Trading Simulation of Portfolios Harvard Case Solution & Analysis

Introduction

             The trading simulation is basically a practical type of exercise, which has been performed on a range of the real stocks and bonds that are currently trading in different markets. The Bloomberg’s BBU function has been used on the terminal in order to trade the securities and optimize them. This report addresses all the results of the trading simulation and also analysis them. However, before that the analysis of the characteristics of the fixed income securities and the stocks has been performed. The returns of all the securities are different because the level of the risk for each asset class is also different. First of all, the characteristics of the stocks and the fixed income portfolios have been discussed and analyzed by comparing with the benchmark returns and then the trading simulation results, which have been obtained through the Bloomberg BBU function have been discussed and then finally the optimization results and the final expected returns for each of the portfolios that have been formed have been discussed in detail. During this complete analysis and the allocation of the funds, it has been assumed that all the cash could be invested at LIBOR + 1%.

Equity Portfolio I

            The excel spreadsheet for the equity portfolio I has been formed separately which consists of the market returns and the portfolio is comprised of two stocks. These two stocks are the Columbia diversified equity income I stock and the Fidelity series 1000 value index. The columbia diversified equity income I stock was selected in order to create capital gains. The PE ratio os this asset class is much higher as compared to the Fidelit series 1000 value index. The CAPM return is also higher for this specific asset class which is around 8.3% as compared to 6.71% for the other class of the asset. The main advantage of investing in this diversified fund is that it the overall risk of the portfolio would be minimzed and it invests in smaller company stocks and the average returns of this asset class are increased as the economic condition sof US improve. The expense ratio for mutual fund is 8.3%, which is also higher than that of the diversified global fund.

The Fidelity 1000 value index is basically a globally diversified index and the reason for chossing this index is that the average returns remain near to the world index. The expense ratio for this specific asset class is low because it keeps the excess returns near to the index returns. The beta for for the global index is less as compared to the diversified index. The allocation of he 2000,000 million pound funds with their respective optimal allocations for both the stocks could be seen in the excel spreadsheet on the basis of which the trading simulation had been conducted. Each portfolios name, ticker, CUSIP number and the number of the shares could be seen in separate columns of the equity portfolio I spreadsheet.

Trading Simulation of Portfolios Case Solution

Fixed Income (Bonds) Portfolio II

            A separate excel spreadsheet has been formed for the fixed income security portfolio II. The two types of the bonds that have been chosen are the Annaly capital management Inc and Wells Fargo and Co bonds. Both of these belong to the mortgage and the financial industry respectively. Both of these bonds had been chosen so that the volatility and the risk of the entire portfolio could be minimized. The first bond is basically controlled by the government and therefore, the risk in investing that bond is much lower and it helps in maintaining the returns in those situations when the downturn of the market occurs. If in case the interest rates in the market rise sharply, then this fund will provide protection with its lower duration.

            The second investment as previously defined has been made in the financial sector, which is the Wells Fargo and Co . The expense ratio for this bond category is 0%, which is a good factor and the coupon that is being paid upon this bond is much higher as compared to the above bond category. The high credit rating of this bond category would suggest that the investors have maintained confidence in this company and that this bond category is more likely to reduce the volatility of the returns of the portfolio, however, its yield is lower. The investment of the funds with the optimal allocations for both the bond categories could be seen in the excel spreadsheet on the basis of which the trading simulation had been conducted. Each portfolio’s name, ticker, CUSIP number and the market price for each of the bond class could be seen in separate columns of the bond portfolio spreadsheet..........................

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