Portfolio Strategy

Haifeng Yao
Yan Zhang
 Objective

 Make money by following the NASDAQ Composite

Index based on a risk adjusted return.
 the average risk tolerance
 Investment Strategy

 Passive investment strategy: construct a portfolio which

has the same risk characteristic as that of benchmark.
 1. investment objective
 2. no sharpen information and investment insight
 However, advantages:
 1. Lower turnover rate , high liquidity , lower transaction
cost
 2. High informational efficiency
 Portfolio construction

 Ideally, should buy every stock included in NASDAQ

Composite Index,
 Two problems: 1 million investable asset; high
transaction commission fee;
 Approach:
 construct a portfolio which will have the same risk
profile as our benchmark does
 Portfolio construction

 Calculate the Beta of the NASDAQ Composite Index:

 1. collect S&P 500 and NASDAQ Composite Index
historical data Monthly data, from Oct 16, 2000 to Oct
1, 2010
 2. use the simple regression to find out the Beta of
NASDAQ
 3. see the following graph
The Beta of NASDAQ Composite Index is 1.3887 times of That of S&P
500.

40

30
f(x) = 1.39 x + 0
R² = 0.78

20

Linear ()
10

0
-15 -10 -5 0 5 10 15 20 25

-10

-20
 Security selection

 top-down approaches to select stocks

 ---consider the macro-economy factor
 ---analyze industrial sectors
 ---pick up a stock within the industrial sector
 Security selection

 Within each above industry, we select the following

stock:
 1. Southern Copper Corporation (SCCO)
 2. Apple Inc. (AAPL)
 3. New Oriental Education & Technology Group (EDU)
 4. AGA Medical Holdings, Inc. (AGAM)
 Analysis before selection

Stock Industry β­i Weight (%) βp NASDAQ

AAPL Technology 1.36 30

[i]
www.finance.yahoo.com
AGAM Medical Appliances & Equipment 0.92 20
1.3 1.39

SCCO Copper 1.61 30

EDU Education & Training Service 0.97 20

  The beta of the portfolio βp =

 Diversification advantages

The correlation between these stocks:

CORRELATION NASDAQ AAPL AGAM SCCO EDU

NASDAQ 1.0 　 　 　 　

AAPL 0.61 1.00 　 　 　

AGAM 0.67 0.39 1.00 　 　

SCCO 0.50 0.35 0.51 1.00 　

EDU 0.41 0.88 0.26 0.07 1.00

 Performance Evaluation
20.00%

15.00%

10.00%

EDU
SCCO
5.00% APPL
AGAM
PORTFOLIO

0.00%
10/29/2010 10/28/2010 10/27/2010 10/26/2010 10/25/2010 10/22/2010 10/21/2010 10/20/2010 10/19/2010

-5.00%

-10.00%
 Portfolio VS. NASDAQ
1.50%

1.00%

0.50%

0.00%
10/29/2010 10/28/2010 10/27/2010 10/26/2010 10/25/2010 10/22/2010 10/21/2010 10/20/2010 10/19/2010

PORTFOLIO
-0.50%
NASDAQ

-1.00%

-1.50%

-2.00%

-2.50%
 Conclusion

 Our portfolio follows NASDAQ Composite Index, but

it is more fluctuate
 The correlation between our portfolio and NASDAQ is
92.8%, their daily standard deviation are 1.16% and
1.03%, respectively.
 Performance evaluation

 Sharp
  ratio: a measurement of excess return per unit of
risk in an investment asset
 S=
 Rp: Return of the portfolio
 Rf: Return of Risk free rate (daily treasure bill return rate)
 Ϭ: Standard deviation of Portfolio
 
 Sp = (0.5% -0.005%)/1.16% = 0.45
 SN = (1.08%-0.005%)/1.03% = 1.04
 
 Adjustment

 choose other industrial sector or select other

securities
 using some derivative instruments
 construct a well diversified portfolio