- Summary of Assignment
You are required to write a report in which you discuss the relationship between the stock market and the economy and economic and financial policies. You will also report on the details of an investment project that you undertake over eight weeks(Oct 25th – Dec 18th ). In this project, you will analyze data of several companies or stock indexes to construct a stock portfolio. You will also manage, trade, and rebalance this portfolio live over eight weeks. Finally, you will provide a full performance evaluation of your stock portfolio.
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- Details of The Stock Portfolio Project:
Project Overview and Goals
You are acting as a portfolio manager for London National Corporation (LNC) clients, your clients have entrusted you with $5,000,000 to invest in the U.S. stock market at your discretion for eight weeks. Your clients are expecting you to invest their money prudently to help them achieve their investment objectives. While your clients desire a high rate of return, their risk tolerance is considered low. Additionally, your clients will be assessing your success in managing their portfolio as measured by the performance evaluation criteria shown below. You will be able to construct and manage your portfolio live on the MarketWatch Virtual Stock Exchange. At the end of the trading period, if your clients are satisfied with your performance managing their portfolio, they will extend their relationship with you, otherwise, they will consider other asset managers.
Investment Policy Statement (IPS)
Following a meeting with your clients you have agreed an investment policy statement with them in which
you assessed their risk tolerance to be low, and a return objective equal to the holding period return on
S&P 500 + 1%. No withdrawals or additions are allowed during the investment period.
Specifically, your clients are concerned about the following criteria:
- Performance measurement: Absolute return as measured by the total dollar increase in the portfolio over the trading period.
- Performance attribution: To assess your skills, clients are interested in a performance attribution of your portfolio returns
- Performance appraisal: Risk-adjusted return as measured by the return on the portfolio taking
into account the level of risk assumed by you, using different performance appraisal measures
(e.g. Sharpe Ratio).
- Details of the Project Report:
- In my assignment, do I need to discuss the impact of COVID-19 on stock markets?
No, at least not directly. Part 1 of your assignment should discuss the impact on stock markets due to the restrictions imposed by governments to fight COVID-19. You will also need to critically discuss the role of monetary and fiscal policies decisions in supporting domestic and global stock markets during the COVID-19 pandemic.
- Which markets should I focus on when discussing the impact of COVID-19-related policies?
Any market is ok (e.g. US, UK, Europe, China, or global markets) as long as you have detailed data about this market and economic and financial policies taken by authorities in this market.
- Can I use technical analysis as the only method for security selection in order to build my portfolio?
Fundamental analysis should play a major role in selecting stocks to build your portfolio. Technical analysis can then be used to inform trading decisions and rebalancing the portfolio.
- Which model should I use to optimise my portfolio?
Use the model that you understand well and feel confident to implement. Also, make sure you can obtain the inputs needed to implement the model.
- Which optimization model is easier to implement?
The Markowitz mean-variance model is the easiest one to implement, while the Black-Litterman (the manager’s views) model is the most challenging one. The Treynor-Black model (the Single Index Model) comes in between.
- Can I use historical stock returns to estimate the expected returns and covariance matrix need to implement the Markowitz model?
- Which rate should I use as the risk-free rate to estimate excess returns?
The yield on the 10-year Treasury Bill of the US Government.
- Are there any spreadsheets or solvers that I can use to optimise my portfolio without the need to build them myself?
You can use this spreadsheet if you decided to use the Markowitz model: The Markowitz Model.xlsx
You can use this spreadsheet if you decided to use the Single Index Model: The Treynor-Black Model.xlsx
Or you can use this website for any one of the three models: Portfolio Visualizer https://www.portfoliovisualizer.com/optimize-portfolio
- Which portfolio management approach (active, semi-active, or passive) should I follow?
Any approach is ok, but you might need to deviate slightly from the benchmark (S&P 500) to meet the return target of 1% above the holding period return of S&P 500.
- Which rebalancing strategy should I use?
The percentage of portfolio rebalancing will be more suitable given the short time horizon of only 8 weeks. For simplicity you could use 10% to identify the corridor. Other factors are still ok with proper justification.
- Which method should I use to measure the performance of my portfolio?
Given the time horizon, you can treat the investment period as a single period and use the holding period return. You can also use the money-weighted rate of return method with appropriate assumptions and calculations.
- which appraisal measures should I use for the performance appraisal of my portfolio?
At least use the Sharpe Ratio and the Information Ratio. Compare them to other well know index funds or the average market ratios.