Objective:

$$ To develop students' skills in building a diversified investment portfolio with a long$-$

term horizon of $5-10$ years, considering the current macroeconomic environment and

future expectations.

Initial Investment:

$$ Each student is allocated a virtual budget of $$100,000$ for investment.

Investment Options:

$$ Equities:

o Value Stock: Example: A company with stable profitability, less volatile

returns, and a lower expected return. Such a company might be in the utilities

or consumer staples sector, known for steady demand and consistent dividend

payouts.

o Growth Stock: Example: A tech startup with a high potential for future

growth, more volatile returns, and higher risk. These companies often reinvest

profits into the business rather than paying dividends.

$$ Bonds:

o Sovereign Bond: Low risk and return, considered safe investments $($e$.$g$.,$ U$.$S$.$

Treasury bonds$).$

o Local Government Bond: Moderate risk and return, depending on the financial

health of the issuing municipality.

o Big Firm Bond: Corporate bonds from established companies with lower risk

compared to smaller firms.

o High Yield Bond: Higher risk and return, issued by companies with lower

credit ratings.

o Junk Bond: Very high risk, issued by companies with significant default risks,

but offering high returns to compensate.

o International Bond: Varies in risk and return based on the issuing country's

economic and political stability.

$$ Money Market Fund: Offers liquidity and safety, with returns slightly higher than a

savings account, ideal for the cash component of a portfolio.

$$ Derivatives:

o Options: Contracts offering the right, but not the obligation, to buy $($call

option$)$ or sell $($put option$)$ a security at a predetermined price within a specific

time frame. Suitable for advanced risk management and speculative strategies.

o Futures: Contracts to buy or sell an asset at a predetermined future date and

price. High risk and complexity, used for hedging or speculation.

Macroeconomic Environment:

$$ Federal Funds Rate: Currently at $5\mathrm{.}25\%($insert current rate$),$ with expectations of a

decline over the next few years, suggesting a looser monetary policy ahead.

$$ CPI and Inflation: Current CPI stands at $3\%($insert current rate$),$ indicating the rate of

inflation and the general price level increase of goods and services over time.

$$ Inflation expectations should factor into the investment strategy, as it impacts the real

returns of investments.

Task:

Students are required to construct a diversified portfolio considering the investment horizon

of $5-10$ years.

Students are expected to think about the questions below and create their diversified

portfolio.

Questions:

$1.$ What do you think is the direction of moving for equity and bonds given that the

federal fund rate is high and it is expected to decline to around $1\%$ in the future $5$

years?

$2.$ Among the valued stocks and growth stocks, which one is more sensitive to the

federal fund rate, and why?

$3.$ Among each category of bonds, which category$($ies$)$ is$($are$)$ more sensitive to the

federal fund rate, and why?

$4.$ Determine the percentage of the portfolio to allocate to each investment, aiming for

diversification to manage risk while targeting optimal returns.

$5.$ Discuss how the selected investments are expected to perform in the given

macroeconomic environment and how changes in interest rates and inflation could

impact the portfolio.

$6.$ Consider the potential need for portfolio rebalancing over time and strategies to

mitigate risks associated with long$-$term investments.

Submission Requirements:

A maximum of $3-$page detailed report outlining the chosen portfolio composition, rationale

for investment choices, and expected performance analysis.

Evaluation Criteria:

$1.$ Clarity and depth of investment strategy and rationale.

$2.$ Understanding of the macroeconomic environment and its implications.

$3.$ Diversification and risk management approach.

$4.$ Analytical and critical thinking in portfolio construction and performance projection.