Fixed Income Term Project

Asset Allocation:

Taking the key elements into consideration, we decided to construct the portfolio with the majority of the investments in US equities. Canadian markets have been hit hard due to the mining sector, whereas the US markets have seen rebounds in the banking sector and a surge in the information technology sector (Pape, 2013).

We are looking for low risk but relatively high return stocks, and thus screen for stocks that have a high dividend yield but at the same time have placed a restriction on stock weights with respect to assets: no individual security holdings can be greater than 15% fund assets. This ensures a certain level of diversification is maintained. Even with this restriction, since there will be investments in risky assets; we need to invest less than 10% of the holdings in derivatives to hedge this risk. To avoid greater risk, we agreed to avoid taking short positions. A portion of the portfolio was invested in an ETF that seeks to track the investment results of US Treasury bonds with maturities greater than 20 years in order to provide stable yearly income. For solvency purposes, the analysts agreed to keep more than 10% of the client’s funds in the bank at the risk free rate.

At the end of week two we had invested 25% of the holdings in equity, in week 5 we began to hedge equity risk by investing in derivatives and by week 8 the portfolio comprised of 14% cash, 39% equity, 40% ETFs and 7% derivatives which is consistent with the asset allocation strategy we constructed initially. Refer to Figure 1 for a weekly breakdown of the portfolio asset allocation and Appendix _ for a detailed breakdown.

Figure 1:

Sector Allocation:

Due to the surge in the tech sector we noticed quite a few opportunities to invest in the information technology sector and thus began by investing 100% in the tech sector. In week 3 and 4 we took note that any more information technology stocks would make the portfolio riskier than the desired...