You need to imagine that you have borrowed a total of £1,000,000 at 2% interest p.a. in perpetuity and that invested this money with the aim of funding your retirement. You hold a portfolio with the following 10 investments:
You will be charged commissions/bid-offer spread of 0.25% of the stock’s purchase price. An Excel worksheet is available on Blackboard to help you keep track of your portfolio and its performance between
Sensitivity: Internal
Analyse the portfolio in Word document
5. You must first analyse your portfolio choices from a behavioural perspective. Use
around 500 words to discuss the biases that (may) have influenced your choice of
assets. Typical biases to consider are overconfidence, representativeness,
availability, ambiguity aversion, narrow framing, herding etc. You will need to cite
literature sources (with references) in the discussion.
6. Next you must evaluate your portfolio asset allocation by applying portfolio theory
(around 1000 words). You will need to cite theory and literature sources (with
references) in the discussion.
7. First look at the initial 10–asset portfolio and
a. Analyse the diversification of the initial 10–asset portfolio
i. How well diversified was it across asset classes? How could you
improve it?
ii. How well diversified was it within the asset classes? How could you
improve it?
iii. How well diversified was it across international and domestic? How
could you improve it?
b. How did your portfolio perform over your investment period (the month
between 1–Feb and 1–Mar)? Would a naïve diversification strategy have
yielded better a better result (see the equal weights portfolio)?
c. Discuss the correlations between your 10 portfolio assets – refer to the
matrix (point 2.c.)
8. Comparing Portfolio A and Portfolio B,
a. discuss whether Markowitz diversification helped reduce risk (refer to the
calculations in point 4.a.)
b. discuss the portfolio betas you calculated (point 4.b.) relative to the market
risk.
c. discuss the Sharpe ratios you calculated (points 4.c.). Which allocation is the
best – Portfolio A or Portfolio B, and why?
9. Going back to your initial 10–asset portfolio,
a. Would this portfolio be good enough for you to meet your retirement goal?
Indicate how you think your portfolio performance should be judged or
benchmarked over the long–term.
b. With explicit reference to active and passive management, how would you
change it?
