liam mescall wealth mgt project

8/4/2019 Liam Mescall Wealth Mgt Project

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Diversification; its Merits and Selected Investments for InvestorPortfolios

Prepared by:Liam Mescall

Daniel O ConnellConor Burke

David O Callaghan


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Table of Contents

Section Page Number

Introduction and Investor Policy Statement discussion 3

The Benefits of Diversification 4

Overview of Asset Classes 4

Investments in Selected Asset Classes 5

Risk Return Measures 8

Recommendations 11

Appendix 12


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Introduction

Having reviewed and updated the Investor Policy Statement (IPS) and discussed the new direction yourfunds may be invested, the following report offers further detail on the asset classes and investmentschosen by us. From the updated IPS we have arrived at the following conclusions:

1) At the age of 55 you are seeking to have sufficient capital in 10 years to provide a revenuesteam for your retirement. The capital required is $2m, which will generate a $60,000 annuityassuming a 3% risk free interest rate from 2020.

2) The return expected by you is 6.5% annually.3) All monies generated in the course of these 10 years will be reinvested and your initial capital

position is $1,065,000.

4) You have no immediate family.

5) Losses cannot exceed 13% of capital in one calendar year.

6) Portfolio returns are not to be benchmarked as you have sufficient knowledge of financialmarkets to gauge performance.

7) A portion of your investment must remain in the ISEQ.

8) You are domiciled and ordinarily resident in Ireland for tax purposes and will be subject to taxlegislation accordingly.

These factors have been taken into consideration when developing a portfolio tailored to yourrequirements and we expect the movement towards a strategy diversified by sectors, geography andasset type to allow you enjoy returns required in your financial planning.


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The Benefits of Diversification

The concept of diversification involves creating a portfolio that includes multiple investments in orderto reduce risk. The concentration of an individuals assets in one company, sector or asset class exposesthe whole portfolio to sudden declines in value i.e. companies profit warning. Had this individualinvested in two or more companies whose values are derived from dissimilar market forces then an

increase in one companies share prices for a particular reason would have a negligible effect on theother company thereby preserving wealth, it follows on from this that the more securities you hold thatdiffer from each other the greater chance you have of preserving wealth. The challenges facing wealthmanagers are to devise a balanced portfolio of these assets which will yield a maximum expectedreturn given a specified level of risk.

The problem with the current portfolio is the concentration of his investments in the ISEQ which hasexperienced increased volatility and is perceived to be overly influenced by financial stocks.Addressing these problems will require a departure from the geographical confines of Ireland towards avariety of asset classes and locations outside Ireland. On average, portfolio risk will fall the morediversified the strategy; however the power to reduce this risk is limited by the systemic or commonsources of risk known as Beta. The Beta of any market has a value of one and depending on personalpreferences we can perform tests to assign a Beta tailored to the specific investors needs. The

concentration of all funds in one geographical region, which is dominated by a particular type of stockincreases risk required to generate a specific return and could be diversified away from.

As the current portfolio is concentrated in Ireland it is subject to macroeconomic factors andpessimistic market sentiment. Removing investment from here to an emerging / stable economicenvironment would offer significantly lower volatility and the potential for higher returns from bothcapital appreciation and dividends. Similarly a selection of asset classes such as commodities or bondscan offer a departure from the financial heavy ISEQ. These can also be combined and tailored to thespecifications of the individual investors.

Regardless of whether you are an aggressive or risk-averse client, the use of diversification to reducerisk is a smart move. Having established your time horizon, risk appetite, financial means andinvestment goals, we feel the following portfolio will offer you the required returns at an appropriate

level of risk

Overview of Asset Classes

Sustained depletion of financial stocks, volatile asset prices (figure 1) and a bleak economic outlookrequires our investments to be more diverse and far reaching than the tracking of one index of shares inone geographical region if we are to maintain returns required at levels of risk specified. What followsis an assessment of how financial markets will develop into the medium term and how we feel yourreturns can be maximised given the time horizon and risk appetite discussed.

