Assume you were approached by a client five years ago with £1,000,000* to invest in the portfolio of equities. As an asset manager working for a reputable company in the city, you asked various questions related to risk appetite and investment objectives of the client who agreed to invest the fund passively for the first five-year period.
This year your client decided to invest the money actively for the 8-week period from teaching week 5 to week 12. In teaching week 5, you are therefore required to reinvest the realized money from passive investment in an active portfolio for which you have decided to make a thorough economic environment analysis and forecasting including a reassessment of your client’s risk tolerance and investment objectives. In this active investment period, your client has agreed with you to make investment in Equities (stocks) and Fixed-Income securities (corporate bonds). The client has surplus fund so if the money available from the realization of passive portfolio is less than £1,000,000, the client will fund the difference amount to invest in the active portfolio i.e., you will have a minimum of £1,000,000 to invest in the new portfolio.
During the active portfolio management period of 8 weeks, you are instructed to select a range of suitable equities and bonds (only corporate bonds) for inclusion in the portfolio. In this period, you can buy, hold or sell securities. However, such decisions should be based on the findings of appropriate investment theory, models and relevant analysis. Additionally, you should compare your portfolio performance with suitable benchmark(s) and provide narrative interpretation of the evaluation.
You are encouraged to make use of the Bloomberg trading terminals for portfolio functionalities where available (but excel may be used).
* Should you decide to invest in currency other than GBP, you can take equivalent amount of £1000,000.
1. Report the major points of your discussions with the client. This should include construction of the portfolios and you should provide the detail of the allocation with justification demonstrating how the asset allocation match the investor profiling. The allocation in the active portfolio should consider the market forecast. Your discussion should be supported by relevant theories and academic literature.
2. Management of the stocks and bond portfolio (active portfolio only): Details of changes made including reflection on strategy selected and reasons for portfolio restructuring. You should undertake a minimum of three rebalancing. Your rebalancing strategies should be supported by relevant investment theories and assets pricing models.
3. A final evaluation of overall performance (for both the active and passive portfolio) as at the end of 8th week (i.e., after teaching week 12) carried out using suitable quantitative measures including both the absolute and relative performance evaluations. You should explain the performance difference between your portfolio and the selected benchmark(s) using risk adjusted and other techniques, such as tracking error and attribution analysis.
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