You are the portfolio manager of a UK-based fund and have to build a small portfolio. The fund should be a balanced portfolio of equities and bonds and should include equities from 6 companies and 6 bonds (government or corporate debt securities).
You are borrowing £12,000,000 for four weeks at the rate LIBOR + 2.25% (annual quote).
Your objective as portfolio manager is to produce a fund that should deliver an annualised return of 16%.
No short-selling nor use of other funds allowed.
The holding period is 4 weeks (beginning and end of investment to be decided by the fund manager).
Trading is allowed during the holding period (transaction costs are assumed to be zero).
Required:
Part 1
A) By undertaking fundamental analysis of company shares select at least three equity sectors that you expect to perform well in the coming 4 weeks. Within each sector, on the basis of your analysis (qualitative as well as quantitative such as company news, current and expected P/E ratios, EPS, Dividends, return and sales forecasts, etc.) select 2 companies that you expect to outperform the equity market. By undertaking fundamental analyses on government and corporate bonds (government debt, expectations on credit rating, changes in yield, duration, convexity) select 6 debt securities that you expect to perform well in the coming month.
B) By using your own judgement and appropriate financial concepts determine the best asset allocation (% of capital allocated to each asset within the portfolio)
C) Select a benchmark index against which to compare your results at the end of the investment period
(50 MARKS)
Part 2
Monitor the performance of the portfolio on a weekly basis. In terms of fundamental factors explain reasons for the changes you are observing. (10 MARKS)
Part 3
Critically evaluate the performance of your portfolios against the performance of the selected benchmark by using one of the following: the Sharpe ratio, the Treynor ratio or Jensen’s Alpha.
(15 MARKS)
Part 4
Conclude and explain the divergences you observe between your portfolio and the benchmark in terms of passive or active management theories and concepts.
(10 MARKS)
Guidelines and important notes
• Answer all questions in this coursework and present your investment plan and findings in a professionally formatted report.
• The assignment should be produced in Word and Excel spreadsheets used for all calculations where necessary, the use of Bloomberg is strongly recommended.
• Computations should be introduced by brief but researched and referenced paragraphs covering: concepts, underlying assumptions.
• The quantitative analysis should be submitted together with the coursework (on an Excel spreadsheet).
• The assignment will be graded to reflect: understanding of key investment analysis concepts, ability to gather relevant data and carry out an in depth analysis. You will also be judged on your ability to make sound financial decisions and to produce an accurate, well presented and referenced report that demonstrates reading and coverage of both theory and practice.
• Word limit 2000 words, excluding executive summary, references, appendices and tables.
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