I only need to essay done from the Portfolio Construction part
BAFI3192 – Risk Management Assessment 3 Assessment (individual): 50% towards your total mark. Word limit 3000 words. Each 100 words over the limit will be penalized with -1 mark. Goal and Chronology The goal of this individual assignment is to gain a better understanding of the portfolio investment (in the US stock market) and risk management process. Below are the tasks to be completed in this assessment: Create an account (with your real first & surname) on marketwatch.com and join the following trading game: https://www.marketwatch.com/game/rm-tradinggame-sem12020 Password for the game is: rmtradingamesem12020 (it’s recommended that you trade stocks within one index e.g S&P 500, Nasdaq etc.) · Your goal is · to set up and manage a stock investment portfolio, · to make profit by trading from week 9, Tuesday, May 5th, 2020 until week 11 – Tuesday, May 19th 2020, · to identify and manage the portfolio risk, and · to communicate your investment and risk management process in using a professional report. · Create an initial equity portfolio that consists of at least 5 different stocks on the first trading day (May 5th, 2020) · Calculate the one day 99%-Value at Risk of your initial equity portfolio (portfolio created on the first trading day) using the historical approach. Use daily stock prices since 2nd January 2017 for the calculation of the VaR. · Perform the followings on the initial portfolio: · Calculate the Beta of your initial equity portfolio. · Hedge your initial portfolio against share price declines with Futures contracts · Select one stock from the initial portfolio and hedge its position against potential losses with an Options contract. · Make additional transactions to purchase or sell stocks to rebalance your portfolio during the trading period (strongly encouraged but not compulsory), in order to maximize your portfolio’s return, while keeping the initial portfolio as you have hedged it. You can purchase more shares of those initial stocks though if you see them as highly potential, but should not just sell those stocks. A copy of you initial and final portfolio including the list of stocks and balances is required in the report (appendix) as a reference for your analysis. · You must maintain the 5 initial stocks in your portfolio for the duration of the assessment. (Note: Hedging of the stock or portfolio should be done on the day you created your initial portfolio. Make sure you use the derivative price on that day. A capture of the listed price of the derivative contracts used for hedging (with the date where possible) is required to be attached to your report). Guideline for Investing and Calculations Portfolio Investment Strategy Since the trading game is only for a few weeks, the investment strategy is to generate high short-term growth in the value of the portfolio over the trading period. Use fundamental (EPS / PE ratio / ROE) and technical analysis (simple MA50) to construct your initial equity portfolio. Marking Guide Report must include the following sections: (this marking guide is made to give you an indication of the weight given to each part, but the final scores will be determined based on the marking rubric) 1. Trading philosophy: (4 marks) Give a overview of your trading philosophy, i.e. how stocks were selected and strategy to outperform the market. You should identify yourself as a value or growth investor or a mixture of both. 2. Portfolio construction: (10 marks) Present your initial portfolio including information on why you have invested in the stocks in your initial portfolio. This part should also include specific information on a. the fundamentals of each stock (2 mark) b. the technical analysis of each stock (2 mark) c. news and the overall market and macroeconomic condition (2 mark) d. The initial weightings of the portfolio and the rationale for that composition (2 mark) e. expected return of your portfolio using the CAPM (Beta, risk free rate, expected market return) (2 mark) 3. Risk identification: (14 marks) In this part you should discuss the risk profile of your portfolio. The discussion should include the following points: a. The systematic risk of your initial portfolio (4 marks) b. The unsystematic risk of your initial portfolio (4 marks) c. Calculation and discussion of the one day 99%-Value at Risk of your portfolio using historical approach. (6 marks) 4. Hedging: (16 marks) Explanation on how the portfolio was hedged. This includes: a. How you used the Futures contract to hedge your initial equity portfolio position against a possible market decline. Provide calculation as necessary. (8 marks) b. How you used the Options contract to hedge your