applied portfolio management

This assignment is worth 40%. It is due Thursday 23rd November. This is a group assignment. The groups are listed on Blackboard under ‘Assessment’

Q1. Single Index Model (10%)

Choose any 6 shares on the NASDAQ100. See the list here

Using any financial database, download weekly (adjusted) closing price data for the past 3 years for each share. Also, download weekly values for the overall NASDAQ OMX 100 index. This is available on many websites:

Finally, use the yield on the 10-year US Treasury bond as a proxy for the risk-free rate (you will need to convert the annualised interest rate to a weekly one).

a) Use natural logs to estimate gross returns as follows =ln(Pt / Pt-1). Then regress the weekly (excess) return on each share on the weekly (excess) return of the NASDAQ OMX 100 index. You can do this in Excel.

b) Also, plot a scatter diagram of the excess returns on each share against the excess market returns. Calculate the predicted values of the dependent variable (Y). Then, the ‘residual’ or prediction error = actual values – predicted value.
c) Interpret the SIM results you get for each share. Compare the results you get for each of the 6 shares. Are the key parameters (alpha and beta) statistically significant and of the expected sign?
d) Calculate the total risk for each share. Then, using the beta estimate, decompose the total risk into the systematic and firm-specific components.
e) Estimate the standard deviation for the NASDAQ OMX 100. Use the historic weekly average for the index as the market return.
f) Estimate the correlation between each of the shares and the NASDAQ OMX 100. Comment on your results.
g) Estimate the correlation matrix of residuals (such as that done in Bodie Kane Marcus Spreadsheet 8_1 Panel 2)
h) Estimate the variance-covariance matrix for the 6 shares.

For this question, submit a soft copy of your Excel spreadsheets. You may include your written analysis in the same spreadsheets.

Q2. Portfolio Construction & Reporting (30%)

You have been allocated €100 million to invest on behalf of a large Irish institutional client. The mandate is quite open-ended, but you can assume that the client has a long time horizon and has a reasonably high risk tolerance. However, the client does not wish to pay the costs associated with a fully active portfolio.

a) Formulate an Investment Policy Statement (a sample of a Vanguard statement is on Blackboard, but there are many IPSs available online to use as a template).

b) Decide on your asset allocation policy. You can decompose your portfolio by a combination of asset classes, geography, and/or sectors (the Zurich Prisma funds are a useful benchmark here).
c) Decide on an appropriate benchmark portfolio. This will obviously depend on your asset allocation strategy.
d) Based on the above steps, split the portfolio into active and passive components. Explain your reasoning for the active / passive mix.
e) Formulate an investment process. This can be a combination of quantitative and qualitative approaches. For example, you may wish to use stock / ETF screeners or themes.
f) Use an appropriate financial database or website to find the NAV (net asset value) or asset price on Friday 20th October (deadline for investing your portfolio). Convert into the appropriate currency, if necessary (you can use for rates).
g) Construct an Excel spreadsheet that shows the allocation and initial investment in each asset, ETF, or index fund.
h) You can rebalance the portfolio on a weekly basis. If you decide to reallocate money from one fund or asset to another, you will have to calculate the effect on the portfolio each week up to Monday 20th November. You can ignore any commissions or fees.


1) Write up an Investment Process document to detail the steps involved in a) to e) above.
2) Construct an overall Excel spreadsheet to show the portfolio’s performance for the month from 20/10/17 to 20/11/17.
3) Write a Monthly Fund Report to detail the investment approach, fund performance (versus benchmark), best- and worst-performing assets, top 10 holdings, and asset allocation. Your report should explain the key factors behind the fund’s monthly performance.
4) Develop a short PowerPoint presentation slideshow to summarise all of the above. (You can think of this as the presentation that you would give to the institutional client – you will NOT have to make a presentation in class).

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