Task 1
You are a UK based Hedge Fund who has been asked to manage £1 million on behalf of a group of investors. All investors in the group are in their 30’s with steady incomes and long term goals; they do not need any regular income from their investments. For the purposes of
this report, please ignore tax implications and transaction costs.
Part A – Asset Allocation [20% of the final grade]
1. Based on the above information provided to you, what proportion of money will you allocate to each of the following asset classes:
A. Listed stocks of firms (Equity)
B. Cash or Cash Equivalents (Cash)
C. Bonds or other fixed income securities (Bonds)
D. Any other asset classes other than the three above
Justify your allocation strategy by critically building upon the concepts studied within this module.
Part B – Equity Allocation [20% of the final grade]
No matter what proportion of money you allocate to Equity in Part A, your portfolio MUST include a minimum of 4 firms’ stocks. Justify why you have included these firms’ stocks in your portfolio. Your report MUST include a brief individual analysis of each firm in your portfolio 2 PLUS how all the firms’ stocks fit together as a portfolio of investments 3 .
1 As with FIN4450, a link will be provided on My Learning to submit your report online.
2 This analysis can be thought of as a summary of the kind of analysis you did in your FIN4450 coursework.
3 In other words, how have you spread your equity investments across industries/countries i.e. explain your diversification strategy; what weights were allocated to each of the 4 firms and why.
Part C – Portfolio Performance [10% of the final grade]
Evaluate performance of the Equity component of your portfolio from Part B using 3 years of historical data. More specifically, calculate the following performance measures for your portfolio and use them to compare its performance with the FTSE100 index 4 .
A. Jensen’s Alpha
B. Sharpe Ratio
C. Treynor Ratio
Task 2 – Portfolio Insurance 5 [10% of the final grade]
A new investor offers you $1 million of her money to manage. She insists that you must invest all her money, the entire sum of $1 million into the Google stock. However, she is worried about losing money and hence wishes to protect her investment.
Design a hedging strategy using Put options to insure her investment in Google shares. Calculate the cost of insurance 6 using real time option prices for Google which can be obtained from the Google Finance website. Critically evaluate the strengths and weaknesses of this portfolio insurance technique.
Further guidance will be provided during lectures and seminars, where you will also have the opportunity to ask questions and clarify your doubts.
