• Your group is responsible for preparing a single PowerPoint presentation that covers both parts of this assignment.

• Use the numbering below in your PowerPoint presentation to clearly label your work. To improve your grade, though, you are strongly encouraged to add additional analysis, tables, graphs, etc.

• Using the iCollege drop box, turn in both a single PowerPoint presentation and a single Excel spreadsheet covering both parts 1 and 2.

• Place all of your results/conclusion/analysis in the PowerPoint presentation. The spreadsheet is used to check how you performed your calculations.

• Your overall project grade is based 80% on you PowerPoint/spreadsheet analysis and 20% on your live presentation to the class. If you are absent from class (without a documented and excused absence) and your group is called upon to make a live presentation to the class, you will receive a zero on the 20% of your grade associated with the live presentation.

• This assignment is governed by the University’s policy on academic honesty. As stated in this policy “Plagiarism is presenting another person’s work as one’s own.” You may not use or turn in the work of other students, past or present.

** • USE ONLY THE EXCEL SPREADSHEET “THOMPSON DATA FILE” AVAILABLE ON THE CLASS iCOLLEGE PAGE TO COMPLETE THIS PROJECT. USING ANY OTHER DATA SOURCE CAN RESULT IN A ZERO FOR THIS PROJECT. SPECIFICALLY, DO NOT USE THE SPREADSHEET AVAILABLE FROM HARVARD.**

__Part 1:__

**Preliminary Note: ****As you work on this part of the case, remember that many of the performance-evaluation calculations are covered in PowerPoint and videos in “Thompson Case” iCollege folder.**

Ikenna Khakpour has just received an e-mail from one of his favorite clients, Peter Landman, who is the investment officer at a local college. Ikenna is a fairly new consultant at a Florida-based pension-plan consulting firm. Ikenna’s firm provides a variety of services – such as manager search, asset allocation, actuarial analysis – to defined-benefit plan sponsors.

Peter in interested in hiring a fairly young firm, Thompson Asset Management, as one of the college’s active portfolio managers. In particular, Peter is thinking of bringing on Thompson to manage a recent $20 million dollar gift to the college. While a young firm, Thompson has had a solid record of both performance and growth. This would be, though, Thompson’s first institutional mandate.

Peter has forwarded to Ikenna the performance data (see **Exhibits 1 through 5**) that he has received from Thompson, and he has asked Ikenna to evaluate Thompson as a potential asset manager for the college. Ultimately, he wants Ikenna to make a final recommendation on whether or not Thompson should be hired by the college. He has asked Ikenna to make a PowerPoint-based presentation to the college’s investment committee within the next few weeks.

With this is mind, Ikenna knows it is time to get to work preparing the PowerPoint for the presentation. He is not the type to wait until the last minute.

**(1)** First, Ikenna will use the data in Exhibit 1, to calculate the historical return and risk characteristics of Thompson’s ProIndex fund. Specifically, he will…

**(1a)** On the same graph, Ikenna will plot the values of $1 invested from 1/1/2009 to 12/31/2013 in both the ProIndex fund and the S&P 500 index.

**(1b)** He will also complete the following table based on the historical data:

**ProIndex**

**S&P 500**

**CAGR**

**Average Daily Return (Arithmetic)**

**Annualized Daily Return (Aritmetic)**

**Daily Standard Deviation**

**Annualized Standard Deviation**

**Sharpe Ratio**

**Treynor Ratio**

**Correlation (with S&P 500)**

**Beta**

**Jensen’s Alpha**

**Daily Tracking Error**

**Annualized Tracking Error**

**Information Ratio**

*In his calculation, Ikenna will assume that the risk-free rate over the historical period was a constant rate of 2%/year.

**(1c) **Obviously, Ikenna knows his PowerPoint slides must look professional. However, since Ikenna will make this presentation to a committee that includes members who are not investment professionals, he also has to make the content generally accessible to his audience. Thus, in his PowerPoint presentation, he will include ** original**, intuitive explanations of these different measures of return and risk and why they are important. If useful, he will also include additional charts and graphs. Note that Exhibit 2 describes the fund’s strategy.

**(2a and 2b)** Using the data in Exhibits 3, 4 and 5, Ikenna will repeat the same analysis as in parts (1a) and (1b) of the return and risk characteristics of the ProValue fund. For the ProValue fund, the value of $1 chart will be graphed relative to the S&P Midcap 400 Index (see Exhibit 5).

In performing his calculations for the ProValue fund, he will be careful to watch out for the new cash flows associated with end of quarters. Since, new investment funds are added to the portfolio at the very end of the quarters, he does not want to confuse the addition of this new money in his return calculations.

**(3)** As the final part of the presentation, Ikenna will also evaluate his results and make his final recommendations on hiring Thompson. If he does recommend hiring Thompson to manage this $20 million dollars, he will need to offer an opinion on how much to allocate to each of Thompson’s funds.

