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Written Portfolio Asset Allocation Review and Risk Management Strategy Your task Prepare a written report recommending an optimal asset allocation given the market expectations below. Your report will include a stress test of the portfolio using three historical return scenarios of your choosing You will then recommend a constant proportional portfolio insurance strategy based on backtesting Step 1: Take the given covariance matrix, which reflects long-term expectations for the selected asset classes, and determine two optimal" allocations. The first will be a portfolio that maximizes the Sharpe ratio, and the second will minimize the standard deviation. You will use the Excel Solver to perform the optimization. In addition, you are provided the following asset allocation constraints from the institution's asset allocation Portfolio Investment Policy Constraints U.S. Equity 30.45 Foreign Equity 5. 10% US Fiard Income 20-35% Private Equity 10-20% Real Estate 0.5 Commodities 5-10% Hedge Funds 10-20 An investment consultant inform you that the following long-term expectations for the study are as follows: Asset class risk and Variance - Covariance Matrix return 1 3 5 6 7 vol sd ER 1. US Equity 0.154 0.123 0.035 0.028 0.002 0.054 0.072 0.154 03392 13.30 2. Foreign Equity 0.123 0.188 0.013 0.06 0.035 0.035 0.064 0.18 0.434 9.90 3. US Fixed Income 0.015 0.033 0.059 -0.023 -0.005 0.011 0.0230.067 0259 30.105 4. Private Equity 0.028 0.068 0.023 0.153 0.020 0.043 0.021 0.153 0.391 15.70 5. Real Estate 0.002 0.035 0.005 0.020 0.100 -0.030 -0.0110.055 0235 7.RO 6. Commodities 0.054 0.035 0.011 0.043 -0.030 0.103 0.040 0.103 0321 15.30 7. Hedge Funds 0.072 0064 0021 -0.011 0.000 00720020268 1740W The consultant alio inform you that the target benchmark portfolio you are up against has the following allocations and has an expected annual return of 12.14%. You are to use a risk-free rate of 1.7% in the study Benchmark U.S. Equity Foreign Equity 15 US Fed Income 20% Private Equity Real Estate Commodities Hedge Funds 100% SN 5% 5% 5% This institution's portfolio currently has the following allocations, which you are to revise Current Allocation us Equity Foreign Louity ISN US Fored Income 40% Private Equity 0 Real Estate 10% Commodities ON Hedge Funds 0% 100% You will use the benchmark portfolio and its expectations to determine normalized benchmark returns for your analysis. Then, generate two optimal portfolios as you did in HW6 and plot an efficient frontier. Once you have a frontier, plot your two constrained portfolio allocations from your optimization and the current portfolio allocation (Maximised Sharpe ratio and Minimized Variance) Once you have determined an asset allocation to proceed with, choose two to four exchange traded funds (ETF) for each asset class. The ETF style must match the respective asset allocation The U.S. Equity category is very general, so you are free to select between large, mid and small cap ETFs. In addition, ETFs that have "theme" strategies, use leverage, or strategies different from passive investing can be used in your Hedge Fund allocation Determine the percent of the portfolio that will be invested in each ETF. You are free to choose weightings per ETF within the asset class. However, the total asset class weighting must match your recommended allocation. Report your portfolio allocation percentage by ETF and asset class Step 2: Now that you have determined an optimal risky portfolio (consisting of ETF, you will backtesta constant proportional portfolio insurance strategy CPP). Gather three one year periods of ETF returns (from any period) for all the ETFs in your portfolio. Try to pick three periods that reflect a down market, rising market, and volate market. For example, one period should cover the pandemic crisis covering January 2020 through May 2020 Once you have return streams for each scenario, use your ETF weights to simulate how your portfolio would perform during each period under three strategies on a daily basis 1. 100% invested in your portfolio Buy and Hold) 2. A 50/50 constant mix between your portfolio and the 10 year treasury. 3. A CPPI strategy which starts with a 50% exposure to your optimal portfolio and 50% in the 10-year treasury, 80% floot, and a 25 multiplier. You are to determine a trading threshold based on your testing for simplicity, you may use a constant 17% amal return fr the 10-year treasury reserve asset). Comment on each strategy across your three scenarios. What do you observe regarding the return, volatility, and drawdowns? 