Winter is coming. As an avid fan of the Game of Thrones TV series, Kyle could not help but smile sadly at how fiction had become reality for him. His family business, Global Plastics Limited, used to be the second biggest company in the world specialising in plastic moulding and manufacturing. Some of the worlds greatest and best known brands, like Apple, Toyota and Boeing Co. were his clients. However, in the last decade, relentless cost pressures and loss of market share to competitors from China made his company unprofitable. Although it pained me greatly, I sold Global Plastics and decided to retire Kyle tells you. You are Kyles best friend. As a veteran portfolio manager, Kyle has asked you to review his financial situation and to manage his money.

Question 1

After a few meetings with Kyle, you have created an Investment Policy Statement (IPS). Kyles required rate of return is 7% per annum and he only wants to invest in Singapore and US equities. The risk-free rate of return is 1.5% per annum.

You extract the following 20 years annualized information from Reuters Eikon:

	Annualized Average Return	Annualized Standard Deviation
Straits Times Index	6.7%	19.6%
Singapore Government Securities	2.1%	3.5%
S&P 500 Index	7.2%	23.4%
Barclays US Aggregate Bond Index	2.3%	3.9%
MSCI World Index	6.2%	18.3%
Barclays MSCI Fixed Income Index	2.6%	4.1%

Develop a strategic asset allocation for Kyle by answering the following:

(a) Calculate the proposed percentage allocation for the above asset classes.

(b) Discuss how adding other types of asset classes may be beneficial to Kyles portfolio.

Question 2

Kyle has been an active investor and has invested in quite a substantial portfolio already, the majority of which is in US equities. The sector weights of his current portfolio and the S&P 500 Index are:

Sector	Portfolio Weight	S&P 500 Weight
Consumer staples	18.4%	10.6%
Healthcare	18.8%	12.2%
Utilities	7.2%	3.4%
Telecommunication Services	4.8%	2.9%
Consumer Discretionary	10.8%	11.7%
Materials	2.2%	3.6%
Energy	9.4%	11.2%
Industrials	7.8%	10.3%
Financials	9.5%	15.8%
Information Technology	11.1%	18.3%
Total	100.0%	100.0%

Discuss Kyles current equities portfolio by answering the following:

(a) Discuss whether Kyles current portfolio appears to be defensively or offensively positioned.

(b) Discuss whether you expect the beta of Kyles current portfolio to be more than, less than or equal to 1.

(c) Discuss how you expect Kyles current portfolio to perform if there is a major bull run in the stock market.

Question 3

You are considering adding three more stocks to Kyles portfolio. They are Google, Amazon and Disney. As part of your analysis, you have collected the prices for these stocks as well as the S&P 500:

Analyse the three stocks and the S&P 500 index by answering the following:

(a) Compute the time -weighted return of all the stocks and the S&P 500.

(b) Calculate the standard deviation of the returns of all the stocks and the S&P 500.

Year	Apple	Amazon	Disney	S&P 500 index
2011	$57.86	$173.10	$37.50	1,257.60
2012	$76.02	$250.87	$49.79	1,426.19
2013	$80.16	$398.79	$76.40	1,848.36
2014	$110.38	$310.35	$94.19	2,058.90
2015	$105.26	$675.89	$105.08	2,043.94

(c) Given the covariance matrix below and the standard deviations you calculated in question 3(b), calculate the beta of Apple, Amazon and Disney with respect to the S&P 500 index.

Correlation	Apple	Amazon	Disney
Amazon	-10.5%
Disney	0.1%	-1.9%
S&P 500 index	0.3%	-2.2%	2.2%

(d) Discuss the risk and potential return of Apple.

(e) Discuss the impact of including Apple in Kyles portfolio.

(f) Discuss the impact of including Amazon in Kyles portfolio.

Question 4

Recent data show that Chinas manufacturing sector has contracted for the sixth month while the Shanghai stock index continues to plunge. Chinas 2016 GDP growth is estimated to be 6.5% compared to an average of 10% in the last 10 years. Adding to the market turmoil is plunging oil prices. Crude oil prices are now below USD 30 per barrel and may continue to drop once Iran starts selling its oil on the international market. On the positive side, the US Federal Reserve Bank (the Fed) decided not to increase interest rates and to keep them low given the market uncertainty.

As you the read the news, you start to worry as Kyle has some banking and oil-related stocks in his portfolio. Perhaps its time to rebalance Kyles portfolio you think to yourself.

Evaluate how the recent market development affects Kyles portfolio by answering the following:

(a) Discuss how banking stocks may be impacted by Chinas slowdown. (b) Discuss how oil-related stocks may be impacted by the plunge in oil prices.

(c) Discuss how the Feds decision may impact the stock market in general.

Question 5

After a year, you compile the portfolio attribution report for Kyles portfolio.

(a) Calculating the contribution (in basis points) of both the sector allocation of Singapore equities and the securities selection of US equities.

(b) Discussing the results of the portfolio attribution report.

1. ASSET ALLOCATION 2. SELECTION A. SINGAPORE EQUITIES I. SECTOR ALLOCATION 129 II. SECURITIES SELECTION 18 147x40% SINGAPORE SUB-TOTAL (portfolio weight) B. US EQUITIES I. SECTOR ALLOCATION 20 II. SECURITIES SELECTION 256 US SUB-TOTAL 236 x 60% (portfolio weight) TOTAL EXCESS RETURN OF PORTFOLIO CONTRIBUTION BASIS POINTS 31 59 142 231