest in 9 assets plus the money market fund (already given)
4.If you are investing in individual shares, choose stocks with a market capitalization of at least £500 million each and 5 years of price and dividend data. You will be charged commissions/bid-offer spread of 0.25% of the stock’s purchase price.
5.If you are investing in funds, choose mutual funds with at least £500 million in total assets and a 5-year history of returns. You will be charged fund-specific fees (initial and administration).
An Excel worksheet is on Blackboard available to help you keep track of your portfolio and its performance.
3.You must first analyse your portfolio choices from a behavioural perspective. Use around 500 words to discuss the biases that (may) have influenced your choice of assets. Typical biases to consider are overconfidence, representativeness, availability, ambiguity aversion, narrow framing, herding etc. You will need to cite literature sources (with references) in the discussion.
4.Next you must evaluate your portfolio asset allocation by applying portfolio theory (around 1000 words). You will need to cite theory and literature sources (with references) in the discussion.
5.In the body of the Word document, analyse the diversification of the initial 9-asset portfolio
a.How well diversified was it across asset classes? How could you improve it?
b.How well diversified was it within the asset classes? How could you improve it?
c.How well diversified was it across international and domestic? How could you improve it?
6.How did your portfolio perform over your investment period (the month between 1-Feb and 1-Mar)? Would a 1/N strategy have yielded better a better result? (put in equal weights and the portfolio tracking sheet will automatically calculate the new return)
7.Discuss the correlations between your 9 portfolio assets – refer to the matrix in the appendix (point 1.c.)
8.If you were to reduce your portfolio to your 5 ‘best’ assets – which would these be? – refer to the matrix in the appendix (point 1.c. and 1.d.)
9.Using the reduced 5-asset portfolio, discuss how Markowitz diversification would reduce its risk (refer to the calculations in point 2.b.)
10.Look at the portfolio beta you calculated (point 2.c.) and discuss the risk of your 5-asset portfolio relative to the market risk.
11.Analyse the 3 Sharpe ratios you calculated (points 2d-f.). Which allocation is the best, and why?
12.Would this portfolio be good enough for you to meet your retirement goal? Indicate how you think your portfolio performance should be judged or benchmarked over the long-term.
13.With explicit reference to active and passive management, how would you change i
