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Investment Portfolios Final Project




Investment Portfolios Final Project FN480 - Due November 30, 2014;Book;ISBN-13: 978-0-470-08014-6;Maginn, J., Tuttle, D., McLeavey, D., & Pinto, J. (2007). Managing investment portfolios: A;dynamic process (3rd ed.). Hoboken, New Jersey: John Wiley & Sons.;Assessment: Summarize Types of Investment Strategies and their Related Uses.;Introduction;For this project you will suppose that you have just won a $200,000 tax-free award to be paid to;you immediately. The stipulations on this award are as follows;You are not allowed to access the principal value until retirement. (Or, if you are already;retired, for ten years).;You are allowed to access earnings from interest, dividends, or realized capital gains at;any time.;You are allowed to make risky investments that could cause the value of the principal to;fall below $200,000.;You will write an investment policy and devise consistent investment strategies to manage this;$200,000 portfolio. Although the funds are imaginary, you should write the policies and;strategies as realistically as possible for your own household.;Activities;A. Write your investment policy statement;Follow the guidelines in the text regarding portfolio objectives and investment policy statements.;Specifically, your statement must include;I.;Background: An introduction giving the relevant background for your household.;II.;Return Objectives: Include both qualitative descriptions (explanations in words) and;matching quantitative objectives (numbers with supporting math). Explain these;objectives.;III.;Risk Tolerance: Discuss your willingness to take risk, and your ability to take risk.;Include qualitative descriptions and the numerical risk measures we have learned about.;List and explain specific factors that increase or decrease your risk tolerance.;IV.;Constraints: Discuss and explain your liquidity requirements, time horizon, tax concerns;and any other constraints or unique circumstances.;V.;Eligible Asset Classes and Target Weights: Based on your return objectives, risk;tolerance, and constraints, list the asset classes that will comprise your portfolio, and give;target weights with allowable ranges. Explain and justify these choices. Your portfolio;must have some type of exposure to equities, fixed income, foreign securities, and at least;one other asset class.;1;Each section must be accompanied by a thorough explanation of how and why it is appropriate;for your household. Your explanations must demonstrate that you understand the related concepts;from the course. If calculations are needed (for example, to find your required return), show;work within the body of the paper or as an appendix.;B. Select securities for the portfolio and perform a portfolio analysis.;Create a portfolio that is consistent with your investment policy statement, contains at least ten;securities, and has some type of exposure to equities, fixed income, foreign securities, and at;least one alternative asset class. Hint: You should definitely use mutual funds and exchangetraded funds for exposure to different asset classes. Direct investments into assets like gold or;real estate will make it difficult to produce the information required below.;Create a spreadsheet showing the following;Each security, and the amount invested in that security.;The yield (dividend, or otherwise) of each security.;Your estimate of the expected return for each security, and the weighted expected return;for the portfolio.;The standard deviation of each security, and the standard deviation of the portfolio.;A table of correlations between each pair of assets.;*Help for finding expected returns, standard deviations, and correlations is in an appendix at the;end of this document, as well as in an Excel spreadsheet that you will receive separately.;C. Demonstrate the portfolios suitability;Use all of the above information to carefully demonstrate how your portfolio is consistent with;your investment policy statement from Part A and the best practices of portfolio construction.;Specifically;Prove that your portfolio is likely to meet your return objectives, including the numerical;return objectives, given in Part A. In addition, justify the values you used for expected;returns in Part B.;Prove that your portfolio meets your risk objectives, including the numerical risk;objectives, given in Part A. In addition, justify the values you used for standard;deviations in Part B. Also demonstrate that your portfolio is diversified, using the;appropriate measures.;Prove that your portfolio meets your target weights and any other constraints you;described in Part A.;D. Portfolio Strategy Discussion;Answer the following portfolio strategy questions. Explain the relevant strategies in detail. Be;sure to demonstrate an understanding of the related course concepts. Each answer should be at;least a solid paragraph. Some answers will need more than one paragraph to be complete.;2;1. Is your overall strategy passive, active, or something else? Explain.;2. Did you use indexing, use actively managed funds, or pick individual securities? Why?;How did you decide which index, funds, or securities to use?;3. Have you completely used a strategic asset allocation, or are there elements of tactical;4.;5.;6.;7.;8.;asset allocation or other strategies?;Does your portfolio fit any particular style such as growth or value?;Which alternative investments did you include? Why these?;What monitoring strategies will you use? What elements will you be monitoring?;Which rebalancing strategy will you use? Be specific. Explain.;How will you measure the performance of your portfolio? Explain