Investment Management, Rational and Irrational Market
Instructions on Assessment:
The module is assessed by 100% individual written assignment. During semester 1 (week 3 to 12: total 10 weeks) you are required to construct and manage an investment equity portfolio based on investment theories. Your objective is to outperform the relevant performance benchmark on a risk adjusted basis. For UK campus students, your suggested benchmark is a portfolio with 100% of fund invested on FTSE250 Equity Index.
The following trading rules apply: No use of futures or options, no short sales, no gearing nor exchange traded funds.
Week 3
Your initial investment is £1,000,000 (UK campus students)
You can invest in any individual equities.
During the portfolio management period (Week 3 to 12), you are required to rebalance your portfolio to realise your investment objective. You must value your portfolio and take into account the transaction cost which is 1% of transaction amount per trade.
You are encouraged to use Bloomberg Financial Database for portfolio analysis, including the PRTU
and PORT functions.
Week 12
At the end of Week 12, you must stop portfolio management and carry out the final valuation. In your final investment report, you are required to address the following:
1. Discuss your investment philosophy. Demonstrate how your asset allocation decisions (Equities and Bonds) match with your investor profiling. Forecast the market and make clear what assumptions you made in forecasting the market.
(10 marks, 500 words)
2. Reflect upon your rebalancing strategies. In this section, you should highlight why you bought, hold or sell your shares and whether the rebalancing changed the nature of your portfolio. Your rebalancing strategies should be supported by relevant traditional investment theories, pricing models. Also reflect upon your investment strategies and identify relevant behavioral concepts that could be used to explain your own irrationality and help you take advantage of market irrationality in your investment strategies. This should be strongly underpinned by academic literature.
(45 marks, 1,500 Words)
3. Evaluate your portfolio’s risk adjusted absolute and relative performance. You should explain the performance difference between your portfolio and the given benchmark using attribution analysis to reveal your overall asset allocation and equity selection capabilities. Also evaluate your risk taking decisions with your investment philosophy. How did you quantify the risk for your portfolio? Discuss how different risk attitudes affect investors’ risk-return trade-off decisions, and why individual investor’s risk attitude may change in different market situations. Your discussion should be supported by relevant theories and academic literature.