Portfolio Management RIT Cases: Analysis and Strategies for Investment

This assignment analyzes two portfolio management cases (PM1 and PM2) where the student is tasked with making investment decisions to achieve a target portfolio value of $1.5M starting with $500,000, using a selection of ETFs over a 20-year period. PM1 focuses on initial investment allocation and answering questions about risk, return, diversification, and portfolio variance. The student explores the impact of investing in single ETFs, the benefits of diversification, and the calculation of expected portfolio returns. PM2 introduces rebalancing strategies, including a naïve diversification approach and strategies based on market performance and reaching specific portfolio milestones. The student compares best and worst-case scenarios, highlighting the influence of individual asset performance and rebalancing strategies on overall portfolio outcomes. The assignment includes appendices with screenshots demonstrating portfolio allocations, performance, and the impact of different investment choices and rebalancing approaches, providing evidence of the student's analysis and investment decisions.

Running Head: Portfolio Management RIT Cases
Portfolio Management RIT Cases
Student Name
University Name
1

Portfolio Management RIT Cases
Contents
Portfolio Management 1 (PM1) Case:...................................................................................................3
A) You will be required to make investment decisions to achieve a target for your portfolio of at
least $1.5M starting with $500,000 cash:....................................................................................4
B) You will be required to answer the discussion questions in the case briefings:...........................4
(1) If your required return is approximately 5.65% per year, what is wrong with investing all of
your money in any single one of the ETFs that has an expected return greater than 5.65% per
year?........................................................................................................................................4
(2) Since your required return is 5.65%, how might adding any of the ETFs with average annual
returns that are expected to be lower than 5.65% help you reach your goal?..........................4
(3) On average, a portfolio with a higher average return will do better than a portfolio with a
lower average return. Why would an investor decide to invest in a portfolio with lower
average expected returns?.......................................................................................................4
(4) How would you compute your expected portfolio return?......................................................5
(5) How will the volatilities and correlations of the component investments affect the variance of
the portfolio return?.................................................................................................................5
C) You will be required to show your best and worst performance. Indicate why there was a
significant difference and document what you have learned.......................................................5
Portfolio Management 2 (PM2) Case....................................................................................................7
A) You will be required to make investment decisions to achieve a target for your portfolio of at
least $1.5M starting with $500,000 cash.....................................................................................7
B) You will be required to answer the discussion questions in the case briefings............................7
(1) From a naïve diversification perspective, what should your rebalancing strategy involve?....7
(2) When considering the investor’s desired outcome, if you have generated very large returns in
the first five or ten years, what should your rebalancing strategy be?.....................................7
(3) In order to maximize the probability of the investor meeting his/her desired return outcome,
what should the rebalancing strategy be if the investment portfolio reaches the 1.5 Million
dollar level at the five, ten, or fifteen year anniversaries?.......................................................8
C) You will be required to show your best and worst performance. Indicate why there was a
significant difference and document what you have learned.......................................................8
D) Please explain if your results for PM2 were better than for the Portfolio Management 1 case. If
so, can you explain the reasoning behind this?............................................................................8
2

Portfolio Management RIT Cases
Appendix 1:...........................................................................................................................................9
Appendix 2:.........................................................................................................................................10
Appendix 3:.........................................................................................................................................11
Appendix 4:.........................................................................................................................................12
Appendix 5:.........................................................................................................................................13
Appendix 6:.........................................................................................................................................21
3

Portfolio Management RIT Cases
Portfolio Management 1 (PM1) Case:
A) You will be required to make investment decisions to achieve a target for your
portfolio of at least $1.5M starting with $500,000 cash.
By investing $500,00 in 16000 shares of HOME ETF, 9500 shares of GROW ETF,
13500 shares of BOND ETF and 11000 shares of MINE ETF, there will be a
probability of approximate 64% that a resulting portfolio can grow to $1.5M in 20
years as shown in appendix 1.
B) You will be required to answer the discussion questions in the case briefings:
(1) If your required return is approximately 5.65% per year, what is wrong with
investing all of your money in any single one of the ETFs that has an expected
return greater than 5.65% per year?
If all the money is invested in any single ETF that has an expected return greater than
the required return of 5.65% per year, then it will increase the overall volatility of the
resulting portfolio. Like, Emerging Markets Equity ETF has an expected average
annual return of 13.0% and it has an expected annual standard deviation of 30%. If we
invest 100% in it, then the volatility of the resulting portfolio will be too high and
approximately there will be only 56% probability ( as shown in appendix 2) of
achieving the goal of accumulating 1.5 million dollars in 20 years period.
(2) Since your required return is 5.65%, how might adding any of the ETFs with
average annual returns that are expected to be lower than 5.65% help you reach
your goal?
The addition of ETFs with expected average annual returns lower than the required
return can help the portfolio attain the desired goal because of the diversification
benefits and reduced volatility of the resulting portfolio. Risk-return characteristics of
such ETFs can reduce the overall risk and increase the probability of achieving the
end goal. Appendix 3 shows these benefits.
4

