As mentioned in class last week, the second term assignment will be based primarily on the principles studied in the Investments Chapter 9.  In summary, the assignment is to develop a portfolio asset allocation based on the client’s risk tolerance, capacity for risk, and that is well-diversified.

1. Identify client risk tolerance/capacity.  The client is 30 years old and single.  All other client characteristics, including answers to risk tolerance questions, are to be created by you.  You need to google a risk tolerance questionnaire that will allow you to determine an appropriate stock/bond allocation for a portfolio.  Many questionnaires will suggest the asset percentage mix that is specific, based on the answers provided by the client.  Include the risk tolerance questionnaire in your report.

2. Create an Investment Policy Statement for the client.  It can be based on the sample in the book or one you may find from other sources.  But it should be specific to your client.  The IPS should be included in your report.

2. Create a diversified portfolio that is consistent with the results of the risk tolerance questionnaire and appropriate based on the Investment Policy Statement.  The vehicles can be either Exchange-Traded Funds or mutual funds.  DO NOT use individual stocks.  The portfolio should have an appropriate mix of investments diversified by asset class type (i.e., large cap, small cap, etc.), as well as risk and correlation to other investments in the portfolio.  Risk should be measured by beta, standard deviation, and r squared.  Yahoo Finance and the research section of the Fidelity website are 2 free research sources that provide ETF and mutual fund risk, performance, and correlation data.  In addition. you can use the following link for a correlation matrix.-

This is a link to a site that allows you to create a correlation matrix.  This is a table that shows the correlation of each holding to all of the other holdings in the portfolio.  You want to have a number of holdings that have a low or negative correlation to other holdings in the portfolio.  If two holdings are perfectly correlated, they are essentially copies of each other and provide no diversification. 

The assignment is to create a portfolio of holdings that is appropriate to the client’s risk tolerance in terms of percentage of stock funds, bond funds, possibly real estate funds, possibly commodity funds that considers correlation of holdings to each other and that minimizes risk by including a number of funds that have a variety of betas and standard deviations.  The holdings can be selected from any mutual funds or ETFs that you like.  

The portfolio description should have the following format.  Below is a partial table:

Asset Class                    Holding                                       Percentage

 Holding X     5%
 Holding Y     5%
Large Cap  
 Holding Z     10 %

For each holding included in the portfolio, include its r squared, beta, standard deviation, alpha, and other characteristics to support the holdings’ reason to be included.

Suggestion – build a portfolio that includes a mix of several international funds as well as large cap growth and value funds, mid cap growth and value funds, small cap growth and value funds, and possibly includes one or two commodity funds (such as oil or gas) or real estate.  

You should then calculate overall portfolio statistics, like weighted average return and risk measurements.

You will need to submit all supporting information mentioned above, as well as a typed paper describing the thought process behind how and why you developed the portfolio as you did.  Your thought process should include reference factors in the current external environment.  The paper should be about 2 pages in length, double spaced.

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