Overall, we see developed markets with too much leverage in their systems (this includes corporate,government and consumer debt). Continued de-leveraging/repayment of this debt will restrictdeveloped nations growth into the medium term. This will also encourage deflation (as money is notspent and banks, when repaid, are currently reluctant to lend), which provides little incentive forinvestment, asset prices will fall which further reduces peoples appetite for investment.

We see government bodies responding to this by introducing cheap money into the marketplace via

sustained low interest rates and further quantitative easing such as QE2 in the US. The world is also onthe verge of a currency war with stimulus packages globally being structured to weaken currencies inan attempt to make goods cheaper and stem an export led recovery.

We believe the medium terms will see people removing investment from developed nations and intoemerging markets and commodity producing countries (which offer a better store of value). Thesenations have far less leverage, high saving rates and sustained growth in their economies all of which

encourages higher interest rates to curb inflation. Higher interest rates will attract investment fromdeveloped nations to emerging nations. The pricing of commodities in USD$ will also raise their value(as will cost more to buy the same commodity). The relationship between equities and commodities is


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such that an increase in any commodity that is a factor of production such as steel or oil will see acorresponding decline in companies using large quantities of these commodities. They are alsoconsidered a store of value in time of equity distress. This offers further diversification.

Returns in your portfolio will also be affected by inflation. The record low interest rates will increaseas signalled by the ECB in recent weeks. Our investment in commodity exposed assets (as described

above) is a natural hedge to this risk as commodity returns historically increase as bonds and stocksreturns decrease offering further diversification to your portfolio. The choice to invest in companiesand not commodities directly

The past two years has seen yields on bonds increase substantially. To further diversify yourinvestment and introduce another relatively stable asset class we consider an investment in a bond fundappropriate. The bonds are substantially all investment grade (as detailed later) and appear anappropriate investment choice for your risk considerations.

A booming world economy over the past two decades has seen a huge increase in globalisation. Inselecting investments suitable we are aware of the increased correlation between both world equitiesand equities and bonds. In identifying the assets appropriate to your portfolio we are satisfied thatgeographically diverse regions at differing stages of business cycles have been selected to mitigate the

affects of globalisation.

As outlined in our diversification benefits, broad spectrums of asset classes are to be included in yournewly constructed portfolio. These have been selected at the expense of a variety of others. Real estateis not enjoying the yields it did at the beginning of the decade. The U.S market and more locally inEurope is now characterised by oversupply, depleted prices and falling rentals. We are not certain abottom has been reached yet and do not see value in an investment. Major currencies have proven toovolatile to form a direct part of your portfolio and the fragile health of the world economy has steeredus clear of developing nations exchange rates (investments are denominated in Sterling, Euro andUSD). We are comfortable that these currencies will prove sufficiently stable to sustain the expectedreturns and de-leveraging affects described above will not impact the overall currency into the middleof the next decade.

Investments selected are denominated in USD, Euro or Sterling. Of late you will note large swings inthe Euro and USD stemming from the unprecedented times we are in. Historically these currencies arefar less susceptible to swings than other less established currencies and over the time of yourinvestment horizon we feel these offer the stability your portfolio needs. There will be a proportionaldivide between the three currencies and overall we consider the currency impact to be minimal.

It is our expectation that we will see moderate growth in the abovementioned asset classes into themedium term.

Investment in Selected Asset Classes

In light of the Asset Class Overview and in line with IPS requirements we have chosen the below asset

classes and investments based on both historical and prospective insight:

Emerging market equities:

We believe these emerging markets will outperform others into the medium term largely because of thereasons described above and structural changes the economies will enjoy. This marks a completedeparture from the ISEQ and Irish economy. The following indices are designed to track the returns ofspecific regions equity markets, which are considered a gauge of the overall health of the economicregion. The following details why we think the economies/index will provide returns to youcommensurate with IPS requirements:

iShares MSCI All Country Asia ex-Japan Index Fund;

This index measures the equity market performance of Asia excluding Japan and includes tendeveloping and developed nations. We consider the index a good gauge of the Asian economy, whichhas enjoyed huge growth over the past ten years, and we expect this to continue into the medium term.


