Managing Investment Portfolios - Dynamic Process - Example

PORTIFOLIO SIMULATION PROJECT Table of Contents Investment Policy Statement 3 Objectives Of The Simulation 3 Time Horizon 3 Risk Tolerance 3 Constraints 3 Investment strategy 4 Evaluation 4 Market review and outlook 5 Portfolio weekly performance 5 Week 1 5 Week 2 6 Week 3 6 Week 4 7 Week 5 7 Week 6 7 Best Sale 8 Worst Sale 8 Portfolio Performance Ratios 8 Total average returns 9 Treynor measure 9 The Sharpe Ratio 10 Information Ratio 10 Modigliani risk-adjusted performance or M2 11 References 12 Investment Policy Statement Objectives Of The Simulation It is to learn and to experience the world that is stock trading. This has a long term effect on getting to learn on the various avenues of Investment and asset management. To effectively invest a total of 200,000, in stocks that have been listed on the S & P 500. The aim to get a return of around 20% by the end of 8 weeks on the upper side and on the down side to be able to make at least 1%. Considering that this is just the start in stock trading experience, the challenge shall be taken head on. Time Horizon The simulation shall take a total of 8 weeks. However the actual trading shall take place after two weeks. This will give us enough time to study the market before getting into it. It will also let us get to see how sudden policy changes within the companies that are listed affect the market. Product launch, like the launch of the new iPhone 6 can be a major play in the stock market. Risk Tolerance Risk tolerance in this project is quite high. The decision to invest 200,000 in the stock market is quite high risk. Also we have very ambitious portfolio goals. This shows that the risks involved in this project are above average. However our risks are very guided and controlled so as not to end up in desperate trading Constraints There were various constrains to the achievement of the objectives set out in the project. First, is the time between ordering and actual purchase. This at the beginning of our trading was a major hiccup. The transaction took more as long as two days. This then ends up in a loss since by then the price had lowered. Second, was our inexperience in trading. This was seen especially when shorting and covering was done. It is also evident with the trading in the first few weeks some losses were made. Third, was the time horizon. For effective trading and actualization of our objectives, more time to learn and get to understand the stock market would have come in handy. However, the time allocated was used to the maximum. There were also some constraints that were experience, like the various regulations on stock trading and also the time difference within the two countries. Investment strategy Even though there was not so much experience in stock trading or information already acquired apart from what was learnt in class, the objective of our simulation was achieved. This is after achieving a total average return of more than 160% with an overall return of 23%. This was significantly higher than that of S & P 500 within the same amount of time. Evaluation The project simulation was evaluated against well-known instruments, the Dow Jones, NASDAQ, and S & P 500. Market review and outlook Over the month of April there were several significant happening in the market. The global equities delivered positive returns in April with emerging markets outperforming developed markets. The crude oil prices rebounded over the month. The U.S equities gained as the prospect of an interest rate hike receded. Merger and acquisition activities continued. There was a general positivity in the market that had been rather unprecedented. Eurozone equities came under pressure as bond yields rose and the euro strengthened against the dollar. This went on to support the oil and gas sector in the UK. The Chinese equities had a liquidity driven rally as the central bank cut the reverse requirement ratio. The Russian stock also profited from the rising oil prices. Portfolio weekly performance Week 1 This was the week for us to start trading. After careful consideration we have selected a diverse portfolio consisting of stocks from various sectors. We had Paragon Offshore Ltd, Lumber and Liquidator Holdings Inc., Fire Eye Inc., Spirit Corporation, Facebook Inc., FedEx Corporation, Silver Spring Network, Accord International Inc., and Cyber Ark Software Ltd. Most of these are listed in NADSAQ and the NYSE. We took our time with the trading. The first week we were testing the waters. We managed to buy two stocks from two different companies. These were stocks from the FedEx Corporation and the Cyber Ark Software Ltd. The diversity was well informed since if anything would have happened to one sector then it would not adversely affect the other stock. We try to sell our Cyber Ark stock but the transaction time was too long. It took two days to do the transaction. This ended up with us getting a loss. It served as a good lesson on transaction timing, timely money wiring and procedures of transactions. Week 2 This also covers week 2. This is because the only transaction that took place that week was the only we had ordered the previous week. We took this time to go back and learn on transactions and what we have to do to make sure the transaction happens smoothly. By the end of close of week, the market went down. All the three indexes, Dow Jones, NADSAQ, and S & P 500, all went down. Even though there was this down surge there were hopes for a better week ahead since the analysis had predicted it. Also, there was