As a recently qualified financial advisor, you are helping a client invest her £100,000 inheritance. You plan to divide the client’s capital into 3 parts. The first part consists of only individual stocks. The second part employs only passive strategies by investing in ETFs and tracker funds. In the third part, capital is allocated to derivatives.
Before committing the fund, you decide to back test the investment thesis and present a portfolio report to the client.
- In the first part of the portfolio, choose minimum of 5 stocks. You can consider equity stock in any financial market, and choose any market available in Bloomberg, but you are limited to trade only equity stocks (no ETFs nor index funds) on major exchanges. You need to explain to the client choices of each stock. To convince her that these stocks are good financial bet, your analysis and discussion should include aspects such as: choice of a particular market; its overview and major characteristics; stocks’ valuation expectation of the stocks’ future performance; the criteria used to select stocks; capital allocation of each stock; reasons of allocation etc. Bloomberg equity screening function (EQS) can help with this task.
- In the second part, choose minimum of 5 ETFs or index funds. Justify your selection, apply the same analysis and rationale as above. But you are limited to trade only ETFs and index funds in this part. Note, your ETF choices must be traded on an exchange with daily prices, some investment funds available from banks do not belong to this category.
- In the third part, choose at least 1 option contract. The option can be a hedging position or a purely speculative position or both. If it is used for hedging, demonstrate how the position protect value of the overall portfolio. If the option position is speculative, explain your rationale and justify the investment thesis.
- Back test the portfolio using stock prices from 3rd October to 5th December 2022, how did the portfolio perform against a chosen benchmark? What is return and risk of the portfolio? Please discuss which portfolio performs better during the back testing period, the benchmark or your portfolio? Explain in detail why the portfolio performs better (or worse) than the benchmark. Bloomberg portfolio management function (PORT) can help with this task.
- As a quality assurance, present a scenario analysis to the client. Hypothetical analysis of the portfolio if a crisis (in scale similar to COVID-19 or the 2008 crisis) strikes. Is your portfolio crisis proof? Why? If not, how can you reduce exposure to a financial crisis. Analysis do not need to be quantitative, discursive discussion is fine.
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