ECOM097 Portfolio Construction Theory Coursework 2019

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ECOM097 Portfolio Construction Theory Coursework 2019

You and your group will be assigned to one of three sessions (all at 7pm) to deliver your in-class presentation: 13th March, 20th March or 27th March (you will find out which session has been assigned to your group in early February). Submission  of the written report will be done electronically through the submission link on ECOM097 in QMplus. Written report submission deadline is 26th April 2018, 23:55. The link will be available from the 10th April 10am. You will upload a PDF document (12pt size and Times New Roman font). You must submit your coursework by the specified deadline unless you have written permission from the module leader for an extension. Permission will only be given for legitimate (normally medical) reasons. Without such permission, a penalty will apply to late submission. Coursework submitted late will be penalised five per cent of the total marks available (i.e. five marks for an assignment marked out of one hundred) for each 24 hour period or part thereof after the submission date and time, including weekends and bank holidays. An assignment submitted more than 168 hours late will be awarded a mark of zero. Coursework that exceeds the stated word limit shows a failure to synthesise material and edit the work so as to present arguments/data concisely. This will be noted in the feedback and reflected in the grade awarded. All courseworks are automatically detected for plagiarism.

ECOM097 Portfolio Construction Theory Coursework 2019

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You and your team are working for a client who is looking to invest £500,000 worth of proceeds from the sale of one of her properties. She is 43 years old and she describes herself as an experienced investor, having been working for the financial sector regulator for the last 18 years. She would like to follow a balanced well-diversified multi-asset approach to her portfolio. After the first few meetings in your office you agree on the following long-term investable strategic asset allocation (SAA) that should be used as the benchmark for the client’s portfolio going forward:
Bloomberg Ticker    Fund Name    Weight (%)
ISF LN Equity    iShares Core FTSE 100 UCITS ETF    20.0
IDVY  LN Equity    iShares Euro Dividend UCITS ETF    10.0
CSPX LN Equity    iShares Core S&P 500 UCITS ETF    10.0
SJPA LN Equity    iShares Core MSCI Japan IMI UCITS ETF     7.5
IAPD LN Equity    iShares Asia Pacific Dividend UCITS ETF    7.5
SEDY LN Equity    iShares EM Dividend UCITS ETF    5.0
IGLT LN Equity    iShares Core UK Gilts ETF    7.5
INXG LN Equity    iShares £ Index-Linked Gilts UCITS ETF    2.5
SLXX  LN Equity    iShares Core GBP Corp Bond ETF    7.5
AGBP LN Equity    iShares Core Global Aggregate Bond GBP Hedged UCITS ETF    5.0
GHYS LN Equity    iShares Global High Yield Corp Bond GBP Hedged UCITS ETF    5.0
SEMB LN Equity    iShares J.P. Morgan $ EM Bond GBP Hedged UCITS ETF    5.0
INFR LN Equity    iShares Global Infrastructure UCITS ETF    2.5
IPRV LN Equity    iShares Listed Private Equity UCITS ETF    2.5
EXXY NA Equity    iShares Diversified Commodity Swap UCITS ETF    2.5
The client will be ready to invest on February 13th and she is happy for you and your team  to manage her assets on a discretionary basis. February 14th will be the first day when the portfolio performance will start being measured.
Considering her risk-tolerance she does not want the absolute risk of the portfolio to be above or below 2% than the agreed SAA (for instance if SAA portfolio risk is 7% she would like actual portfolio risk to fall between 5% and 9%).
She would like you to manage the portfolio on a dynamic basis and put forward ideas to adjust the initial SAA. To make sure you take sufficient active risk, you agree to set the minimum tracking error (TE) constraint at 0.5% versus SAA, with the maximum set at 2.5%.
However, the client would like to limit investment fees and requires that any changes to  the SAA should not increase the portfolio total expense ratio or OCR (please note that for the purpose of this assignment you can either use OCR or TER and consider them equivalent) by more than 10 basis points (0.10%) per annum. There is no need to incorporate entry or exit fees as part of this constraint.

ECOM097 Portfolio Construction Theory Coursework 2019

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The client is currently working part-time and would like to supplement her monthly salary with the income from her investment portfolio. The gross  distribution yield from the underlying assets should not be lower than 2% on an annual basis.
Finally, she disagrees, on ethical grounds, with profiting from rising food prices and does not want her portfolio to hold more than 1% in agricultural commodities.
She  will expect you to provide her with a detailed risk report for each month end (as of  the last business day in February and March) that will form the part of the final investment report that will be sent to her on 26th of  April 2019. She will also need you to schedule a catch up meeting with her in the second half of March. This will give you and your team a chance to present your investment ideas, including an update on their performance versus the  SAA, and give her a chance to ask questions about her investment  portfolio.
Note: The absolute risk of the portfolio on a given day is measured as a standard deviation of simulated daily returns over previous 250 business days. The tracking error is using the same methodology but is calculated on relative returns instead (daily deviations of simulated portfolio returns from the simulated SAA returns). This means that all allocations proposed for the portfolio need to  be investable and priced daily to facilitate the calculation and monitoring of these risk parameters.
For TER/OCR and gross distribution yield calculation you can refer to the latest available factsheet for the relevant ETF/fund. For direct investments TER/OCR is zero and distribution yield must be sourced from the issuer or Bloomberg. You are allowed to add any fund or security to the portfolio provided daily prices and 250-day histories are available on Bloomberg for volatility and tracking error calculation and all other constraints are satisfied.

