Investment Portfolio Construction Shuohuang

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    05-Jul-2015

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Investment Portfolio Construction to beat Benchmark

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  • 1. MajesticGroup Members: By u ,Shuo Huang Keqing Qu Chuan Tian WIN OR LOSE ?MajesticFund AnalysisTerm Project for Fin512

2. Contents

  • Introduction and Objective
  • Strategy
  • Assumption
  • Portfolio construction
  • Risk and industry exposure
  • Conclusion

3. Introduction and objective

  • Whats Majestic Fund?
  • Our objective----beat S&P 500

4. Strategy

  • 1. Forecastmacro-economy from FY1990-2008
  • --good years or bad years?
  • 2. Find out pro-cyclical industries for good years and counter-cyclical industries for bad years
  • 3. Pick stocks from chosen industries to construct Majestic Fund

5. Assumptions

  • 1. Rf is monthly T-bill rate.
  • 2. Macro-economy forecast bases on 9 years
  • eco-cycle.
  • 3. Industrys correlation with GDP growth bases
  • on previous 10 years data.
  • 4.High EPSandBig Equitybring high return.
  • 5. Definition of other stocks: stocks with high EPS
  • and Big Equity from uncorrelated industries.

6. Forecast Macro-economy

  • Our Model:
  • GDP T+1 =a+b 1 *F 1t +b 2 *F 2t +b 3 *F 3t +b 4 *F 4t +
  • GDP:in 100 billions
  • Four indicators:
  • F 1is retail sales(in billions)
  • F 2is the M2 money supply(in 100billions)
  • F 3is S&P 500 index(price)
  • F 4 is CPI index(price)

7. 1.Test Forecasting Model previous 20y data from 1971-1989 8. H igh fitting degree and stability, it is a good model for forecasting 9. Forecast from 1990-2008 10. Forecast Result 11. Forecast Result 12. Find out P ro-cyclical I ndustries and C ounter-cyclical Industries Correlation between percentage of industry return and percentagechange of GDP Correlation > 0 Correlation < 0 13. 14. 15. 16. Result ofpro-cyclicalindustries andcounter-cyclical industries 17. Select Stocks

  • 1. Strategy selectHigh EPS and Big Equitycompanies from each chosen industry
  • We have 1 to 3 companies from each industry.
  • 2. Others: adjust our portfolio by adding 1 or 2 stocks with high EPS and Big Equity from uncorrelated industries .

18. How we select stocks? 19. 20. 21. Stock select results: 22. Portfolio Performance 23. 24. Risk Exposure 25. 26. 27. Industry Exposure 28. Industry exposure result 29. 30. Conclusion

  • 1. Setting up right model to forecast economy
  • 2. Defining the pro-cyclical and counter cyclical industries correctly
  • 3. Selecting high equity companies to keep consistency and low stock turnover ratio

31.

  • Success brings the seeds of failure!
  • Thank you!

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