4. Suggest an improvement to the model that might resolve any problem you see in the analysis. This may be altering the reserve asset or any modification of the CPP trading decision you see fit. Test your model The written report must: Be approximately 10-15 pages Reference page at the end using a generally accepted citation system for any documents and data sources Be your work Your report must have the following sections: Introduction on what your report ("Asset allocation study") Summary of results/recommendation This section of your paper will summarize key facts about your recommended asset allocation, past performance under the three managed risk strategies Analysis of Asset Allocations This section should be about two/three pages long. First, list the descriptions of each ETF in the respective asset classes. fie number of stocks, institution managing the ETF, and any fact you feel relevant). A reader should have a general overview of what each ETF does after reading this section Portfolio Optimization This section of the paper concerns the asset allocation optimization process. First, you should show benchmark adjust returns, var-covarlance matrix, and the efficient frontier Then, discuss how your portfolio is superior to the existing Results of the stress test and managed risk strategies Discuss the results of testing the performance of your portfolio against the three scenarios you gathered. Test the 100% buy and hold, 50/50 buy and hold, and CPPI strategy. Report expected returns, standard deviations, maximum drawdowns, min/max portfolio values, and Sharpe Ratio. Discuss findings and parameters for the CPPI strategy Be sure to show price graphs for your three scenarios Modification of the Model Compare and discuss the performance of your modification Appendin Technical details of your worksheet. Any more detailed information that a reader might a want to see Grading 15% Presentation, overall appearance, and effort. 25% Implementation of the portfolio optimization procedure 40% Stress tests of the portfolio and alternative managed risk strategies. 20% Your write-up and discussion of findings. gratuitous use of graphs and tables to tella story. Written Portfolio Asset Allocation Review and Risk Management Strategy Your task Prepare a written report recommending an optimal asset allocation given the market expectations below. Your report will include a stress test of the portfolio using three historical return scenarios of your choosing You will then recommend a constant proportional portfolio insurance strategy based on backtesting Step 1: Take the given covariance matrix, which reflects long-term expectations for the selected asset classes, and determine two optimal" allocations. The first will be a portfolio that maximizes the Sharpe ratio, and the second will minimize the standard deviation. You will use the Excel Solver to perform the optimization. In addition, you are provided the following asset allocation constraints from the institution's asset allocation Portfolio Investment Policy Constraints U.S. Equity 30.45 Foreign Equity 5. 10% US Fiard Income 20-35% Private Equity 10-20% Real Estate 0.5 Commodities 5-10% Hedge Funds 10-20 An investment consultant inform you that the following long-term expectations for the study are as follows: Asset class risk and Variance - Covariance Matrix return 1 3 5 6 7 vol sd ER 1. US Equity 0.154 0.123 0.035 0.028 0.002 0.054 0.072 0.154 03392 13.30 2. Foreign Equity 0.123 0.188 0.013 0.06 0.035 0.035 0.064 0.18 0.434 9.90 3. US Fixed Income 0.015 0.033 0.059 -0.023 -0.005 0.011 0.0230.067 0259 30.105 4. Private Equity 0.028 0.068 0.023 0.153 0.020 0.043 0.021 0.153 0.391 15.70 5. Real Estate 0.002 0.035 0.005 0.020 0.100 -0.030 -0.0110.055 0235 7.RO 6. Commodities 0.054 0.035 0.011 0.043 -0.030 0.103 0.040 0.103 0321 15.30 7. Hedge Funds 0.072 0064 0021 -0.011 0.000 00720020268 1740W The consultant alio inform you that the target benchmark portfolio you are up against has the following allocations and has an expected annual return of 12.14%. You are to use a risk-free rate of 1.7% in the study Benchmark U.S. Equity Foreign Equity 15 US Fed Income 20% Private Equity Real Estate Commodities Hedge Funds 100% SN 5% 5% 5% This institution's portfolio currently has the following allocations, which you are to revise Current Allocation us Equity Foreign Louity ISN US Fored Income 40% Private Equity 0 