these measures.;Presentation (14 PAGES);You will submit one MSWord document containing the following;Your investment policy statement with accompanying explanations, with all requirements;described in part A.;Your portfolio with the information required in part B. If you cannot paste your Excel;information into Word in a professional manner, then you may attach your Excel;spreadsheet separately.;The explanations of your portfolios suitability as required in part C.;Answers to the portfolio strategy discussion questions in part D.;Your presentation must be professional in appearance and free from language errors. Your;presentation must also be clearly labeled to distinguish each part. Use appropriate headings and;subheadings. You will lose points if it is not clear how the parts of your presentation match up to;the project requirements.;All papers should be formatted in the following manner;1. Double-spaced;2. Times New Roman, 12-point font;3. 1-inch margins (all sides);4. Include Title Page;5. Include Reference Page;a. References must be in alphabetical order and in proper APA format (double-;spaced with hanging indents);b. APA resources;c. APA citation should be used whenever sources are cited;3;APPENDIX: Finding Information Needed to Create a Portfolio;Finding Correlations;The website is a good tool to find correlations. Click the Correlations tab;and the click the Time sub-tab. Enter two ticker symbols and change the time to 5 years. This;will produce a graph of the correlation between the two assets over the last 5 years. You will see;that the correlation fluctuates, which is a challenge in the portfolio creation process. Use your;best estimate (such as the average value in the graph) for the correlation.;If you wish to create a free account at, you can then enter your portfolio and;get a table of all the correlations at once. If you do this, look under the table for Select Period;and choose the longest period available.;Finding Standard Deviations;For any type of fund, go to, get a quote, and click the Ratings & Risk tab.;The standard deviation will be listed.;For an individual stock, copy a list of annual historical prices into Excel, and use the;=STDEVP() formula. Historical prices can be found many places, but one easy place is at; Get a quote, click the Performance tab, then the Price History sub-tab, set;the date range to Max and the frequency to Yearly. Use the close prices.;Finding a Portfolio Standard Deviation;Remember that a portfolio standard deviation is NOT the average of the individual standard;deviations. You will receive an Excel spreadsheet to help you calculate a portfolio standard;deviation. Follow the instructions on the Instructions tab to calculate the portfolio standard;deviation.;Estimating Expected returns;Method 1: Historical;If you have a long time horizon, then it is acceptable to use a long-term average historical return;as an expected return when your investment matches a major asset class. For example, for almost;any standard U.S. large-cap mutual fund, 9.9% would be acceptable to use as an expected return.;These are geometric mean returns for the period 1926 through 2010;Large company stocks;9.9%;Small company stocks;12.1%;Long term corporate bonds;5.9%;Long term government bonds;5.5%;Intermediate term government bonds5.4%;U.S. Treasury bills (short term);3.6%;Inflation;3.0%;These have less of a history;EAFE index (World developed markets, 1970-2010) 10.1%;Equity REITs (1972-2010) 12.0%;4;You can also make some reasonable interpolations from the above data. For example, a mid-cap;stock fund should be between the 9.9% and the 12.1%. High yield (lower grade) corporate bonds;may be 1% to 2% above the 5.9% for investment grade bonds.;Method 2: Beta and CAPM;Another method is to use the CAPM equation;Expected return = Risk Free Rate + Beta (Expected Benchmark Return Risk Free Rate);Betas can be found at almost any online financial site. However, you do need to find a;source that specifies which index the beta is being measured against. For example, the;iShares site says, Beta versus S&P 500.;The expected benchmark return would be for the index being used to measure beta.;U.S. Treasury bills are usually used for the risk free rate.;Example: The S&P GSCI Commodity-Indexed Trust (Ticker: GSG) has a beta of 1.13 against;the S&P 500. Using 3.6% for the risk free rate (the historical average for Treasury bills), and;9.9% for the expected benchmark return (the S&P 500 is for large stocks), we get: Expected;return = 3.6 + 1.13 (9.9 3.6) = 10.7%;Method 3: Estimate based on standard deviation;In the long run, expected return should have a direct relationship to standard deviation (risk). The;risk/return relationship can be approximated by;Expected return = 3.6 + 0.405*standard deviation;Example: The iShares S&P Global 100 Index (Ticker: IOO) has a standard deviation of 17.01.;The expected return is approximately 3.6 + 0.405*17.01 = 10.5%.;Finding the Expected Return of a Portfolio;The expected return of a portfolio is the weighted average of the individual expected returns. For;each asset in the portfolio, multiply its expected return by its weight in the portfolio. Then, add;up the results to get the expected return of the portfolio.;Other Helpful Resources;;ETFs for stocks, bonds, foreign investments, alternative assets. Includes standard deviations of;these funds.;;Enter your portfolio and get summary data about it, including styles.;;;;;Suggested asset allocations. If you use these sites, you must still completely justify your choices;beyond because thats what the asset allocation website said.;5


Paper#27075 | Written in 18-Jul-2015

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