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Broadly speaking stimulus and loosened monetary policy across Asian countries have encouragedinvestment and economic growth. The medium term should see co-ordination of monetary, exchangerate and fiscal policies between Asian countries to facilitate the structural changes anticipated. Thesechanges will see economies move from the first and second sectors of their economies (to there secondand third) and continue to grow albeit at a slower pace. Refer Appendix 1 for five-year performancerelative to S&P 500 and DJIA.

The fund has enjoyed average returns over the past five years of 14% showing minor negativedeviation from the index itself. The minimal variance offers us exactly what we are looking for as thepremise behind this investment is to gain exposure to the wider Asian economies which we feel arewell represented by the index.

Commodities:

As described previously, commodities provide a better store of value than deflationary assets.Investment in the following commodity classes will offer further diversification from the commoditylight ISEQ and offer another departure from a specific economic region to a more global platform. Theinvestments we have selected are equities whose value is derived from the price of the underlyingcommodities. We encourage the purchase of the following indices:

ETFX Dow Jones STOXX 600 Oil & Gas Fund

Designed to track the performance of the Dow Jones Oil and Gas fund. An investment in this indexoffers exposure to major industrial players including oil drilling equipment manufacturers and serviceproviders, coal companies, oil companies, pipeline builders, and liquid, solid or gaseous fossil fuelmakers. While oil prices broadly track the strength of the US economy (it being the largest consumer),increased demand from developing nations such as India and China have picked up where the USsailing economy had left off. Prices have traded within a ten-dollar range for the past year showingreasonable stabilisation from the prior years volatility. This is a relatively defensive option as oil andgas is required by people and economies in everyday life and we expect a solid return based on thisalone. Refer Appendix 2 for graph of Dow Jones Oil & Gas, S&P and DJIA for indication ofmovement with S&P and out performance of other equities in prior years.

The fund has marginally underperformed against the index over the past five years but the margin ofdifference has been negligible. This includes a return of 19.08% in the 2009 calendar year approachingthe watermark of large losses during 2008 when demand for fuel plummeted in line with expectedglobal economic health. Average earnings over the last five years are 7.4% which is testament to thecontinued demand for fuel in a recovering world economy, and a signal to the investments endurance intough economic conditions.

Royal London FTSE 350 Tracker Trust

This fund will track the FTSE 350 Mining index. The index offers seventeen different miningcompanies across a broad range of metals including copper, platinum, zinc and nickel. Broad ranges ofgeographical regions are also implicated as asset prices are determined by global demand. Mining isnot well represented on the ISEQ. Demand for these metals has been consistent with that of gold in thepast three months and we foresee a continued demand for emerging markets and developed market

investors seeking escape from deflated asset prices. Refer Appendix 3 for graph of FTSE 350 miningindex Vs Dow Jones over past year,

The exposure to commodities is obtained through a broad range of companies. The nature of theinvestment would leave an individual company exposed to event risk (as you may have seen with BPrecently). We feel is appropriately mitigated as the investment is spread over a large number ofcompanies across a diverse range of commodities.

As you will see from Appendix 3 the returns noted, while more volatile, offer far greater returns than apurely equity investment in benchmarks such as the S&P. This is a result of the negative relationshipbetween returns as discussed further in the report. Fund performance is in line with that of the indexand has enjoyed a 22% average return over the period, brought about largely by the economic crisisand flight to safety during these times. Global consumption of these metals has remained strong as

China has only noted a temporary setback during 2007 and 2008 and demand remains strong as aresult. We see no immediate change in this.


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Bonds:

John Hancock Bond Fund:

To gain exposure to the bond market we are advising an investment in the John Hancock bond fund.The fund offers exposure to a variety of corporate bonds, debentures, US government and agencysecurities (i.e. Fannie Mae), at least 75% of which are investment grade. The fund invests primarily in

USD$ and no more than 10% of its holdings are in securities denominated in foreign currency. Weconsider this fund suitable for investors requiring a core bond fund that seek to generate a moderatelevel of income with limited exposure to high-yield bonds and foreign securities. Refer Appendix 4 forfive year performance. We encourage the selection of bonds as the cornerstone of your portfolio as ourrecommendations will outline.

