FINC3017 Investments and Portfolio Management : Market Portfolio


The Investment Committee has strict policies on report structure, outlined below. Your task is to identify the Optimal Risky Portfolio (ORP) using the Treynor-Black optimization model and prepare a report that addresses each of the 10 items below. Where applicable, charts and tables are highly recommended.
1. Executive summary. Make reference to the portfolio recommendation and key issues.
2. Brief discussion of the Treynor-Black model process and assumptions, including a comparison to the Markowitz full-covariance portfolio optimisation model.
3. Determine and comment on the Treynor-Black ORP recommendation, clearly identifying:
a. The optimal weight of each individual security in the active portfolio
b. The optimal weight of the active portfolio
c. The optimal weight of the market portfolio
d. The ORP expected risk premium
e. The ORP beta
f. The ORP variance
g. The ORP information ratio
h. The ORP Sharpe ratio
4. Compare and discuss the Sharpe ratio of the ORP with the Sharpe ratios of the active portfolio and the market portfolio.
5. Provide a response to Committee Member A’s question. Your response should include discussion on how changes in these inputs would affect the weight of the active portfolio in the ORP.
6. Provide a response to Committee Member B’s question. In your answer, you should consider the underlying assumptions of the SIM, particularly regarding residual correlation, and attempt to support your argument with the information and data provided. You should also clearly identify what additional data and steps you would take to provide further quantitative evidence to strengthen your answer.
7. Provide a response to Committee Member C’s question. You should explain your choice of VaR methodology noting any assumptions.
8. Provide a response to Committee Member D’s question. You should clearly outline and justify a fee recommendation.
9. Provide a response to Committee Member E’s question. As CIO, Dr Gatakis is very interested in the strength of your argument but her time is limited so you also need to be clear and concise. You should be looking to impress her to validate your promotion as she has become an important career mentor and advocate for you. As such, she is also interested in where you see your future career plans in the investment management industry context.
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