Analysis and Strategy Assignment

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.