Real Estate 10% Commodities ON Hedge Funds 0% 100% You will use the benchmark portfolio and its expectations to determine normalized benchmark returns for your analysis. Then, generate two optimal portfolios as you did in HW6 and plot an efficient frontier. Once you have a frontier, plot your two constrained portfolio allocations from your optimization and the current portfolio allocation (Maximised Sharpe ratio and Minimized Variance) Once you have determined an asset allocation to proceed with, choose two to four exchange traded funds (ETF) for each asset class. The ETF style must match the respective asset allocation The U.S. Equity category is very general, so you are free to select between large, mid and small cap ETFs. In addition, ETFs that have "theme" strategies, use leverage, or strategies different from passive investing can be used in your Hedge Fund allocation Determine the percent of the portfolio that will be invested in each ETF. You are free to choose weightings per ETF within the asset class. However, the total asset class weighting must match your recommended allocation. Report your portfolio allocation percentage by ETF and asset class Step 2: Now that you have determined an optimal risky portfolio (consisting of ETF, you will backtesta constant proportional portfolio insurance strategy CPP). Gather three one year periods of ETF returns (from any period) for all the ETFs in your portfolio. Try to pick three periods that reflect a down market, rising market, and volate market. For example, one period should cover the pandemic crisis covering January 2020 through May 2020 Once you have return streams for each scenario, use your ETF weights to simulate how your portfolio would perform during each period under three strategies on a daily basis 1. 100% invested in your portfolio Buy and Hold) 2. A 50/50 constant mix between your portfolio and the 10 year treasury. 3. A CPPI strategy which starts with a 50% exposure to your optimal portfolio and 50% in the 10-year treasury, 80% floot, and a 25 multiplier. You are to determine a trading threshold based on your testing for simplicity, you may use a constant 17% amal return fr the 10-year treasury reserve asset). Comment on each strategy across your three scenarios. What do you observe regarding the return, volatility, and drawdowns? 4. Suggest an improvement to the model that might resolve any problem you see in the analysis. This may be altering the reserve asset or any modification of the CPP trading decision you see fit. Test your model The written report must: Be approximately 10-15 pages Reference page at the end using a generally accepted citation system for any documents and data sources Be your work Your report must have the following sections: Introduction on what your report ("Asset allocation study") Summary of results/recommendation This section of your paper will summarize key facts about your recommended asset allocation, past performance under the three managed risk strategies Analysis of Asset Allocations This section should be about two/three pages long. First, list the descriptions of each ETF in the respective asset classes. fie number of stocks, institution managing the ETF, and any fact you feel relevant). A reader should have a general overview of what each ETF does after reading this section Portfolio Optimization This section of the paper concerns the asset allocation optimization process. First, you should show benchmark adjust returns, var-covarlance matrix, and the efficient frontier Then, discuss how your portfolio is superior to the existing Results of the stress test and managed risk strategies Discuss the results of testing the performance of your portfolio against the three scenarios you gathered. Test the 100% buy and hold, 50/50 buy and hold, and CPPI strategy. Report expected returns, standard deviations, maximum drawdowns, min/max portfolio values, and Sharpe Ratio. Discuss findings and parameters for the CPPI strategy Be sure to show price graphs for your three scenarios Modification of the Model Compare and discuss the performance of your modification Appendin Technical details of your worksheet. Any more detailed information that a reader might a want to see Grading 15% Presentation, overall appearance, and effort. 25% Implementation of the portfolio optimization procedure 40% Stress tests of the portfolio and alternative managed risk strategies. 20% Your write-up and discussion of findings. gratuitous use of graphs and tables to tella story