investment portfolio construction shuohuang

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www.company.com Majestic Group Members: By u, Shuo Huang Keqing Qu Chuan Tian WIN OR LOSE ? Majestic Fund Analysis Term Project for Fin512

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Investment Portfolio Construction to beat Benchmark

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Page 1: Investment Portfolio Construction Shuohuang

www.company.com

Majestic Group Members:By u, Shuo Huang

Keqing Qu Chuan Tian

WIN OR LOSE ? Majestic Fund Analysis

Term Project for Fin512

Page 2: Investment Portfolio Construction Shuohuang

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Contents

• Introduction and Objective • Strategy• Assumption• Portfolio construction

• Risk and industry exposure• Conclusion

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Introduction and objective

• What’s Majestic Fund?

• Our objective----beat S&P 500

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Strategy

• 1. Forecast macro-economy from FY1990-2008• --good years or bad years?

• 2. Find out pro-cyclical industries for good years and counter-cyclical industries for bad years

• 3. Pick stocks from chosen industries to construct Majestic Fund

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Assumptions

1. Rf is monthly T-bill rate.

2. Macro-economy forecast bases on 9 years’

eco-cycle.

3. Industry’s correlation with GDP growth bases

on previous 10 years’ data.

4. High EPS and Big Equity bring high return.

5. Definition of “other stocks”: stocks with high EPS

and Big Equity from uncorrelated industries.

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Forecast Macro-economy

Our Model:

GDPT+1=a+b1*F1t+b2*F2t+b3*F3t+b4*F4t+ε

GDP: in 100 billions

Four indicators:

F1 is retail sales(in billions)

F2 is the M2 money supply(in 100billions)

F3 is S&P 500 index(price)

F4is CPI index(price)

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1.Test Forecasting Modelprevious 20y data from 1971-1989

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High fitting degree and stability, it is

a good model for forecasting

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Forecast from 1990-2008

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Forecast Result

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Forecast Result

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Find out Pro-cyclical Industries and Counter-cyclical Industries

Correlation between percentage of industry return and percentage change of GDP

Correlation > 0

Correlation < 0

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Result of pro-cyclical industries and counter-cyclical industries

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Select Stocks

1. Strategy— select High EPS and Big Equity companies from each chosen industry

We have 1 to 3 companies from each industry.

2. “Others”: adjust our portfolio by adding 1 or 2 stocks with high EPS and Big Equity from uncorrelated industries .

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How we select stocks?

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Stock select results:

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Portfolio Performance

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Risk Exposure

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Industry Exposure

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Industry exposure result

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Conclusion1. Setting up right model to forecast economy2. Defining the pro-cyclical and counter cyclical

industries correctly3. Selecting high equity companies to keep

consistency and low stock turnover ratio

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Success brings the seeds of failure!

Thank you!