Competition requires that you submit a theoretically and empirically sound report with evidence of critical understanding of portfolio management.
The report requires that you:
(1) Outline the portfolio management process (Note: you should discuss the relation between investment objectives, investment constraints and asset allocation. Based on this discussion and the article “Time for investing’s four-letter word” from Bodie, Kane and Marcus pages 170-171, set your own objectives / constraints and decide what asset classes should be considered for investment).
(2) Assuming you will invest in stocks and Treasury Bills:
(a) Discuss the theoretical concept of portfolio diversification and select 25 stocks from the constituents of the S&P 500 Index and collect monthly returns for the 10-year period ending December 31, 2018.
(b) Discuss the theoretical concept of the Treynor/Black method and use data for the 10-year period ending December 31, 2018 to identify 15 mispriced stocks from the S&P 500.
(c) Using data from both (a) and (b) analyse the annualised risk return profile of each sample stock. (Note: your analysis should include descriptive statistics, autocorrelation, and correlation analysis. Such analysis should be considered as an exploratory data analysis. Include the names and ticker of your sample companies in an Appendix.)
(3) Using the sample in part 2(a), construct optimal and complete portfolios (based on your investment objectives/constrains) using (a) the Passive strategy in finding a portfolio with 5 stocks to track an index portfolio defined by the market value weighted portfolio of your selected 25 stocks in 2(a), (b) the Active strategy by taking the 15 misprices stocks identified in part 2 (b) and the S & P 500 index, by the Treynor-Black method. Discuss the aforementioned portfolios from both passive and active investors’ perspectives and evaluate them using two performance measures appropriate to each strategy (Note: Beyond the constructing processes needed in an excel file, you also need to comment on your calculated optimum. You may choose to allow or not allow for short-selling. You need to briefly justify your chosen performance evaluation measures).
(4) Evaluate the performance of the portfolios for the next year i.e. 1st January 2019 – 31st December 2019. Critically compare these results with the previous results in part 3.
Your coursework should be presented as a report (unified piece of work) rather than answers to each part of the aforementioned questions. There are 15 marks attributed to the presentation or your report.
This report has an overall word limit of 2000 words. The word count should include all the text (plus endnotes and footnotes,) but exclude diagrams, tables, references and appendices.
