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.

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:

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)

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)

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)