Portfolio

management
ALEXANIAN Tom
ASSANVO Marie Elisabeth Ebabla
DAHARE Likhendra
ERMAKOVA Aleksandra
RAMID Souhail
TALBI Maria
 Our Client’ Profile : Macy
MANDATES 100,000 €
50 years old Single Parent

House owner in Courbevoie

Holds sole custody of her 14 years

old Child

“Wants to Finance the tertiary Education of

her son in United States or Canada”
 Portfolio

01
composition
and Data
Collection
 Portfolio composition
1.1

01 02 03
SCHX VEA
RSP
Vanguard FTSE Developed
Schwab US Large Cap ETF Invesco S&P 500 Equal Weight
Markets ETF
Tracks Dow jones ETF
Canada, Japan, Europe

04 05
EEM QQQ
iShares MSCI Emerging Markets Invesco QQQ trust ETF
ETF
1.2 Data Collection
Data Ddd

● Yahoo Finance historical data

● Time span: 01/01/2011 to 31/12/2020
● Computation on a weekly basis to
achieve more accuracy
02 Return and
risk
2.1 Risk and Return

Annual (SCHX) (VEA) (RSP) (EEM) (QQQ)

Risk
0,140519242 0,068498945 0,128366314 0,052510095 0,19740027

Return
0,164930402 0,17667111 0,181674834 0,203184729 0,18032561
03 Data Analysis
3.1 Covariance Matrix

Returns Returns (VEA) Returns (RSP) Returns (EEM) Returns (QQQ)

(SCHX)

Returns
(SCHX) 0,000522104 0,000489756 0,000557127 0,000557127 0,000519851

Returns (VEA) 0,000489756 0,000599083 0,000545087 0,000575861 0,000471761

Returns (RSP) 0,000557127 0,000545087 0,000633498 0,000530363 0,000527689

Returns (EEM) 0,000487833 0,000575861 0,000530363 0,000792388 0,000504571

Returns (QQQ) 0,000519851 0,000471761 0,000527689 0,000504571 0,000624124

3.2 ETF volatility

SCHX VEA RSP EEM QQQ

Beta 0,95 0,91 1,08 1,01

❖ Computed using Dow Jones, S&P 500, FTSE 100 and NASDAQ
weekly return
❖ ETFs Beta close to the market volatility
3.3 Weights allocation Mean St. Dev (SCHX) (VEA) (RSP) (EEM) (QOO)

7% 17,470% 0,0582 0,7736 0,0000 0,1682 0,0000

8% 17,120% 0,1871 0,6894 0,0000 0,1235 0,0000

9% 16,831% 0,3160 0,6052 0,0000 0,0788 0,0000

10% 16,605% 0,4450 0,5209 0,0000 0,0341 0,0000

❖ 11% 16,446% 0,5762 0,4238 0,0000 0,0000 0,0000

Computed with
excel solver 12% 16,367% 0,7108 0,2868 0,0000 0,0000 0,0024
❖ Portfolio return
set between 13% 16,358% 0,7091 0,2100 0,0000 0,0000 0,0809

5.25% and 19.7%

14% 16,401% 0,7074 0,1331 0,0000 0,0000 0,1594

15% 16,498% 0,7058 0,0563 0,0000 0,0000 0,2379

16% 16,649% 0,6575 0,0000 0,0000 0,0000 0,3425

17% 16,887% 0,4817 0,0000 0,0000 0,0000 0,5183

18% 17,221% 0,3059 0,0000 0,0000 0,0000 0,6941

19% 17,646% 0,1301 0,0000 0,0000 0,0000 0,8699

3.3 Portfolio efficient frontier

❏ 13% return and 16.35% risk

constitute the MVP MVP

❏ 70.91% in SCHX, 21% in

VEA, and 8.09% in QQQ
❏ Still need to consider her
utility
3.4 Macy’s Utility Function

❖ Medium risk aversion

❖ A=3

❖ U= E(r)-0,5A𝞼²

❖ Maximizing her utility with 19% return

and 17,65% risk

❖ Need to Invest 13.01% in SCHX ETF

and 86.99% in QQQ.
3.5 Portfolio return, risk and ratios

❖ The return of the portfolio that should select Macy is 19% by year.

Portfolio (SCHX) (QQQ) Portfolio

Composition features

Weight 13,01% 86,99% Return 19%

Fees 0,03% 0,2% Adjusted return 18,82%

St. Dev (risk) 17,646%

β 0,95 1,01

β 0,99

Sharpe ratio Treynor Ratio

0,1882 - 0,0060 0,1882 - 0,0060
= 1,03 = 0,1823
0,17646 0,9999
3.6 Comparison with the Benchmark

❖ Since SCHX tracks the Dow Jones whereas the QQQ tracks the NASDAQ, we compute with the same
weight their annual average rate of return, their standard deviation, and the covariance.

Benchmark Portfolio Macy Portfolio Differences

Return 17.64% 18,82% + 1,16%

Risk 16,99% 17,65% + 0,66%

β 1 0,99 - 0,01

❖ We also estimate alpha of the ETF in which we are going to invest by using the CAPM Model.

(SCHX) (QQQ)

Weight 13,01% 86,99%

Alpha 4,42% 1,59%

Alpha of the portfolio 1,94%

3.7
❖ Expected Expenses

Year 1 Year 2 Year 3 Year 4 Total for 4 years

Tuition Fees $37,430.00 $37,430.00 $37,430.00 $37,430.00 $149,720.00

Rent $11,140.00 $11,140.00 $11,140.00 $11,140.00 $44,560.00

Other Expenses $12,000.00 $12,000.00 $12,000.00 $12,000.00 $48,000.00

Total $60,570.00 $60,570.00 $60,570.00 $60,570.00 $242,280.00

❖ Investment Horizon

➢ Invest $100000 or (120000$)

➢ Receives $239,188.03 at the end of year 4 based on the 18.82% Portfolio return
04 Solution
proposition
 4.1 Suggested solutions for our client

Solution 1: Invest till Year 5

Problem: A $3 092 gap

❖ Total investment after 4 years $239 188

❖ Total tuition and expenses $242 280

Solution: Invest till Year 5 in order to fill the gap and have an extra $30 547 ate the end of year 5.

To understand:

1. Withdraw in year 4 her son’s yearly tuition and expenses around $60,570.00.

2. Keep investing the remaining $178,623.0 during the 5th year in order to produce $178,623.07 *
1.1882= $212,257.97.

3. Pay all the charges and create an extra capital $212,257.97- (60,570*3) = $30,547.97
 4.2 Suggested solutions for our client

Solution 2: Invest in 8 years and hedge against any risk

❖ This alternative strategy to invest for 8 years helps Macy to hedge against any high foreseen
risk in the future or to get back an important part of her initial investment (Classes failure,
exchange program...).

❖ She will end up with 96,986.26$.

 4.3 Suggested solutions for our client

Solution 3: Reduce Risk by investing in both the portfolio and the T-bill

❖ Problem: Macy is not satisfied with the risk suggested and wants to decrease her exposure to risk

❖ Solution: Invest in a portfolio along with the T-bills for an 8-year period in order to minimize her risk

❖ To understand:

➢ Find the Optimal point where the Capital Market Line is tangent to the Efficient Frontier =

➢ As Beta is equal to 1 the return of the market which is equal to 17.65%.

➢ By solving this equation we find the weights.

➢ Weight of T-Bill = 6,37% / Weight of Portfolio P = 93,62%

➢ The new risk of the P’ portfolio is 16,52%

Thank you for your attention

Questions?