Critically, at this stage of the project, Ikenna knows that he is being paid for more than merely graphing numbers, completing calculations, and drawing the obvious conclusions. He is also being paid for his broad and critical analysis of the firm, its strategies, and markets. That is, he knows that success in his career depends on much more than plugging numbers into a formula; he is also being paid to critically think about and analyze the broad situation. Ikenna knows that this higher-level thinking and analysis needs to be reflected in the PowerPoint presentation.

**PowerPoint Presentation:** Ikenna will include the above work in the PowerPoint presentation he prepares.

__Part 2:__

Preliminary Note: Please keep in mind that in this part of the case assignment, you want all of the returns, variances, covariances, etc. on an **annual basis**. Please see the PowerPoint associated with this case for details on how to annualize these numbers.

Also, with the constrained-optimization portfolios in question 3) it may not be possible to create all of the portfolios. That is, there may be some scenarios that have no possible solution. So, please don’t freak out if some of the solutions may not be possible with the constrained optimizations. Instead, think about why they are not possible.

Allysa Alvarado is a new analyst at Thompson Asset Management. Her boss, Allison Thompson, has asked her to run some optimization results and provide her opinions and thoughts on the analysis and the potential direction of the portfolio.

**(1)** As a starting point, she used the weights of the current portfolio (see Exhibit 6), the forecasted expected returns (see Exhibit 6), and the historical variance/covariance matrix (built from the historical monthly returns that can be calculated from the price information in Exhibit 7) to estimate the expected return and standard deviation of the current portfolio (that is, without having ATO and CNO in the portfolio).

Note: Her calculations for the historical variance/covariance matrix were based on the monthly returns that can be calculated from the monthly prices in Exhibit 7. That is, she did **NOT** use the daily data in Exhibit 5 for these calculations

In essence, she created a starting point for her analysis; she labeled this** ‘Base Case Portfolio**.’

**(2) **Based on the monthly returns calculated from the price data in Exhibit 7, Allysa creates the correlation matrix for the stocks; she labeled this ‘**Correlation Matrix: Monthly Returns.’**

**(3)** Next, she used Excel’s optimizer to evaluate the entire set of stocks (including ATO and CNO). She used the expected returns in Exhibit 6 and the historical variance/covariance matrix built from the historical monthly returns calculated from the price information in Exhibit 7 as inputs to the optimizer. On these runs, she set the following objective and constraints:

**Objective:** Minimize Standard Deviation

**Subject To:**

• The stock weights sum to one.

• The expected annual return on the portfolio equals X%

**(3a)** Based on these runs of the optimizer, she completed the following table:

Portfolio: Expected Return

5%

10%

15%

20%

25%

30%

35%

40%

Portfolio: SD

Weight in Stock:

ROC

PII

MRC

ETFC

EGN

USM

BAH

FNF

LPLA

ATO

CNO

**(3b)** Based on the above table, she then graphed the opportunity set formed by these stocks.

She labeled these results as ‘**Alternative 1.**’

**(4)** In looking at the results of Alternative 1, Allysa sees that to construct this portfolio, the firm would have to hold very large positions in some stocks. And they would also have to take short positions.

**(4a)** Thus, Allysa decided to redo the optimizations, adding two assumptions:

**Objective:** Minimize Standard Deviation

**Subject To:**

• The stock weights sum to one.

• The expected annual return on the portfolio equals X%

• No short sales

• The maximum size of any one position is 25% of the portfolio.

As in the Alternative 1 analysis, Allysa completes the following table:

Portfolio: Expected Return

5%

10%

15%

20%

25%

30%

35%

40%

Portfolio: SD

Weight in Stock:

ROC

PII

MRC

ETFC

EGN

USM

BAH

FNF

LPLA

ATO

CNO

**(4b)** She also graphed the new opportunity set.

She labeled these results as ‘**Alternative 2**.’

**(5) **To see how the additional constraints affected the opportunity set, Allysa plots the two opportunity sets from (2b) and (3b) on the same graph. She also includes the Base Case portfolio as a single point on her graph.

She labeled these results as ‘**Combined Opportunity Sets.**’

**(6)** Allysa is now ready to complete an internal Powerpoint presentation to use in a one-on-one discussion with Allison Thomas. Allysa wants to go beyond merely presenting the numbers. She knows that to grow in her profession she need to critically think about and analyze situations.

As a starting point, Allysa wonders whether the stock allocations in ‘Alternative 1’ make sense from a portfolio management perspective. Allysa knows that she also has to think through the implications of having so much of the portfolio invested long or short in just a few stock positions. That seems in contrast to what she learned in business school about the importance of diversification. As a learning experience, Allysa will step out on a limb and make a ‘recommendation’ to Allison on how the firm should proceed.

**PowerPoint Presentation:** Allysa will include all of the above work in the PowerPoint presentation she prepares.

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