Project Title/Subject: Economic And Baty Of Service Assignme

Project Title/Subject Economicand Batype Of Serviceassignment With Calc

In answering the questions below you should submit TWO documents: a. A Word or PDF document where the questions are answered (report) and, b. An excel spread sheet with the data collected and your workings. The overall word limit for questions 1 to 3 is 2,000 words, excluding cover page and references The cut-off date, for the portfolios (Question 1 to 3) is April 12th .

This is the date that must be used to assess/report performance achieved. The short essay (question 4) word limit is 1,000 words. Question 1 Your client wants you to produce a set of minimum variance and efficient portfolios with and without short selling restriction; using any 20 stocks of your choice. Your cash balance is £500,000. Instructions: 1. Portfolio Construction a. Collect the closing monthly share prices for 61 months for 20 companies from your choice (e.g. Datastream, Eikon, Bloomberg, yahoo finance, etc) b. Derive the minimum variance frontier for various levels of expected returns, without shortselling of risky assets 2 c. Derive the minimum variance frontier for various levels of expected returns with restricted short-selling (apply whatever restriction you consider appropriate) of risky assets allowed. d. Plot those two minimum variance frontiers. e. Produce a client report explaining your workings and findings. f. Critically discuss the problems associated with short-selling. 2. Performance Regarding your efficient portfolio (you should select one portfolio from the alternatives produced) analyse your risk/return performance against an appropriate benchmark (justification of the benchmark should be provided). [30 marks] Question 2 You have the mandate to construct an Investment Fund. The initial cash balance is £500,000 that you can use in total or partially. In your report you have to: a. Define the Investment objective and policy (strategic asset allocation risk profile, benchmark, constraints, etc.) b. Explanation of the rationale behind the portfolio construction c. What are the characteristics and composition of your portfolio? Why have you structured in this way? d. Analyse your risk/return performance against an appropriate benchmark (justification of the benchmark should be provided). It is expected the use of risk adjusted performance measures e.g. Sharpe ratio). [30 marks] Question 3 You are a hedge fund manager. The initial cash balance is £500,000 that you can use in total or partially. In this task you should apply any of the long/short Portfolio Construction Techniques discussed (Market Neutral, Portable Alpha (Equitised) portfolio or Hedge Strategy). In your report you should clearly explain the rationale behind the portfolio construction and its composition, how your strategy is implemented, benchmark used and theoretical payoff. [10 marks] The overall word limit for questions 1 to 3 is 2,000 words, excluding cover page and references The cut-off date, for both portfolios (Question 1 and 2) is April 12th . This is the date that must be used to assess/report performance achieved. Question 4 Many observers think that the Bank of England will raise the base interest rate in the next 18/24 months. Explain what could be the motivations and effects of such a policy on the UK economy and how this decision can be affected by Brexit. Attached files available to the selected winning bid I will attached the excel sheets I started with my relevant stock details. Cear instructions will also attached for the assignment.

Paper For Above instruction

The assignment at hand requires a comprehensive financial and economic analysis, focusing on portfolio construction, performance evaluation, fund management, and macroeconomic policy implications related to interest rate decisions in the UK. The complexity of this task mandates a detailed, methodically structured approach, supported by quantitative data, theoretical frameworks, and critical discussions.

Question 1: Portfolio Optimization and Risk Analysis

The first task involves constructing minimum variance and efficient portfolios using 20 stocks, considering both with and without short selling restrictions. The process begins with data collection—monthly closing prices over 61 months for chosen stocks sourced from reputable platforms such as Bloomberg or Yahoo Finance. Using this data, the next step is to estimate the expected returns and covariance matrix essential for portfolio optimization.

The development of the minimum variance frontier entails applying Markowitz’s mean-variance optimization principles, first without restrictions and subsequently imposing short sale constraints. For the unrestricted case, portfolios that minimize risk for given return levels are identified by solving quadratic optimization problems. The short sale restriction typically limits weights to non-negative values, modifying the optimization and resulting in a different frontier. Visualizing both frontiers by plotting risk (standard deviation) against expected return reveals the efficiency boundary.

The report should thoroughly explain the methodologies used—including data processing, assumptions, and optimization techniques—and interpret the resulting frontiers. A critical discussion on the problems associated with short selling encompasses issues like potential for unlimited losses, market liquidity concerns, and regulatory challenges.

