Introduction
The trading simulation has been performed on different range of stocks and fixed income scurrilities that are trading in the market. The Bloomberg BBU <GO> function has been used to performed the detailed trading simulation. Before beginning with the detailed analysis of the trading simulation, the characteristics of the equity portfolio I and the fixed income portfolio II have been analyzed. The risk level between both the asset classes is different and so their returns are also different. It had been stated that any cash would be invested at the rate of LIBOR + 1%, therefore, weights have also been allocated for cash investment in the formulation of the equity and the fixed income portfolios. First of all, the characteristics of the equity and fixed income portfolios have been analyzed, then the trading simulation results have been discussed and lastly, the optimization results and the final expected returns for each of the portfolios that have been formed have been discussed in detail.
Equity Portfolio I
First of all, the excel spreadsheet for the equity portfolio I has been formed. The equity portfolio comprises of the share investments of two companies which are the Royce Dividend Value fund and the i Shares MSCI index (ETF). In order to create capital gains, the Royce Dividen Value fund was selected. The PE ratio os this asset class is much higher as compared to the MSCI index’s PE ratio. The CAPM return is also higher for this specific asset class. The main benefit of this mutual fund is that 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 also higher than that of the ETF.
The MSCI index which is globally diversified index has been chosen so that the average returns remain near to the world index. The expense ratio for this specific asset class is low because because it keeps the excess returns near to the index returns. The beta for MF is high and for ETF is low as compared to the index. The respective optimal allocations for both the companies could be seen in the excel spreadsheet on the basis of which the trading simulation had been conducted. The respective portfolio name, ticker, CUSIP number and the number of the shares could be seen in separate columns of the equity portfolio spreadsheet.
Fixed Income Portfolio II
Secondly, the excel spreadsheet for the fixed income portfolio II has been formed which basically comprises of two types of the bonds which include the Bank of America bonds and the Western Asset MBS (MF) bonds. In order to minimize the volatility of the portfolio the western asset fund and the Bank of America were chosen for the fixed income securities. The western asset fund is protected by the government in case the market downturn occurs. If the market interest rates rise sharply then this fund provides protection with its lower duration.
The second investment has been made in the financial sector in Bank of America. The coupon is much higher for this fixed income security as compared to the western asset fund and the expense ratio is also 0%. Although the yield to maturity is low, however the credit rating of A, shows why this asset class would be beneficial in minimizing the volatility of the portfolio returns. The respective weigh tage in the two fixed income securities is 16% and 17% respectively. The respective optimal allocations for both the bond companies could be seen in the excel spreadsheet on the basis of which the trading simulation had been conducted. The respective portfolio name, ticker, CUSIP number and the market price for each of the security could be seen in separate columns of the equity portfolio spreadsheet.Trading Simulation Case Solution
Portfolio I and II characteristics and Analysis
First of all, the characteristics of equity portfolio I have been analyzed as follows:
Equity Portfolio I Characteristics Analysis
As previously stated, investment has been made in two different types of the securities of the companies. The respective expense ratios for each security have also been mentioned which could be seen in the excel spreadsheet. However, the price and the quantity of these securities have been taken from reliable sources which are mentioned at the end of the report. Based on those and the number of the shares that would be acquired, the value of the equity investments has been calculated. The market value for each class of the security could be seen. The price for the MSCI index is much higher as compared to the mutual fund................
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