jia wei zhang-wealth management project

Innovative Asset Allocation 2014

Asset

Management

Overview

Portfolio Constituents

Traditional Mean-Variance Optimization Portfolio

Conditional Value at Risk (CVaR) Optimization Portfolio

Risk Controlled Portfolio (Risk-Class Diversified Portfolio)

Asset

Management

Overview

The fundamental investment objective is to generate the long termreturns needed to sustain our clients at the return and risk objectivethrough improved model asset allocation.

11.5%Annualized target return (gross)

20BillionInvestment fund at October 20, 2014

5ETFsInvest instrument passive strategy

Asset

Management

Interest Rate

Foreign Currency

Exchange

Equity Risk Factor

Liquidity

Risk Exposures

Client Profile: Pension Plan

Return Objective

Achieving investment returns to serve

its liabilities under subjection of pre-

defined constraints and improving

pension plan surplus best benefiting

its pension plan memberships

Asset

Management

Overview





Asset

Management

Portfolio Constituents:

IFNA Ishares North America Real Estate LWC SPDR Barclays Long Term Corp Bond

Asset Class: Real EstateExchange: NYSEArca; to track the investment results of an index composed of real estate equities in North America

Asset Class: Fixed Income-Corporate BondExchange: NYSEArca; track the long term sector of the United States corporate bond market

VWO Vanguard FTSE Emerging Market ETF GII SPDR S&P Global Infrastructure

Asset Class: Equity - Emerging MarketsExchange: NYSEAcra; to track the benchmark index of emerging market countries

Asset Class: Miscellaneous SectorExchange: NYSEAcra; to track Macquarie Global Infrastructure 100 Index

EFA iShare MSCI EAFE ETF

Asset Class: Equity - Developed MarketExchange: NYSEArca; to track the investment results of an index composed of large- and mid-capitalization developed market equities, excluding the U.S. and Canada

Data Period: Jan. 1 2009 – Dec 31 2013. Data Source: Bloomberg and Yahoo Finance: http://finance.yahoo.com/

5ETFsInvest instrument passive strategy

Ticker

Asset Name

Asset

Management

Input Summary:

Data Source: Bloomberg and Yahoo Finance: http://finance.yahoo.com/

Asset Class Annualized Mean Annualized S.DCorrelation

LWC EFA GII IFNA VWO

LWC 10.59% 9.21%

EFA 13.23% 20.78% 0.19

GII 6.85% 14.66% 0.27 0.86

IFNA 19.34% 26.95% 0.28 0.67 0.66

VWO 16.12% 24.52% 0.23 0.89 0.70 0.61

Risk Factor Monthly Mean Monthly S.D.Correlation

InterestRisk

SMB HML FX Risk

Interest Risk 0.09% 16.35%

SMB 0.23% 2.44% 0.37

HML -0.08% 2.08% 0.15 -0.13

FX Risk -0.09% 2.34% -0.16 -0.04 0.13

Asset

Management

Overview





Asset

Management

Efficient Frontier


Optimal Portfolio

Mean 11.50%

Standard deviation 9.41%

Efficient Frontier depicts the mostoptimal opportunity-sets that offersthe minimized risk measurement,standard deviation, at the given levelof the expected return

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

4.0% 9.0% 14.0% 19.0% 24.0% 29.0%

Targ

et

Retu

rn

Standard Deviation

GII

LWC

IFNA

VWO

EFAOpt Portfolio

11.5%

GMVP

Data Source: Morningstar Direct

Asset

Management

Efficient Frontier


6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

4.0% 9.0% 14.0% 19.0% 24.0% 29.0%

Targ

et

Retu

rn

Standard Deviation

GII

LWC

IFNA

VWO

EFAOpt Portfolio

11.5%

GMVP

LWC, 82.22%

EFA, 3.68%

GII, 1.78%

IFNA, 7.39% VWO, 4.93%

Asset Allocation


Asset

Management

Shortfall of Traditional Efficient Frontier



• The scope of risk assessed is limited

• Does not quantify the downside risk

Asset

Management

Overview





Asset

Management

LWC, 84.26%

EFA, 3.06%

GII, 4.32%

IFNA, 5.45%

VWO, 2.91%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

Interest Rate Risk

SMB

HML

Currency Risk


Asset Allocation

Risk Contribution

By Risk Classes

Data Period: Jan. 1 2009 – Dec 31 2013. Data Source: Bloomberg, Morningstar Direct and Yahoo Finance: http://finance.yahoo.com/