Clearly from Appendix 4, there has been a strong relationship between the capital losses in bonds andequity indices, with the bond index outperforming equities in the last five years. These capital losseshave reduced average earnings to 1.25% over the same period which is reasonable in light of pastmarket turmoil as the value of bonds plummeted. Waves of capital losses appear to have past for thefund with 28% total returns noted in 2009 calendar year. The continued credit shortage and proposedrate increases bode well for investments future.

ISEQ Investment:

We decided to divide our investments in the ISEQ into 3 companies namely Kerry Group, Glanbia, andPaddy Power, all of which have equal weightings. These 3 companies which are in the food andbookmaking industries, and are relatively defensive and we are hopeful they will guarantee a return inthe medium term.

Glanbia:

Glanbia is an international nutritional ingredients and cheese group. The Group has three businesssegments - US Cheese & Global Nutritionals, Dairy Ireland and Other Business. Glanbia also has threeprincipal international joint ventures - Southwest Cheese in the USA, Glanbia Cheese in the UK andNutricima in Nigeria. The diversification inherent to the company itself is attractive for the purposes of

this portfolio as there is no focus on the domestic market. The cash flows generated from a variety ofcountries abroad offer the stability required. Refer Appendix 5 for recent performance.

The diversified cash flows have left the company in a strong position which noted a 51% increase inEPS year on year and a near 40% increase in share price from 2006. This is in stark contrast to theperformance of the ISEQ. While this recent growth may plateau we feel the return to health of theglobal economy and ever increasing world population are promising signs that a stable future is in storefor the company.

Kerry Group:

Kerry Group plc is an international food corporation engaged in food ingredients and flavourtechnologies serving the food and beverage industries. The company is also a consumer foodsprocessor and supplier in selected European Union (EU) markets. The Company operates in two

business segments: Ingredients and flavours, and Consumer foods. The Ingredients and flavourssegment manufactures and distributes application specific ingredients and flavours spanning a numberof technology platforms. The Consumer foods segment supplies added value brands and customerbranded foods to the Irish and United Kingdom markets. Much like Glanbia, the diversification inproduct range and revenue source from a defensive company such as Kerry group is appropriate forthis portfolio. Refer Appendix 7 for recent performance.

Kerry has also noted a near 40% increase in share price over the period brought on by revenueincreases in 2006, 2007 and 2008. Consumer trends became more budget conscious in 2009 with aslowdown in growth which returned in 2010. Excluding 2009 there has been consistent EPS growthover the last four years and we expect sustained and stable growth to persist as the pace of the worldeconomic recovery increases.


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PaddyPower:

Paddy Power plc provides sports betting services through a chain of licensed betting offices. TheCompany also provides online gaming services and financial spread betting. It provides these servicesprincipally in the United Kingdom and Ireland. It also provides business-to-business services globally.They recently entered the Australian Internet and telephone sports betting markets with the acquisitionof interests in Sportsbet Pty Limited (51% interest) and International All Sports Limited. While

revenues have slumped in most industries over the past two years, Paddypower has enjoyed stableearnings, increased profits with no deterioration in industry as seen by the recent jobs announcementsfor Ireland. We attribute the decline in share value in 2009 to general economic conditions andsentiment with no consideration for the defensive nature of the company. Expansion to Australia, UKand financial markets (spread betting) also offers diversity in revenues and exposure to the buoyantAustralian economy.

Refer Appendix 7 for recent performance. Again performance has been vastly superior to that of theS&P and DJIA. We consider this to also be a relatively defensive stock as evidenced by performance inthe last five years. 2010 profit before tax figures note a 54% increase and 31% EPS growth. Stronginitial performance from expansion has supported a strong performance in the domestic market.Revenue streams have been split; 43% UK, 39% Ireland and 16% Australia. As the Australianeconomy continues to thrive we expect stronger revenue streams, this is also the case for the UK who

are enjoying a quicker financial recovery than the Irish economy.

