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Portfolio Management II

1. Ronaldo, in his investment policy statement, indicated that he wants a strategic asset allocation of 50% stocks / 40% bonds / 10% cash. Ronaldo s portfolio is valued at $1 million, and he rebalances annually. At the beginning of the year, his portfolio looks as follows:


After one year, the stocks generated a return of 10% while the bonds generated a return of 2%. Assuming the role of a portfolio manager, help Ronaldo assess his portfolio allocation at the end of the yea. Assess the deviation (if any) from the investment policy that Ronaldo had committed for. And help him revise the allocation if needed to match the investment policy. (10 Marks)

2. Nithin Kamath of Zerodha has opposed the recent regulation proposed by SEBI to
regulate API-generated trades by various brokers as Algorithmic Trades. Algorithmic
Trading has been a cause of constant concern for all market participants including the regulators and retail traders. Assess the Algorithmic Trading participation in the Indian market and discuss how AT impacts the overall market microstructure. Discuss the differentiation between AT & HFT. Conclude with support or critique of the proposed regulation. (10 Marks)

3.a. John recently joined as a portfolio manager for ABC Bank and since he was new, he was asked to mimic a 5-Asset benchmark portfolio to ensure low-risk exposure of the investor s funds. However, based on his understanding, John tweaked the portfolio weights in expectation to outperform the market. The year-end fund performance is going to be assessed by his manager in the next few days. Based on the data summarized below, assess if John needs to be worried. Did his tweaking of portfolio weights add any value? (5 Marks)

TABLE BELOW
Weights Weights Year-End
Asset Benchmark Portfolio Asset Return Risk Exposure
A

B

C

D

E 23% 17%
21% 14%
11% 9%
9% 24%
36% 36% 11.30%
12.80%
10.80%
9.90%
12.50% 49%
25%
8%
10%
5%

3.b. John recently joined as a portfolio manager for ABC Bank and since he was new, he was asked to mimic a 5-Asset benchmark portfolio to ensure low-risk exposure of the investor s funds. However, based on his understanding, John tweaked the portfolio weights in expectation to outperform the market. The year-end fund performance is going to be assessed by his manager in the next few days. Based on the data summarized below, assess if John needs to be worried. Did his tweaking of the portfolio increase the riskiness of the portfolio? Assume Rf = 6.5% (5 Marks)

Weights Weights Year-End
Asset Benchmark Portfolio Asset Return Risk Exposure
A

B

C

D

E 23% 17%
21% 14%
11% 9%
9% 24%
36% 36% 11.30%
12.80%
10.80%
9.90%
12.50% 49%
25%
8%
10%
5%

Correlation A B C D E
A 1 0.95 -0.45 -0.95 0.03
B 0.95 1 0.25 0.45 -0.6
C -0.45 0.25 1 0.83 -0.7
D -0.95 0.45 0.83 1 -0.03
E 0.03 -0.60 -0.70 -0.03 1

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