Portfolio Management Report

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| 2013|
| Javis Mutual Fund

[Dow-Jones Plus fund]|

Word Count: 3750
Word Count: 3750
Table Of Content
Part A - Passively managed investment
Optimal passive fund from historical data estimates
Methodology overview3
Steps in Practice4
Optimal passive fund from CAPM model
Applying CAPM6
CAPM’s application6
Steps in practice6
Part B - Actively managed investment
Problem defined10
Solution: Black – Litterman Model11
Application for Dow Jones Plus Fund12
Review on the Portfolio13
Part C – Portfolio performance and Style analysis
Portfolio performance
Sharpe’s Measure16
Treynor’s Measure16
Jensen’s Measure17
M2 Measurement17
Style analysis
Style analysis18
Benchmark indices18
Fund’s return19

Dow-Jones Plus is a newly established fund of Javis Mutual Fund, focusing on the Dow Jones Industrial Average. Starting with US$10 million and following active managing style, the fund’s goal is to outperform the DJIA index and the also outperform the style benchmark portfolio. This report is to show the investment strategy of our Board Management in constructing the portfolio. Through a well-certificated process, with detailed historical data, thorough analysis and expert opinions, it is supposed to reach the goal, and thus, acquire the trust and support from investors.

Part A
Passively managed investment
Investment Strategy
Now that ten constituents of the portfolio have been determined, the investment strategy firstly conducted is to use a predetermined strategy that doesn't entail any forecasting, called passively managed investment. The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future. With low management fees, higher returns in such fund (compared to a similar fund with similar investments but higher management fees and/or turnover/transaction costs) are expectedly obtained. In addition, mean-variance framework would be employed. The optimal portfolio will be chosen based on the following idea: selecting the portfolio which has the highest expected return for a given level of risk or, in other words, the minimum risk level for a given expected return. I. Optimal passive fund from historical data estimates

1. Methodology overview
Portfolio risk minimization involves taking stock price historical data and calculating past returns and their variances. This will separate certain stocks which have a tendency to fluctuate greatly from day to day and those that have more consistency. Using historical data, the algorithm will be able to give us the portfolio with the minimum variance for each expected return. By varying the expected return, we construct an efficient frontier. The efficient frontier is a term used for the infinite number of combinations of the mean rate of returns and corresponding minimum variances. For any mean rate of return that we choose, there is a minimum variance portfolio associated with it. Since we are using historical data, it is very important to gather data as recent as possible. When our main concern is to make a profit, this is an effective strategy. We can always set a high expected rate of return, and even though the portfolio variance will be high, the optimization routine will minimize it. This strategy could thus be used by both the conservative investor and the aggressive investor. In this project we implement this theory using historical data from the whole year of 2011 (on daily basis) to find the optimal portfolio and then computing how much return we would have got in the next year. 2. Steps in Practice

a. Data procession
| Mean|
BA| 0.06%|
BAC| -0.24%|
JNJ| 0.04%|
MCD| 0.14%|
WMT| 0.05%|
IBM| 0.10%|
GE| 0.04%|
DIS| 0.03%|
KO| 0.05%|
PG| 0.03%|
The portfolio...