Risk Return Measures

The selection of the highest yielding portfolio within your risk limits has been explored using standarddeviation as a risk measure and annualized monthly returns as an overall return gauge. To illustrate theeffects of diversification on a portfolio we have selected your investment in the ISEQ, its risk/returnprofile and compared it to the other selected investments:

Investment Risk (std deviation) Return

ISEQ Overall 26.00% -15.49%

DJIA Oil & Gas Index 30.30% 7.40%

MSCI Fund 27.04% 14.28%

John Hancock Bond Fund 5.76% 1.25%

MiniISEQ 22.02% 17.03%

FTSE 350 Tracker Trust 34.71% 22.24%

The benefits are further highlighted with the introduction of the assets individually to the overall ISEQinvestment. To do this we have recalculated the risk matrices for six separate portfolios (refer excelsheet attached with risk return tab for calculations). This has allowed us view the effects as follows:

Investment Risk (std deviation) Return

(1) ISEQ Overall 26.00% -15.49%

(2) ISEQ, MSCI 23.70% -0.61%(3) ISEQ, MSCI, Bond Fund 17.15% 0.01%

(4) ISEQ, MSCI, Bond Fund, DJO&G 17.27% 1.86%

(5) ISEQ, MSCI, Bond Fund, DJO&G, FTSE 19.75% 5.93%

(6) MSCI, Bond Fund, DJO&G, FTSE, MiniISEQ 19.11% 6.22%

Clearly, with the addition of each investment, the trade-off between risk and return improves. Thefourth and fifth portfolio listed note an increase in risk with their addition to the portfolio, these riskincreases bring a substantial increase in earnings also. Portfolio 3 notes returns as 0.06% of risk whileportfolio 4 and 5 can boast figures of 10.77% and 30% respectively highlighting the strongimprovement in the risk return ratio. The additional ISEQ further reduces risk and increases returnswith returns at 32.55% of risk. This is represented graphically below with the movement in value froma one hundred euro investment in the ISEQ graphed against portfolio 2:


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Figure 1

and portfolio X, which highlights the widening of the gap in portfolio values:

Figure 2

The addition of assets listed in portfolio 3 to portfolio 6 can be found at Appendix 8. These figures areillustrative and no investment will be placed in the ISEQ overall. Figures are guidelines on which todevelop our investment strategy but past performance is not a guarantee of future earnings. Please referattached excel workbook for details of calculations.

Fundamental to the performance of this portfolio is the asset allocation between these individualinvestments. We have constructed an efficient frontier based on portfolio theory illustrating the bestrisk/return ratio and weightings needed to generate this risk/return ratio. The following graph tells usthe most efficient portfolio weightings to achieve a specific risk/return objective:


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Figure 3

We consider it appropriate to expect a return of up to 6.9% with potential losses not to exceed 12.83%per year. This appears in line with your IPS requirements and we would urge you to consider investingaccordingly. Refer Appendix 9 for other possible combinations.

The lower risk and volatility requested into the future appears attainablee as historically the ISEQ andPortX (your proposed portfolio) vary greatly:

Figure 4

Figure 4 illustrates the volatility of the ISEQ over the last 5 years, and the corresponding PortXvolatility that would have been observed based on its constituent investments. All volatilitycalculations can be referred to in the accompanying Excel worksheet (CalcsforWealthPortFinal\AllReturns and CalcsforWealthPortFinal\ISEQ). As can be seen the risk (illustrated by the volatility) ofPortX is significantly smaller than that of the overall ISEQ alone, a quality in the portfolio which was

considered important given the clients profile. A marked correlation can be observed from Figurebetween PortX and the ISEQ, and from the calculations, (Results observed in Appendix 9 &11 ) thiscorrelation is 66.6%. This appears quite high despite the portfolios diversification, and is attributable tothe heavy weighting conferred on the Bonds investment in the portfolio.

The correlation of this Bond portfolio with the ISEQ is itself 58.25%, and accounts for much of theobserved correlation between PortX and the ISEQ. It is important however to analysis this figure withrespect to the risk of PortX. A lower correlation with the ISEQ could have been achieved by allocatingthe major weighting of the portfolio with its constituent DJOG investment, which itself has the lowestcorrelation with the ISEQ of all the constituents, 48.34%. This was undesirable however as the DJOGalso represented the second riskiest asset in the portfolio with an observed average risk of 30.3%,compared to the Bonds portfolio average risk of only 5.76%. If PortX had of been calculated swappingthe minimum weighting of the Bond and DJOG assets ( to 10% and 40% respectively, see Appendix 9

& 11 ) then the minimum average risk achievable for PortX would have rose to 21.36% from 12.86%.Although the corresponding returns of PortX would also have rose from 6.9% to 13.2% , it was


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considered more important to keep risk to a maximum of 13% based on the clients profile andinvestment history, hence this was done at the expense of increased returns.