individual stock position. Provide calculation as necessary (8 marks) 5. Reflection on the trading process: (36 marks) An important goal of this assignment is to give you a (costless) insight into your trading behavior, risk appetite and your risk management process. Learning from this activity includes a thoughtful, comprehensive reflection of the trading and hedging process. Your reflection should include: a. Your risk appetite. Hint: are you risk-love or risk-averse? How did this influence your selection of stocks in your trading and the hedging activities? Has your appetite remained the same or has it changed after you experienced this investment activity? Explain. (4 marks) b. A comparison of the return expected on the portfolio (i.e using the CAPM model) and the actual return achieved (based on stock price movement). Discuss the difference and implication this has in relation to the potential risk in stock portfolio investment. This discussion may requires a demonstration of good understandings of the CAPM model, how it is used and what it often shows, which may require a good revision and/or additional research on this model. (8 marks) c. A calculation of the net portfolio return taking into account the hedging transaction. (6 marks) d. A calculation of net return of the particular stock that you have hedged using option. (6 marks) e. A comparison and contrasting of the hedging transactions, based on which you should make a conclusion on i) the effect of hedging on your investment portfolio e.g how it helped you manage the risks that you have identified (in part 3) ii) the preferable derivative contracts (among the two) that you would prefer to use in hedging an investment portfolio. (12 marks) 6. Usage of professional Figures and Tables: (10 marks) 7. Language: (10 marks) Total=100 marks Bonus marks: Trader with the · highest portfolio return will be awarded 3 extra marks, · 2nd highest portfolio return will be awarded 2 extra marks, · 3rd highest return will be awarded 1 extra mark. Note: · The report will include VAR calculations which will require you to use Excel. Therefore, though the result of calculations should be discussed in the report, you should submit a separate Excel file to Canvas to show your detailed calculations. · This instruction includes suggestions on items to include in the report, more information for parts you think are important may be included as you feel necessary, keeping in mind the word limit. · Keep in mind that the main focus of this assignment is on the Risk Management part. The fundamental and technical analysis part only accounts for 5 marks of the total of 50 marks. To help you construct your portfolio: 1. Marketwatch provides information on the ratios and calculates the moving average for you. ie. Facebook: https://www.marketwatch.com/investing/stock/fb 2. Watch this video on how to evaluate stocks using fundamentals: https://www.youtube.com/watch?v=hrs6WhHV12c 3. Watch this video on how to use moving averages to identify buy and sell signals:https://www.youtube.com/watch?v=4R2CDbw4g88 4. Information on value investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking3.asp 5. Information on growth investing can be found here: https://www.investopedia.com/university/stockpicking/stockpicking4.asp Futures and Options Data 1. Futures contract on the S&P500 can be found here https://www.marketwatch.com/investing/future/sp%20500%20futures 2. Options contract for, for example, Facebook can be found here https://www.marketwatch.com/investing/stock/fb/options Other data: 1) Historical stock prices can be downloaded from open access websites like yahoo finance such as the following link: https://finance.yahoo.com/quote/FB/history?p=FB&.tsrc=fin-tre-srch for Facebook historical prices. You find a proxy for risk free rate here 3 month treasury bill https://fred.stlouisfed.org/series/TB3MS 2) Annual return of the S&P500 can be found here https://ycharts.com/indicators/sandp_500_total_return_annual 3) A proxy for risk free rate such as 3 month treasury bill can be found here https://fred.stlouisfed.org/series/TB3MS CAPM, Beta and ROE helpful videos: Login to https://shib.lynda.com/Shibboleth.sso/InCommon?providerId=https://sso-shibboleth.rmit.edu.au/idp/shibboleth 1. Capital Asset Pricing Model (CAPM) https://www.lynda.com/Finance-Accounting-tutorials/Capital-asset-pricing-model-CAPM/565365/710964-4.html 2. What is Beta https://www.lynda.com/Finance-Accounting-tutorials/What-beta/565365/710968-4.html 3. ROE Dupont https://www.lynda.com/Finance-Accounting-tutorials/DuPont-framework-return-equity/565365/637011-4.html 4. Earnings per share https://www.lynda.com/Finance-Accounting-tutorials/Earnings-per-share/565365/734440-4.html