a look out for the S & P 500, getting to be above 1890. Week 3 This week was not so good for the market. The market closed at a low. However, we managed to take advantage and buy some stocks from the Lumber and Liquidators Holdings, Facebook Inc. and Apple Inc... There was speculation that in the coming weeks these first two stocks would increase in price. We managed to trade with the Apple stocks for a day and managed to gain $46. This is 0.05% positive rate of return. At this time we believed that we had learnt a lot and for the coming weeks we would take more risks. Week 4 This was a week characterised by poor buying and selling of stocks. The Facebook Inc. shares were sold at 81.50 having been bought at 82.66. This taught us not to depend on speculations that are not well founded on facts. However, the FedEx stock did make us some profits. This is from the fact that the stock price rose from 164.79 to 170.00. This provided more funds to try and venture into our investments. We also tried out on shorting and covering. The first time we did it, it did not work out so we decided to go back and research on it and become more conversant in dealing with such a venture. At the end of the week, trading with the FB shares got us enough money to acquire some more shares. The week ended with a negative in the portfolio, but this is because of the fb shares that were bought at the end. The market was however positive, with the indexes all having an upsurge. Week 5 This week sees the portfolio have negative returns. This is the opposite of the from the market. This is from the fact that there was a loss in the sale of the Sprint stock. The fact that we were able to trade with the FEYE shares, shows that we had now gained confidence in ourselves and in the market. Week 6 This week showed how we had gained in experience on the trading. It eventually bared fruits. we were able to make very high returns in this week. There was as much as 209% rate of return on the stock for that week. The week ended with extremely good returns. These returns were better than any in the indexes. This helped us to even make an overall profit of more than 20% on our initial capital. The Market was rather stagnant and to be able to make such returns it was truly acquired skill. Best Sale Our best sell was sale of the FedEx shares in week six. This was after the sale was made of stocks at the price of 170.00. this is after they had been bought at 164.79. this is a more that 3% return from one single stock at a single time. This improved our portfolio by over $1000. Worst Sale The worst sale of the portfolio is the Sprint stock sold in week seven. This is after the stock was bought at 5.27 and some more at 5.24 only to be sold at 5.13. This means a loss of up to 2.66% for one investment at one time. This is also closely followed by the Facebook shares sold in week 6. This saw the stock, bought for 82.66 and sold at 81.50. This is a loss of 1.4%. This is from the stock sold at that time. Portfolio Performance Ratios portifolio%s dowjones%s nasdaq S&P% 162.75% 0.67% 10.82% 0.98% Total average returns average active return 12.66% 1.1136E+13 average return benchmark 0.90156% 8.599987259 average return portfolio 13.56% 8.2995E+13 variance of active return 0.425173605 6.749421738 variance of benchmark 0.001254272 0.019910944 variance of portfolio 0.414522685 6.580343629 std deviation of active return 0.652053376 2.597964922 std deviation of benchmark 0.033907948 0.141106146 std deviation of portfolio 0.643834362 2.565218047 beta -3.78752528 -3.78752528 daily rate 0.0004 0.146 treynor measure -0.03570231 -2.1913E+13 sharp ratio 0.210028247 3.2354E+13 information ratio 0.194167784 3.19462E+13 sharp ratio benchmark   59.91225415 M^2 0.007521627 4.56535E+12 time weighted average 1.2309589   The portfolio has a higher standard deviation and higher return. This means that we will have to follow the active return. There are ratios used to do this analysis Treynor measure This measure is very fundamental is portfolio management. The treynor measure is -0.0357. the measure is made negative because of a negative beta value. A big treynor measure the better the portfolio. In calculating this measure, we use the daily risk less rate of 0.0004%, or the annual equivalentof 0.014%. The Sharpe Ratio The Sharpe ratio for the portfolio is 0.21. The benchmark Sharpe ratio for the year is 59.912. The Sharpe ratio is meant to show us if the returns are from smart investment or the riskless investment. This as is clearly seen from the results is smart investment. Information Ratio This ration shows return above the return of a benchmark to the return relative to those returns. Rp = Return of the portfolio Ri = Return of the index or benchmark Sp-i = Tracking error (standard deviation of the difference between returns of the portfolio and the returns of the index i.e.: standard deviation of active return) 0.194167784 is our ratio; this is because of the high rate of return compared to the benchmark. Modigliani risk-adjusted performance or M2 It measures the returns of the portfolio, adjusted for the risk of the portfolio relative to benchmark.   is the Sharpe Ratio  is the standard deviationof the excess returns for some benchmark   is the average  risk-free rate for the period in question. For this portfolio, the M^2, is 0.007521627. References Maginn, J.L., Tuttle, D.L., Pinto, J.E., McLeavey, D.W., (2007).Managing Investment Portfolios:A Dynamic Process, 3rd Edition.John Wiley & Sons: New Jersey, USA. Wikipedia.com Invespodia.com Stockstobuy.org Dowjonesclose.com Read More