-36.00%

-26.00%

-16.00%

-6.00%

4.00%

14.00%

24.00%

34.00%

Portfolio Interest Rate Change SMB HML Currency Risk

Asset

Management

Coefficients Standard Error t Stat P-value

Intercept 0.008851029 0.002909771 3.04183 0.003679864

Interest Rate -0.085105596 0.019846718 -4.28814 7.83454E-05

SMB 0.296197559 0.130779187 2.264868 0.027715611

HML 0.425919696 0.14564486 2.924372 0.005102862

Currency Risk -0.277827614 0.127059584 -2.18659 0.033294975


Regression

Statistics

𝑹𝒊 = 𝜶𝒊 + 𝒊=𝟏𝒏 𝒃𝒊𝒋𝑭𝒋 + 𝜺𝒊

𝝈𝒊𝟐 = 𝒋=𝟏

𝒏 𝒌=𝟏𝒏 𝒃𝒊𝒋𝒃𝒊𝒌𝝈𝒋𝒌 + 𝝈𝒆𝒊

𝟐

𝑹𝒊𝒔𝒌 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒐𝒇 𝑹𝒊𝒔𝒌 𝑭𝒂𝒄𝒕𝒐𝒓 𝒋 𝒊𝒏 𝑨𝒔𝒔𝒆𝒕 𝒊:𝒃𝒊,𝒋 𝒌=𝟏

𝒏 𝒃𝒊,𝒌 𝝈𝒌,𝒋

𝝈𝒊𝟐

𝛼𝑖: 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 𝑖𝑏𝑖𝑗: 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑎𝑠𝑠𝑒𝑡 𝑡𝑜 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗, 𝑎𝑙𝑠𝑜 𝑐𝑎𝑙𝑙𝑒𝑑 𝑓𝑎𝑐𝑡𝑜𝑟 𝑙𝑜𝑎𝑑𝑖𝑛𝑔

𝐹𝑗: 𝑠𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗

𝜀𝑖: 𝑎𝑠𝑠𝑒𝑡 𝑖′𝑠 𝑖𝑑𝑖𝑜𝑠𝑦𝑛𝑐𝑟𝑎𝑡𝑖𝑐 𝑟𝑎𝑛𝑑𝑜𝑚 𝑠ℎ𝑜𝑐𝑘 𝑤𝑖𝑡ℎ 𝑚𝑒𝑎𝑛 𝑧𝑒𝑟𝑜𝜎𝑗𝑘: 𝑐𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑖𝑠𝑘 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗 𝑎𝑛𝑑 𝑘

𝜎𝑒𝑖2 : 𝑖𝑑𝑖𝑜𝑠𝑦𝑛𝑐𝑟𝑎𝑡𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 𝑖

Arbitrage

Pricing

Theory

Kellogg School of Management Arbitrage Pricing Theory: http://www.kellogg.northwestern.edu/faculty/papanikolaou/htm/FINC460/LN/Lecture6.pdf

Asset

Management


20BillionInvestment fund at October 20, 2014

Cut off5%

VaR†

4.93%

0.986 Billion

CVaR††

8.49%

1.698 Billion

††:The expected value of losses greater than 0.986 Billion at 5% cut-off level is 1.698 Billion

†:Portfolio has a 5% probability to lose more than 0.986 Billion


Asset

Management

Overview





Asset

Management

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-40% -20% 0% 20% 40% 60%

PO

RTF

OLI

O M

ON

THLY

RET

UR

N

5 YEAR TREASURY YIELD MONTHLY CHANGE

INTEREST RISK

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10% -5% 0% 5% 10%P

OR

TFO

LIO

MO

NTH

LY R

ETU

RN

USD/EUR MONTHLY CHANGE

CURRENCY RISK

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-6% -4% -2% 0% 2% 4% 6% 8% 10%

PO

RTF

OLI

O M

ON

THLY

RET

UR

N

HML MONTHLY

HML

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-8% -6% -4% -2% 0% 2% 4% 6% 8%

PO

RTF

OLI

O M

ON

THLY

RET

UR

N

SMB MONTHLY

SMB

Asset

Management

Risk Controlled Portfolio

𝑹𝒊 = 𝜶𝒊 + 𝒊=𝟏𝒏 𝒃𝒊𝒋𝑭𝒋 + 𝜺𝒊

𝝈𝒊𝟐 = 𝒋=𝟏

𝒏 𝒌=𝟏𝒏 𝒃𝒊𝒋𝒃𝒊𝒌𝝈𝒋𝒌 + 𝝈𝒆𝒊

𝟐

𝑹𝒊𝒔𝒌 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒐𝒇 𝑹𝒊𝒔𝒌 𝑭𝒂𝒄𝒕𝒐𝒓 𝒋 𝒊𝒏 𝑨𝒔𝒔𝒆𝒕 𝒊:𝒃𝒊,𝒋 𝒌=𝟏

