You are investment strategists recently hired into an investment bank. The first task assigned to you in the job is to create new equity products (strategies) for the bank.

The report should consists of two part – the first part describes the portfolio selection and the second part analyses the performance of the selected portfolios.

2(a). Selection

The aim of this task is to give you the opportunity to demonstrate your ability to apply the knowledge acquired in lectures, in the context of the real market data. The focus is on creating and forming successful portfolio.

You are investment strategists recently hired into an investment bank. The first task assigned to you in the job is to create new equity products (strategies) for the bank. For a new product to be successful, it has to be attractive (in terms risk and return) to the banks’ existing or potential clients, who are primarily hedge funds.

Specifically, you are required to create an equity portfolio with a minimum of 20 stocks, assuming you are given £1,000,000.  You can consider equity stock in any financial market, and choose any market available in Bloomberg, but you are limited to trade only equity stock on major exchanges. You need to explain to the top management choices of each stock. To convince them that the portfolio is a good financial product, your analysis and discussion may include aspects such as: choice of a particular market; its overview and major characteristics; the portfolio’s performance in the past; expectation of the portfolio’s future performance; the criteria used to select stocks; portfolio weights of each stock; reasons of portfolio weights etc. Bloomberg equity screening function (EQS) can help with this task.

There is no need to use any quantitative model to make the selection. Stock prices used for portfolio allocation should be based on closing price on Monday 11^th November 2019.

2(b). Performance Evaluation

To demonstrate the viability of the newly created equity product. You are required to closely monitor its performance for the next month. However, your manager does not have confidence in your stock picking skill, he realises that there are also quantitative techniques which can be used to create equity products. These include:

Markowitz optimal portfolio. Portfolio weights are allocated to individual stocks based on optimisation of covariance matrix.

Index model. Portfolio weights are allocated based on single factor index model.

Zero-beta model. Portfolio weights are allocated based on rankings of each stock’s beta.

Fama-French model. Funds are allocated based on the well-known three-factor model, you need to explain in details how each factor portfolio is formed, and the factor loadings of your choice.

Pair-Trading model. Funds are allocated based on identifying “correlated” pairs. Details rules of identifying pairs, as well as trading rules need to be clearly explained.

He asks you to create the second equity product using one of the above models. Once the second portfolio is constructed, you also need to evaluate performance of both portfolios based on a number of performance measures, e.g. Sharpe ratio, VaR, tracking error, risk adjusted return, etc. Please discuss which portfolio performs better during the trading period, and carefully explain why the portfolio performs better than the other. You can use appendices for data and supporting information but not for substantial part of the discussion and explanations that should be included in the main body of your report. Bloomberg portfolio management function (PORT) can be help with this task. Stock prices used for portfolios evaluation should be based on closing price on Monday 9^th December 2019.

There is no word limit on the portfolio report, but the report should be no more than 6 pages.

Criteria Ratings

This criterion is linked to a learning outcome Stock selection

Detailed discussion on how stocks are picked for the portfolio, e.g. market choices, EQS criteria etc. Justification of final stock choice

18.0 Pts Full marks

0.0 Pts No marks

18.0 pts

This criterion is linked to a learning outcome Model discussion

Explanation/discussion on how quantitative models are used to form the second portfolio. Justification of model choices and parameter restrictions, etc.

18.0 Pts Full marks

0.0 Pts No marks

18.0 pts

This criterion is linked to a learning outcome Portfolio performance

Demonstration of portfolios return and risk, e.g. how the two portfolios compare against each other, have both portfolios made money for investors, etc. Discussion of performance ratios, e.g. Sharpe ratio, VaR, etc.

18.0 Pts Full marks

0.0 Pts No marks

18.0 pts

This criterion is linked to a learning outcome Presentation

The overall readability of the report, e.g. clear structure, well formatted table, good use of graphs, stay within page limit, etc.

6.0 Pts Full marks

0.0 Pts No marks

6.0 pts

Total points: 60.00