Purpose of Policy Statement
The purpose of the Policy Statement is to create an agreement between XXXX, YYY, and ZZZ to collectively manage a mock $1,000,000 portfolio during the 2011 fall semester. It will define the investment objectives, strategies, and risks associated with this portfolio.
The objective of our team is to seek capital appreciation of portfolio in three months. Moreover, given the little risk tolerance of the team, our nominal return should exceeds the rate of inflation over some period of the time through capital gains, and increase the purchase power of our group. The chosen benchmark to beat is the S&P index.
Our investment strategies are somewhere in between to maximize expected returns and to minimize risks. We use Market timing as one of our strategies to maximum our returns. The market timing strategy is to making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction is based on an outlook of market or economic conditions resulting from technical or fundamental analysis.
Also we another strategy is to analysis base on performance of a particular financial asset. The start-up fund was divided into six parts: 10% cash, 5% mutual funds, 55% stocks, 30% bonds, and may vary by+/-5%.
Given the short time frame, liquidity is a concern and as such long-term speculative investments such as real estate, art and antiques, and collectibles will be avoided. Only those investments than can be traded on a short-term notice will be used. Taxes and trading costs will not be considered since this is a simulation.
On the grounds of strong risk aversion expressed within the team, risk bearing in excess of general market risk is not tolerated. Moreover, the team strives to mitigate the inevitable share of market risk as much as possible. As to the weight assigned to each stock that is central to risk control, there is a cap of 25% of the fund that is available to each stock. No extra use of fund is allowed on single stock basis.
1. Well-Diversified & Best Risk-Return Trade-off Portfolios
After we established the investment policy that specified our investment objectives, risk tolerance, allocation of different types of securities in details, we then sought for the best selections of securities. Generally, our first methodology was very simple but useful: maintain an appropriate level of portfolio diversification, and maximize the total return on our investment meanwhile limit the total risk.
According to this basic approach, firstly, we divided our bond investment into four portions equally in Treasury Bonds and different corporate bonds, which enjoyed good credits, rated above A, and operated stable and profitable in the long-run:
|Table1 Bond Selections | | |Coupon Rate/Maturity |Rating | |T-Note |3.875%/15-Feb-2013 |AAA | |MetLife Inc. |5.000%/15-Jun-2015 |A | |Morgan Stanley |5.250%/02-Feb-2012 |A | |Merck & Co Inc. |4.000%/30-Jun-2015 |AA |
Secondly, with respect to the reserved attitude for mutual funds, our team decided to only invest in two of them, taking up 5% of our whole portfolio value totally. The following table provides summary information on these two funds:...