Selecting an optimal portfolio from the efficient frontier involves analyzing risk-adjusted return metrics like the Sharpe ratio, alpha, and beta in comparison to an appropriate benchmark, such as a market index like the FTSE 100 or S&P 500. The performance evaluation includes calculating these metrics to assess whether the chosen portfolio delivers superior returns relative to its risk profile.

Question 2: Construction of an Investment Fund

The second part entails designing an investment fund anchored in a clear objective and policy. This includes defining the strategic asset allocation aligned with the investor’s risk profile, time horizon, and constraints such as liquidity, legal restrictions, or ethical considerations. The initial cash of £500,000 can be allocated across various asset classes—equities, bonds, currencies, or alternative investments—that align with the investment mandate.

The rationale behind the portfolio’s structure should be justified in terms of diversification, risk mitigation, and return potential. For example, emphasizing a balanced approach might involve allocating 60% to equities for growth with 40% in fixed income for stability. The specific assets selected should reflect sector and geographic diversification, liquidity considerations, and macroeconomic outlooks.

Performance evaluation against a benchmark—say, a blend of MSCI World Index and Barclays Global Aggregate Bond Index—using risk-adjusted measures like the Sharpe ratio, Sortino ratio, or Information ratio, is necessary to demonstrate the fund’s effectiveness. These analyses help justify the portfolio’s design and assess whether the investment objectives are being met.

Question 3: Hedge Fund Strategy Development

As a hedge fund manager, the application of long/short strategies or market-neutral portfolios involves sophisticated techniques such as pair trading, leverage, derivatives, or portable alpha strategies. The construction process begins by identifying pairs or sectors with diverging performance and establishing long and short positions to exploit anticipated relative movements. The rationale for this setup focuses on generating alpha independently of market direction, thus reducing systematic risk.

Implementation involves selecting appropriate instruments (stocks, options, futures), setting leverage, and executing trades according to predefined signals. The theoretical payoff diagrams illustrate how these strategies aim to generate positive returns even in stagnant or declining markets. The benchmark for performance measurement could be a market-neutral benchmark or a hedge fund index like HFRI.

The report concludes by discussing risks, including leverage risk, liquidity risk, and model risk, alongside risk mitigation techniques. This comprehensive approach emphasizes how such strategies can enhance diversification and return potential.

Question 4: Macroeconomic Policy and Brexit Impact

The final discussion explores the potential motivations behind the Bank of England increasing the base interest rate in the next 18-24 months. The primary motivations include controlling inflation, stabilizing economic growth, and preventing asset bubbles. An increase in rates tends to cool down overheating sectors, strengthen the currency, and curb excessive borrowing. However, such a decision is heavily influenced by macroeconomic indicators like inflation rate, employment figures, and GDP growth.

The effect of a rate hike on the UK economy could be mixed—higher borrowing costs may dampen consumer spending and business investment, possibly slowing economic growth and employment. Conversely, it can help anchor inflation expectations and stabilize financial markets.

Brexit adds complexity to this decision by introducing uncertainties around trade policies, currency stability, and investment flows. Brexit-related disruptions can dampen economic growth and inflation, potentially delaying or altering the Bank of England’s tightening plans. The Brexit-induced uncertainty might also lead to demand for safe assets like government bonds, influencing the central bank’s stance and policy choices.

Overall, the interplay between domestic economic indicators and Brexit uncertainties makes interest rate decisions highly nuanced, requiring careful analysis of both short-term shocks and long-term prospects.

References

• Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
• Sharpe, W. F. (1966). Mutual Fund Performance. The Journal of Business, 39(1), 119–138.
• Litterman, R. (2003). Modern Portfolio Theory (Lecture Notes). Goldman Sachs.
• Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25–46.
• Elton, E. J., Gruber, M. J., & Blake, C. R. (2014). Modern Portfolio Theory and Investment Analysis. John Wiley & Sons.
• Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments. McGraw-Hill Education.
• Hull, J. (2017). Options, Futures, and Other Derivatives. Pearson.
• Barberis, N., Shleifer, A., & Wurgler, J. (2005). Comovement. Journal of Financial Economics, 75(2), 283–317.
• Bank of England. (2023). Monetary Policy Report. Bank of England.
• ECONOMIC DATA. (2023). Office for National Statistics. UK Economy Overview.