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As a fund manager, you are asked to invest in global assets such that the portfolio will outperform the inflation

rate[1]in Hong Kong (consider a floor of 3%), which is high relative to the rest of the world. 

To build your portfolio, you will consider a Strategic Asset Allocation (mean-variance) framework, which maximises the portfolio Sharpe ratio subject to certain constraints. The style analysis and performance measures help identify the risk factors that drive the portfolio. That set the base Global Tactical Asset Allocation.

Project description: 

  • Your portfolio starts with USD 100,000
  • You can invest in around 5-10 assets (stock/bonds/ETFs), including Asian and U.S. Treasury bills, notes, and bond, stocks in developed countries and emerging markets, global corporate bonds
  • Your portfolio will be sold as a managed investment fund across different asset classes
  • Your portfolio can combine long and short investment strategies
  • Your risk free asset is the 10year US Treasury
  • The data frequency monthly
  • Consider 5-10 year of data for your analysis

Part A: Create an Equally Weighted Portfolio A 

  1. Explain your view on the chosen these assets?
  2. Which asset has the highest/lowest return, lowest/highest volatility? How does that compare to the market return/risk? Looking at assets correlations, would the chosen assets be a good or bad choice for your portfolio?
  3. Construct an equally weighted portfolio Aand check portfolio performance in the last 5-10 years.

Part B: Optimal Asset Allocation (Strategic allocation) Portfolio C

  1. Using the regression technique for Index Models in excel, please estimate the alpha and the beta, for each of your assets. Comment on the significance of the coefficients using a 95% confidence interval. 
  2. Construct the covariance matrix using the market sensitivities, i.e. the betas and the index volatility. 
  3. Using Solver find the optimal asset allocation for your risky portfolio, call it portfolio P.
  4. For a risk aversion of 4 and the 10yr UST as the risk free rate, what would the final asset allocation look like? (This is for the complete portfolio C =portfolio P +risk_free)
  5. What are the complete portfolio C stats such as return and risk?

Part C: Same Assets, but different Portfolios

  1. Compare the historical performance (last 5-10 years) of the optimal portfolio C versus the equally weighted portfolio A.

Part D: Risk Factor Analysis 

  1. Given the factors provided to you (we will provide you with the data set on Canvas/Project), please carry a sensitivity analysis to find out the risk factors that drive your portfolio returns.  Comment on the results.

Part F: Style Analysis and Portfolio Performance Evaluation

  1. What would have been the performance of your portfolio over the last 5-10 years (in sample analysis)? Use the alphas, betas and the risks derived from the Regression analysis.
  2. Total Return 
  3. Total Risk 
  4. Sharpe Ratio 
  5. Treynor Measure 
  6. Alpha and Jensen Alpha
  7. Max Drawdown 
  8. Active returns
  9. Tracking Error 

Comment on their individual asset performance and the performance of the portfolio relative to the benchmark.

Part G: Momentum and Risk Weighted Portfolio D

  1. Add momentum and value factor in your portfolio while minimizing for risk as well. That creates a modified portfolio D.
  2. Compare its performance relative to the previously constructed portfolio A, C, D. 

Use Excel to better show....

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