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You are a portfolio manager for a UK-based fund and have to build two small ethical portfolios. One of the two funds should include equities (from 9 companies) and the other fund should include bonds (9 debt securities).
You are borrowing ?12,000,000 overall at the annual rate LIBOR + 2.25%.
Your objective as a portfolio manager is to produce an equity fund that should deliver an annualised return of at least 20%, and a bond fund aiming at delivering an annualised return of 12%.
No short-selling, derivatives or use of other funds allowed.
The holding period is 4 weeks between 16/01/2012 and 01/04/2012
Trading is allowed during the holding period (transaction costs are assumed to be zero).
Required: Choose from at least 3 of the following -USA, UK, Germany, Japan, Saudi Arabia and Venezuela
Part 1
A) By undertaking fundamental and technical analyses 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, return and sales forecasts, etc.) select 9 shares that you expect to outperform the market. By undertaking fundamental and technical analyses on government and corporate bonds (government debt, expectations on credit rating, changes in yield, etc.) select 9 debt securities that you expect to perform well in the coming month.
B) All shares and corporate bonds must be from ethical companies, according to the fund manager?s definition of ethical investment (no gambling, arms, tobacco).
C) By using your own judgement and appropriate financial concepts determine the best asset allocation (% of capital allocated to each asset within each portfolio, the ?12ml capital is divided equally between bond and equity funds)
D) Define a benchmark index for each portfolio against which to compare your results at the end of the investment period
(50 MARKS)
Part 2
Monitor the performance of the portfolios 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 the Sharpe ratio or the Treynor ratio or Jensen?s Alpha.
(15 MARKS)
Part 4
Conclude and explain the divergences you observe between your portfolios and the benchmark in terms of passive or active management theories and concepts.
(10 MARKS)
Guidelines and important notes
? The assignment should be produced in Word and Excel spreadsheets used for all calculations where necessary, the use of Bloomberg is strongly recommended.
? Each set of computations should be introduced by fully researched and referenced paragraphs of descriptions covering: concepts, underlying assumptions, statement of formulae used together with an outline of the procedure.
? Calculate the covariance
? Calculate the correlation
? Portfolio Standard Deviation
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