RecommendationsBased on these calculations we consider it appropriate to allocate the following assets the following

weightings:

Asset Weighting

DJIA Oil & Gas Index 10.00%

MSCI Fund 10.00%

John Hancock Bond Fund 59.65%

ISEQ Investment (3 Co.) 10.35%

FTSE 350 Tracker Trust 10.00%

This results in:

Name Risk Return

PortX 12.8% 6.9%

Obviously the portfolio is heavily invested in bonds, this may appear a large concentration but giventhe nature of your IPS we feel it appropriate. The securities comprising this bond fund are

predominately AAA rated and have performed to the highest standard throughout the recent years

crisis. Asset backed securities form a minor part of the portfolio, all of which are performing andcontain the highest ranking tranche in the securitys structure. The bonds carry with them the lowestindividual risk weighting, which has a corresponding return and we feel this will consistently generatereturns required. The diversity and range of investments to complement the bond investment offer thebalance needed to ensure growth targets are reached at a reasonable risk i.e. a decline in equities givesrise to an increase in commodities and the relationship between bonds and equities, while correlated asdescribed previously, is not to the same extent as other equity markets. Refer Appendix 11 for data

highlighting relationship between investments.

We trust the above analysis and recommendations are in line with your expectations and offer asuitable investment vehicle to see you to your retirement. Please advise if you wish to proceed with thisinvestment.


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Appendices

Appendix 1

IShares MSCI All Country Asia ex-Japan Index Fund Vs S&P ad FTSE - One Year

Appendix 2

ETFX Dow Jones STOXX 600 Oil & Gas Fund Vs S&P and DJIA - One Year

Appendix 3

iShares Dow Jones U.S. Energy Sector Index Fund Vs Dow Jones


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Appendix 4

Appendix 5

Appendix 6


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Appendix 7

Appendix 8


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Appendix 9

The MatLab code used to generate the efficient frontier was:%These are the expected returns of the MSCI, JOHN HANDCOCK BOND, DJOG%FTSE350MI and 3 stocks in the ISEC (Glanbia, Kerry Group and Paddy Power)clc;Return = [0.1428 0.0125 0.0740 0.2224 .1703];

% These are the respective standard deviations% You can calculate these in excel if you likeSTDs = [0.2704 0.0576 0.3030 0.3472 .2202];

% The correlations between the timeseriescorrelations = [ 1 .6165 .7048 .7529 .9386

.6165 1 .4587 .4495 .6612

.7048 .4587 1 .7103 .8977

.7529 .4495 .7103 1 .7883

.9386 .6612 .8977 .7883 1];%now calculate the covariances from the STDs and Correlations

covariances = corr2cov(STDs , correlations);%Finally, make the graph for (in this case) 20 different portfolio weights

portopt(Return , covariances , 20)[PortRisk, PortReturn, PortWts] = portopt(Return , covariances , 20)


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Once compiled it yielded the following twenty portfolios and efficient frontier:

Port Risk Return Weights

MSCI Bond DJOG FTSE350M MiniISEQ

A 5.76% 1.25% 0 1 0 0 0

B 6.46% 2.35% 0 0.9381 0 0.0244 0.0375

C 7.35% 3.46% 0 0.8682 0 0.025 0.1067

D 8.34% 4.56% 0 0.7984 0 0.0256 0.1759E 9.42% 5.67% 0 0.7286 0 0.0262 0.2451

F 10.55% 6.77% 0 0.6588 0 0.0269 0.3143

G 11.71% 7.88% 0 0.5890 0 0.0275 0.3835

H 12.91% 8.98% 0 0.5192 0 0.0281 0.4527

I 14.12% 10.09% 0 0.4494 0 0.0287 0.5219

J 15.35% 11.19% 0 0.3796 0 0.0293 0.5911

K 16.60% 12.30% 0 0.3098 0 0.0299 0.6603

L 17.85% 13.40% 0 0.24 0 0.0305 0.7295

M 19.11% 14.51% 0 0.1702 0 0.0311 0.7987

N 20.38% 15.61% 0 0.1004 0 0.0317 0.8679

O 21.65% 16.72% 0 0.0305 0 0.0323 0.9371

P 23.06% 17.82% 0 0 0 0.1518 0.8482Q 25.20% 18.93% 0 0 0 0.3639 0.6361

R 27.95% 20.03% 0 0 0 0.5759 0.4241

S 31.17% 21.14% 0 0 0 0.7880 0.2120

T 34.72% 22.24% 0 0 0 1 0

These portfolio weightings were unacceptable as they completely excluded some of the constituentinvestments and detracted from our diversification goal. As a result the MatLab code was compiled asabove in addition to code which allowed us to put constraints on the portfolios weightings. It wasdecided that the portfolio should consist of a least the following composition:

Portfolio Risk Return Weights

MSCI Bond DJOG FTSE350M MiniISEQ- - - 0.1 0.4 0.1 0.1 0.1

The additional code was as follows:Covariance = corr2cov(STDs , correlations);PortReturn = [0.069];NumAssets = 5;AssetMin = [.1 .4 .1 .1 .1];Group = [1 1 1 1 1];GroupMax = 1;ConSet = portcons('Default', NumAssets, 'AssetLims', AssetMin,...NaN,'GroupLims', Group, NaN, GroupMax);[PortRisk, PortReturn, PortWts] = portopt(Return,...

Covariance, [], PortReturn, ConSet)


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We decided a risk/return of no greater than 7% was appropriate and altered the code accordingly. Thiscode was ran numerous times, each time changing the PortReturn value until different weightingsresulted in an acceptable Risk/Return for the portfolio, resulting in:

Port Risk Return Weights

MSCI Bond DJOG FTSE350M MiniISEQ

X 12.8% 6.9% 0.1 0.5965 0.1 0.1 0.1035

Appendix 10

ISEQ = Irish Stock Exchange

MSC = Asia ex Japan Index

Bond= John Hancock Global Bond Fund

DJOG = Dow Jones Oil and Gas Index

FTSE350M = FTSE350 Mining Index

MiniISEQ = 3 companies in the ISEQ = Glanbia, Kerry Group and Paddy Power.

Port2 = ISEQ + MSCI

Port3 = ISEQ + MSCI + Bond

Port4 = ISEQ + MSCI + Bond + DJOG

Port5 = ISEQ + MSCI + Bond +DJOG + FTSE350M

PortX = MSCI + Bond +DJOG + FTSE350M + MiniISEQ

Appendix 11

The Variance-Covariance matrices and Correlation matrices were calculated in MatLab and can beviewed in the accompanying Excel sheet, they are summarised here:

PortX constituent investments:

Variance Covariance Matrix

MSCI BOND DJOG FTSE350M MiniISEQ

0.0061 0.0008 0.0037 0.0059 0.003528

0.0008 0.0003 0.0005 0.0007 0.00053

0.0037 0.0005 0.0045 0.0048 0.002891

0.0059 0.0007 0.0048 0.0100 0.003801

0.0035 0.0005 0.0029 0.0038 0.0023

Correlation

1.0000 0.6165 0.7048 0.7529 0.9386

0.6165 1.0000 0.4587 0.4495 0.6612

0.7048 0.4587 1.0000 0.7103 0.8977

0.7529 0.4495 0.7103 1.0000 0.7883

0.9386 0.6612 0.8977 0.7883 1.0000


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PortX and ISEQ:

Correlation

ISEQ PortX

1 0.666622

0.666622 1

ISEQ and Bond:

Correlation

ISEQ Bond

1 0.582547

0.582547 1

CorrelationISEQ MSCI

1 0.597059

0.597059 1

Correlation

ISEQ DJOG

1 0.48343

0.4834303 1

CorrelationISEQ FTSE350M

1 0.57475

0.5747497 1

Correlation

ISEQ MiniISEQ

1 0.614617

0.6146172 1

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