ECOM097 Portfolio Construction Theory Coursework 2019

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Question 1
Draft a brief Investment Policy Statement (IPS)  outlining client circumstances, their goals, objectives, risk tolerance and relevant constraint.
[5 marks]
Question 2
Summarise the role of individual assets in the  SAA and describe their key risks.
[5 marks]
Question 3
Each member  of your team should suggest one dynamic amendment to the initial  SAA and clearly  justify their decision based  on the properties of the  asset and/or recent market developments. The amendment might include either a change to the weight of the existing asset or an addition of a completely new asset to the  portfolio. The new addition can either be a new index-tracking fund, an active fund or a direct investment. Make sure you state clearly which asset is involved in your recommendation, what its new percentage  % is in the portfolio and which other positions need to be adjusted to move to the new allocation.
Each member of the team will need to present their own idea but the team as a  whole will need to consider their aggregate impact on the portfolio in light of its objectives  and constraints.   If two or more members of your  team put forward the  same idea, make sure you each provide an original justification and size the individual positions accordingly so the aggregate trade does not violate any constraints.

ECOM097 Portfolio Construction Theory Coursework 2019

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Note: This is the only part of the written report for which you will be assessed individually. You will be asked to submit your new portfolio and individual dynamic adjustments (“investment idea”) by 17th of February (5pm) in an Excel format, submitted through QM Plus. Note that the written trade rationale only needs to be submitted as part of the written report on 26th April.
[20 marks]
Question 4
Demonstrate how the initial portfolio satisfies all the relevant constraints as of the close of business on 13th of February. If the initial portfolio does not satisfy all the relevant constraints, it needs to be adjusted.
[5 marks]
Question 5
Prepare the attribution (ignoring transaction costs) for the first month of the live portfolio performance i.e. the period from close-of-business (cob) on 13th of February to close-of-business on 13th of March. It should include:

–    the total return of the portfolio and the Sharpe ratio (with risk calculated on simulated returns over last 250 business days)
–    the excess return of the portfolio relative to the SAA and the Information Ratio (with tracking error calculated on simulated relative returns over last 250 business days)
–    Jensen’s alpha with the portfolio beta calculated for simulated returns over last 250 business days versus daily returns on global equities proxied by the returns on MSCI World Total Return Index (Bloomberg ticker: MDWO Index, in Sterling).
–    the return contribution of each investment idea in isolation
–    a brief commentary to help client understand how the portfolio behaved since launch
[5 marks]
Question 6
In the Risk section of the written report, for the first month-end (cob on 28th February) calculate:

–    portfolio’s historical volatility (based on 250 days of historical simulated returns, assuming daily rebalancing to target weights)
–    portfolio’s historical tracking error (based on 250 days of historical simulated relative returns versus SAA, also assuming daily rebalancing)
–    Comment if any adjustments are necessary to the portfolio allocation in the light of the agreed risk constraints
[5 marks]
Question 7 (in-class Presentation)

ECOM097 Portfolio Construction Theory Coursework 2019

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Prepare a 15 minute presentation for the client that you will deliver during the catch up meeting with her in March. Make sure that you do not over-run as the client will only have 20 minutes for you and wants to have 5 minutes afterwards to ask you some questions about the portfolio. The presentation should cover:

–    A brief summary of the Investment Policy Statement
–    The proposed portfolio with clear rationale for any deviations from the agreed SAA
–    Assessment of the proposed portfolio in the light of the agreed constraints (as per Question 4)
–    One-month performance update (as per Question 5. IMPORTANT: groups presenting on 13th of March only need to provide a performance update from close-of-business on 13th of February to close-of-business on 6th of March. All other groups need to cover the whole one-month of performance)
–    End-of-February risk assessment including adjustments to the portfolio, if any (as per Question 6)
–    Summary slide
[40 marks]
Note: A maximum of 30 marks will be given for your individual contribution (quality of slides that you cover, your delivery and the way you handle questions during the 5-minute Q&A session following the presentation), a maximum of 10 marks will be given for the group as a whole (the cohesion of the overall presentation, time-keeping, group dynamic)
Question 8
Submit the final written report by 26th April. Make sure it contains all the elements from Questions 1-6 and also includes the following:

ECOM097 Portfolio Construction Theory Coursework 2019

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–    Updated performance attribution (ignoring transaction costs) for the second month of the live portfolio performance (i.e. the period from cob on 13th of March to cob on 12th of April; IMPORTANT: groups presenting on 13th of March now need to provide a performance update from close-of-business on 6th of March to close-of-business on 12th of April. All other groups need to cover the whole one-month of performance)
–    Updated risk report with the risk estimates and commentary for the second month-end (cob on 29th March)
–    Historical Scenario testing for both the original SAA and your new allocation (based on simulated historical returns for 250 business days prior to the launch of the portfolio on 14th February) including:
o    95% historical weekly Value-at-Risk, in Sterling terms
o    Probability of daily loss in excess of -1.00%
o    Simulated portfolio return on the best and the worst day for global equities (proxied by MSCI World Total Return Index in Sterling)
–    Final recommendation, prepared by the group as a whole, in the light of the above to either leave the portfolio unchanged or adjust its allocation again. Make sure you justify your decision.
[15 marks]
End of Paper

ECOM097 Portfolio Construction Theory Coursework 2019

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