Question: It is assumed that five years ago you read an article by French (2008) and the findings of the paper related to extra cost associated with active investment motivated you to construct a passive portfolio of equities.

It is assumed that five years ago you read an article by French (2008) and the findings of the paper related to extra cost associated with active investment motivated you to construct a passive portfolio of equities. You then had inherited £1,000,000 cash (for non-UK campus students it is equivalent local currency) and you could make such decisions as: how much to invest, in which equity(ies) and any specific criteria for the selection of equities you wanted to follow.
• Passive approach chosen is Top-down approach, buy and hold approach. Refer to the attached appendix.
• Risk tolerance is moderate

This year, as a student in the investment management course, you have the opportunity and time to invest actively. Starting from teaching week 3 of semester one, you are required to invest the money you realised from passive investment in an active manner for which you have decided to make a thorough economic environment analysis and forecasting including a reassessment of your risk tolerance and investment objectives. (In the case that all your investment from the passive portfolio has lost its value, you can borrow at 5% per annum interest rate but only such amount to give you a total of £1000,000 in week 3 i.e., if the value of your passive portfolio is above £1000,000 in week 3 then you won’t be allowed to borrow additional funds). Note the following information for all new trades:
• Passive investment portfolio on 30 Sep 2022 is 1,081,575 refer to appendix


Week 3

The active trading starts in week 3 of Semester 1 and you should close and realise the value of your active investment in week 12 i.e. you have a total of 10 weeks for active trading. Similar to the passive portfolio, you are required to build and manage investment portfolio of equities only. The following trading rules apply: No use of futures or options, no short sales, no gearing and no exchange traded funds, and no investment in bonds.


Week 3 to 12 (10 week period)

During the portfolio management period (weeks 3 to 12), you are required to rebalance your portfolio to achieve your investment objectives. At the end of Week 12, you should close your portfolio and carry out the final valuation. In this period, your objective is to outperform the relevant performance benchmark(s) on a risk-adjusted basis.

For UK campus students, your suggested benchmark is a portfolio with 100% invested in FTSE 250 Equity Index (Bloomberg Ticker: MCS Index). For HK campus students, your suggested benchmark is a portfolio with 100% invested in Hong Kong Hang Seng Index (Bloomberg Ticker: HSI Index). For Qatar campus students, your suggested benchmark is a portfolio with 100% invested in Qatar Exchange Index (Bloomberg Ticker: DSM Index). However, you are allowed to select benchmark(s) that you believe is(are) suitable for evaluation purposes. Likewise, students can invest in exchange(s) from anywhere in the world.

You must value your portfolio and take into account the transaction cost which is 1% of the transaction amount per trade (same for your passive portfolio).

You are encouraged to use Bloomberg Financial Database but you can also use publicly available financial database sources such as Yahoo finance and Google finance. Similarly, you can use Bloomberg portfolio analysis tools or perform analysis through calculations in MS Excel.

In your final investment report, you are required to address the following:

1. Discuss your investment philosophy. Demonstrate how your asset allocation decisions match with your investor profiling. Forecast the market and discuss your assumptions in your market forecasting analysis. Discuss how it differs from your investment five years ago.
(20 marks, 600 words)

Notes: Please include the below for part 1 as well
a) Passive approach chosen is Top-down approach, buy and hold approach. Refer to the attachment 1 appendix. Risk tolerance is moderate
b) Investor Profiling (Investment Objectives) can be summarized in a table or chart. Such as investment objectives, time horizon, constraints, preferences etc
c) Economic Environment Analysis (for your selected country 2017 and for now) example of market economic analysis forecast in attachment 2
Economic Forecasting useful websites that you can search for:
World economic Outlook (IMF)
GoldmanSachs
UK Economic Outlook (pwc)
d) 4. Capital Market Line Concept and Capital Allocation Decision. *You may use Efficient Frontier line concept here as well*

2. Reflect upon your rebalancing strategies. In this section, you should highlight why you bought, held or sold your shares and whether the rebalancing changed the nature of your portfolio. Your rebalancing strategies should be supported by relevant investment theories and asset pricing models. Additionally, you are required to identify relevant behavioural biases and explain your own irrationalities observed during the construction and management of the equity investment portfolio. This should be strongly underpinned by academic literature.
(40 marks, 1,200 Words)

Notes: Refer to the below for part 2
a) Efficient frontier line (by taking at least 2 stocks from your active portfolio construct EFL) – Also, you can use EFL in Part A of the assignment as well.
b) Capital Market Line (CML)-
c) Behavioral Biases (Prospect theory/ overconfidence/ confirmation bias)-
You may find behavioral bias examples here that can be relevant for your assignment discussion.
d) Irrationality – Discuss your bias and link your discussion with theory.
e) Capital Asset Pricing Model (CAPM) – Apply CAPM for your individual stocks of your active portfolio-
f) Stock Valuation – Dividend Discount Model (DDM) & Relative Evaluation.




3. Evaluate your portfolio’s risk-adjusted absolute and relative performance. You should also explain the performance difference between your portfolio and the given benchmark(s) using techniques such as attribution analysis and tracking error. Additionally, you should link and evaluate your strategies, including active and passive, your results and risk-taking decisions with your investment philosophy. Your discussion should be supported by relevant theories and academic literature.

(40 marks, 1,200 Words)


Notes to include for part 3 This is the minimum requirement for Part C to use these 4 ratios.
Use Risk-Adjusted Return Tools such as:
1. Sharpe Ratio
2. Treynor Ratio
3. Information Ratio
4. Jenson Alpha

Also include Attribution analysis
*There are other calculations and concepts in Week 10 Folder. You may use them for Part C of your assignment such as Sortino ratio, Modified sharpe ratio etc. *
Instructions for Re-balancing (hold or sell stocks) for your portfolio
You should use at least 3 different models to justify your re-balancing (buy/sell) strategies. Example of Valuation Models:
1. Dividend Discount Model (DDM) –
2. Capital Asset Pricing Model (CAPM)
3. Relative Valuation
You have to do excel calculations using the above mentioned models in order to decide whether to hold or sell your stocks. You may use any other models of your choice as well.
Examples:
4. Technical Analysis (Relative Strength Index/ Moving Averages)
5. Efficient Market Hypothesis (You can link your bias of buying or selling stocks by looking into some news)