investment portfolio construction shuohuang
DESCRIPTION
Investment Portfolio Construction to beat BenchmarkTRANSCRIPT
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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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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!