Create a Theoretical Investment Portfolio Assignment

Things to Remember

The main goal of the project is to create a theoretical portfolio for yourself or someone that you know, as a client of yours. You are taking the role of an investment planner in this exercise. This will involve choosing stocks and estimating their value, buying mutual funds, and understanding what choices you need to make and what behavioural biases you may exhibit. Your hypothetical portfolio will start off with CAD 1,000,000 (one million Canadian dollars).

In your proposal, you will need to provide the following:

1.  A description of your client. This should be fairly basic, but give an idea of what kind of risk tolerance they have as well as their goals and personal situation. Think of this as an investor policy statement. (5)
2. An explanation of one behavioural bias exhibited by your client. Clearly explain how this will affect your client’s investment portfolio and how you might help them to deal with it. (5)
   3. Ten companies that you want to include in your portfolio. These can be chosen from any stocks listed on the Toronto Stock Exchange. Make sure that at least one of the companies pays regular dividends (since you will value it in the next part of the project). Clearly explain why you chose these companies. If you chose a bank, for example, then why did you choose that specific bank instead of a different bank? (15)
   4. What sources of data you will use. This should be as detailed as possible. This might include specific websites, databases, or other research sources. See the 7th bullet below.  (5)
   5. Five mutual funds that you want to include in your portfolio. These can be any fund that is available in Canada. Clearly explain why you chose these funds. For example, if you choose a bond fund—why did you choose this particular bond fund over any other? (15)
   6. An estimate of the beta of one of the chosen stocks. Estimate this yourself, using the tools discussed, and compare it with an estimate that you find online. (10)
   7. A valuation of one of the 10 chosen companies, using the Dividend Discount Model. Make sure to clearly explain your assumptions and the sources of data used. (10)
   8. A summary of your asset allocation, including a chart and a justification for why the allocation suits your client. You can allocate the $1,000,000 between the 10 stocks and 5 mutual funds. See the 4th bullet below. (10)
   9. A description how the fund performed over the past 12 months. This is a unique opportunity to look at performance without having had to hold the assets. This may include some qualitative discussions (such as any news which might have affected prices), but should also include quantitative measures such as Sharpe ratio and a comparison to an appropriate benchmark. Include a chart with the performance of your portfolio and of the benchmark on the same axes. (20)

Things to remember: 
This assignment is due by mid night of November 20, 2021. You will upload your file in the drop box under the assessments tab in your D2L page. 

Making money is NOT the goal of this assignment. If you do make money, that’s fine, however, that’s not the goal here. The goal is to understand the different limitations we face in portfolio building given the clients’ needs and biases. I want to see you can make good use of what you learn in class in a semi-practical set up. 

Please understand that I can not ‘review’ your draft work and tell you what is right or wrong before the assignment is due.** You can ask me questions in the class about this assignment and I will answer that. But please don’t email me your work or part of the work asking for a feedback. 

Keep in mind that there is a “round lot” trading rule that asks you to buy stocks in 100s. You can buy 65 or 128 stocks, but that’s called “odd lot” trading which costs you more in transaction costs. That said, it is NOT necessary that you have to put equal amount of money in each stock/fund. You distribute the money according to your client’s goals. This might mean that you won’t be able to use the entire $1m or you may need a couple of thousand dollars more. That’s fine with me. 

Please pick your own stocks and funds and create your own portfolio. I will be checking the similarities between you and your peers’ selections. 

There are no page or word limits specified either for the whole assignment or for its individual elements. That said, you will be losing points for unnecessary writing. What I require from you is clearly shown above in the 10 elements. The things that I want in each of those elements are also clearly described. I don’t want to see anything more than what has been asked from you and I will penalize you if you make your writing unnecessarily long. 

Lastly, do not expect me to check on your links that you provide as a reference. You MUST write down the full name of the source. For example, you can say that you got the number from Yahoo Finance and NOT write down the link for the particular page in that site. 
For each of the 10 things that you have been asked to do, create a separate paragraph with a headline showing what you are discussing. 

All tables and graphs should be shown in the same space where you are discussing. Do not put them at the end of the assignment under any heading. 

For item # 6 and 7, you can attach an excel file showing your work. Nothing else should be shown in this file. 

Your final product should not be in big fonts and double spaces trying to make it look bigger. Neither should it be in small fonts and single space so that you can squeeze in too many things in one paragraph. Make it easy to read. I am not saying that there won’t be overlaps between your choices for the stocks and funds with your peers. However, too many overlaps should not happen. Especially in the case of mutual funds – there are almost 34,000 mutual funds in Canada alone. So, if your 5 funds have 3 overlaps with your peer, that is not a coincidence. 

Although you are doing this exercise with a client in mind, I expect you to be able to use all or part of it for yourself sometime in the near future. No matter what career path you choose, you will have to invest for yourself. My expectation is that this assignment will aid you in that critical task. Good luck.