Investment Strategy for a small fund
The context
You are the portfolio manager of a UK-based fund and have to build a small portfolio.
You need to construct a balanced portfolio of equities and bonds. Your portfolio must include equities from 6 different companies and 6 different 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 is 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 (taxes & transaction costs are 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 of the three sectors, 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
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.
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.
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.
The assignment should be produced in Word and Excel spreadsheets used for all calculations where necessary, the use of Bloomberg is essential.
Computations should be introduced by brief but researched and referenced paragraphs covering: concepts, underlying assumptions.