Funds Management

Funds management tuto

Week 11

Aina Faten Abdu Karim

23765674

Q1

If alphas last on average for 2 years, the average of the portfolio’s turnover would be approximately at 50% per year, before consideration of transaction costs. If there is declination in alpha from 2 years to a year, it might bring to an increase in turnover to the value of 100% per year due to a swift deterioration in benefit from holding a position. Thus a higher turnover would bring to a higher transaction cost and shorter term gains realization. Portfolio holdings will tend to decrease as positions are held for a shorter

period of time.

Q2

Portfolio management is a process of continual portfolio revision due to many reasons which one important one is the ever changing needs from the investors. Change may come in the form of the investors need on wanting to invest more or less in  a portfolio which requires portfolio revision or a change in their investment goal may occur which lead to a revision on their portfolio as well. Besides that, changes in the financial market such as the risk in changes in interest rates or the volatility in the equities market, that may also lead to a constant revision of portfolio investments.  Hence in this sense, I agree with the statement. s

Q3

1. The critiques on establishing a corridor of target percentage of +/- 5% is that such targets does not take into consideration the volatility of different asset classes where rebalancing usually comes from those asset classes that are of higher volatility. Besides that, corridor percentage also doesn’t look at asset correlations as well as not taking into account the different amounts of transction costs based on different asset classes.

1. i) The corridor should be lower due to the lower risk apetite

ii) The corridor should remain unchanged as it does not have an impact on the bonds

iii) The corridor should be lower with lower correlation, as the asset becomes less   risky because they don’t move in the same direction as other assets. The questions is quite ambiguous

iv) The corridor should be increased as the volatility in domestic equities has increased.

Q4

1. The best method would be the calendar rebalancing where monitoring is done frequently such as weekly or monthly and allocations are adjusted to match the desired needs. The main factors that play a role on this type of rebalancing are transaction costs as rebalancing too frequently such as weekly may be expensive, time constraints as well as the determined drifts. The advantage that this method has is it isn’t time consuming for the investors as compared to other methods.

1. If markets were non trending, according to Perold- Sharpe analysis, the markets are usually categorized by reversal and heightens investment outcomes after rebalancing to the SAA.

Q5

• Buy and hold strategy

• This strategy only involves a process of buying and then holding it an initial mix and no rebalancing is required. The investor gets to determine the floor below in which they don’t want the porfolio’s value to fall to and thus and amount equal to the value of that floor is then invested in an asset that is less risk or risk free and does not fluctuate in price. The strategy is

particularly appropriate for an investor whose risk tolerance above the specified floor varies with wealth but drops to zero at or below that floor. After the initial portfolio transaction, transaction costs are not an issue. The strategy is tax efficient for taxable investors.

• Constant mix

• This strategy preserves an exposure to equities that is a continual percentage of total wealth. There is periodic rebalancing to bring the mix of assets back to the desired state by selling the equities as they increase in value and vice versa. This strategy works best in a relatively flat market and capitalizes on market reversals. The constant-mix strategy is particularly appropriate for an investor whose risk tolerance varies proportionately with wealth; such an investor will hold equities at all levels of wealth. works well with non trending market because you get the chance to sell at high and buy at low

• Constant proportion portfolio insurance

• A method of portfolio insurance in which the investor sets a floor on the dollar value of his or her portfolio, then structures asset allocation around that decision. The two asset classes used in CPPI are a risky asset (usually equities or mutual funds), and a riskless asset of either cash, equivalents or Treasury bonds. The percentage allocated to each depends on the "cushion" value, defined as (current portfolio value – floor value), and a multiplier coefficient, where a higher number denotes a more aggressive strategy. The floor value involves investment in less risky assets

b) The CPPI strategy would be the best choice for MU endowment as their specifications are factored in such as their increase tolerancy for risk, with the bullish out on the market’s growth in assets for the next five years and with the lower than normal volatility level, this strategy provides consistency in their desire for higher tolerance as the strategy requires more purchasing of equities as higher risk tolerance is portrayed through such action.

Q6

1. ($220,000- $200,000)

= $20,000 x 5

= $100,000 is put into equities

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