𝒏 𝒃𝒊,𝒌 𝝈𝒌,𝒋

𝝈𝒊𝟐

𝛼𝑖: 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 𝑖𝑏𝑖𝑗: 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑡ℎ 𝑎𝑠𝑠𝑒𝑡 𝑡𝑜 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗, 𝑎𝑙𝑠𝑜 𝑐𝑎𝑙𝑙𝑒𝑑 𝑓𝑎𝑐𝑡𝑜𝑟 𝑙𝑜𝑎𝑑𝑖𝑛𝑔

𝐹𝑗: 𝑠𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑟𝑖𝑠𝑘 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗

𝜀𝑖: 𝑎𝑠𝑠𝑒𝑡 𝑖′𝑠 𝑖𝑑𝑖𝑜𝑠𝑦𝑛𝑐𝑟𝑎𝑡𝑖𝑐 𝑟𝑎𝑛𝑑𝑜𝑚 𝑠ℎ𝑜𝑐𝑘 𝑤𝑖𝑡ℎ 𝑚𝑒𝑎𝑛 𝑧𝑒𝑟𝑜𝜎𝑗𝑘: 𝑐𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑖𝑠𝑘 𝑓𝑎𝑐𝑡𝑜𝑟 𝑗 𝑎𝑛𝑑 𝑘

𝜎𝑒𝑖2 : 𝑖𝑑𝑖𝑜𝑠𝑦𝑛𝑐𝑟𝑎𝑡𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑓𝑜𝑟 𝑎𝑠𝑠𝑒𝑡 𝑖

Arbitrage

Pricing

Theory

Kellogg School of Management Arbitrage Pricing Theory: http://www.kellogg.northwestern.edu/faculty/papanikolaou/htm/FINC460/LN/Lecture6.pdf

Asset

Management

Coefficients t Stat P-value

Intercept 0.0087 2.9329 0.0049

Interest Risk -0.0795 -4.3186 0.0001

HML 0.3164 2.1843 0.0333


Intercept 0.0076 1.0861 0.2822

SMB 1.3207 4.5898 0.0000

Currency Risk -1.1369 -3.7892 0.0004


Intercept 0.0073 1.6515 0.1044

SMB 0.3859 2.1458 0.0364

Currency Risk -0.7448 -3.9715 0.0002


Intercept 0.0099 1.6792 0.0989

SMB 0.8596 3.5554 0.0008

Currency Risk -1.0615 -4.2104 0.0001

RLWC=0.0087-0.0795Interest Risk+0.3164HML


Intercept 0.0073 0.0044 1.6531

Interest Risk -0.0214 0.0301 -0.7105

SMB 0.4686 0.1983 2.3635

HML 0.2822 0.2208 1.2782

Currency Risk -0.7969 0.1926 -4.1368

REFA=0.0099+0.8596SMB-1.0615Currency

Risk

RGII=0.0073+0.3859SMB-0.7448Currency Risk

RIFNA=0.0178-0.0957Interest Risk

+1.5981SMB +1.3089HML-0.7933Currency

Risk

RVWO=0.0076+1.3207SMB-1.1369Currency Risk

Asset

Management

47.69%

82.33%

53.89%

80.69%

12.54%

3.24%

18.28%

18.54%

2.54%

12.23%

6.26%3.03%

8.08%

0.64%

13.05%18.20%

3.81%

14.95%

MIN INTEREST RISK MIN SMB MIN HML MIN CURRENCY RISK

LWC EFA GII IFNA VWO

71.29%

4.34%

66.55%

44.80%39.95%

25.68%32.04%

55.20%

3.03%

55.70%

1.40%

MIN INTEREST RISK MIN SMB MIN HML MIN CURRENCY RISK

Interest Risk SMB HML Currency Risk

Risk Controlled Asset Allocation Risk Class Contribution

Asset

Management

LWC66%

EFA9%

GII10%

IFNA6%

VWO9%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Interest Risk

SMB

HML

Currency Risk

Risk Controlled Portfolio

Risk-Class Diversified Portfolio (RcDP Product)

Innovative Asset Allocation 2014

Thank You

jia wei zhang-wealth management project

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