Portfolio Management RIT Cases
(3) On average, a portfolio with a higher average return will do better than a
portfolio with a lower average return. Why would an investor decide to invest in
a portfolio with lower average expected returns?
An investor would invest in a lower average return portfolio because of its lower risk
characteristics. This reduced volatility will increase the probability of attaining the
investor’s goals. Depending upon the risk averseness of the investor and the
importance of goals it may be more appealing for the investor to invest in portfolios
with a lower average return. As shown in appendix 4, portfolio B with lower expected
average annual return has overall lower risk and a higher probability of reaching the
investor’s goal as compared to portfolio A.
(4) How would you compute your expected portfolio return?
The expected portfolio return is calculated by taking the weighted average of the
expected return of the individual components of the portfolio. Where the individual
weights are calculated by dividing the money invested in each asset by total portfolio
amount.
(5) How will the volatilities and correlations of the component investments affect the
variance of the portfolio return?
The variance of the portfolio return depends upon the volatilities of the component
investments and the pairwise correlations. For a two assets portfolio,
Portfolio variance = [(Weight of first asset)^2 * (Volatility of first asset)^2 + (Weight
of second asset)^2 * (Volatility of second asset)^2 + 2 * (Weight of first asset) *
(Weight of second asset) * (Correlation between two assets)].
The portfolio variance will increase with the increase in the volatility of individual
assets and with the increase in pairwise correlation as described by the above
expression.
5

Portfolio Management RIT Cases
C) You will be required to show your best and worst performance. Indicate why
there was a significant difference and document what you have learned.
Appendix 5 shows the best ($3,308,125) and worst ($492,935) performance. There
was a significant difference between both cases because of the different performance
of individual components of the portfolio over this period. The main reason for this
was the massive difference in the performance of Global Commodities ETF (MINE),
as in the best case its share was around $220 at the end of the period but it was around
$14 in the worst case scenario. The learning from this comparison is that the higher
volatilities of some asset classes can result in different portfolio outputs over the long
investing period. So, it is advised to use diversification while making portfolio
decisions.
6

Portfolio Management RIT Cases
Portfolio Management 2 (PM2) Case
A) You will be required to make investment decisions to achieve a target for your
portfolio of at least $1.5M starting with $500,000 cash.
In the starting, $500,00 is invested in 16000 shares of HOME ETF, 9500 shares of
GROW ETF, 13500 shares of BOND ETF and 11000 shares of MINE ETF.
According to the excel simulation, there is a probability of approximate 64% that a
resulting portfolio can grow to $1.5M in 20 years as shown in appendix 1. But the
performance of the portfolio can be improved by using the rebalancing strategies
depending upon the market movement. Best and worst case scenarios using these
strategies are shown in appendix 6.
B) You will be required to answer the discussion questions in the case briefings.
(1) From a naïve diversification perspective, what should your rebalancing strategy
involve?
A naïve diversification approach means investing in a large number of assets by using
some weighing scheme like an equally weighted portfolio to reduce the overall risk of
the portfolio. From this perspective if we start with an equally weighted portfolio of
the 5 ETFs, then the rebalancing strategy should involve maintaining the starting asset
allocation by selling the assets that become over-weighted and buying the under-
weighted assets. By doing this, the overall risk of the portfolio will remain in the
acceptable range.
(2) When considering the investor’s desired outcome, if you have generated very
large returns in the first five or ten years, what should your rebalancing strategy
be?
If very large returns are generated in the first five or ten years, then the rebalancing
strategy should be to reduce the weight of high-return high-risk assets and increase
the weights of low-risk assets to increase the probability of the investor’s desired
outcome of accumulating $1.5M at the end of 20 year period.
7

Portfolio Management RIT Cases
(3) In order to maximize the probability of the investor meeting his/her desired
return outcome, what should the rebalancing strategy be if the investment
portfolio reaches the 1.5 Million dollar level at the five, ten, or fifteen year
anniversaries?
If the investment portfolio reaches the 1.5 million dollar level at the five, ten or fifteen
year anniversaries then the rebalancing strategy should be to invest all the money in
lowest risk asset class that is Money Market ETF (Average return = 2%, Volatility =
1%) so as to maximize the probability of the investor meeting his/her desired return
outcome.
C) You will be required to show your best and worst performance. Indicate why
there was a significant difference and document what you have learned.
Appendix 6 shows the best ($6,240,453) and worst ($865,283) performance. There
was a difference between both cases because of the significant difference in the
performance of individual components of the portfolio and the different impact of
rebalancing strategies. As a result, there was a massive difference in the final profit
from the HOME and MMKT ETFs.
The learning from this comparison is that the market movements can dent the
performance of the portfolio so the risk of individual assets should be considered
carefully. Proper rebalancing strategies depending upon the market performance and
investor’s goals can also have a big impact.
D) Please explain if your results for PM2 were better than for the Portfolio
Management 1 case. If so, can you explain the reasoning behind this?
The results for PM2 were better for both the worst case and best case scenarios
respectively. These cases are shown in appendix 5 and appendix 6. If we consider the
difference between the best case scenarios, it can be explained by both: the
performance of individual components and the proper implementation of the
rebalancing strategy. As in PM2, the returns from the GROW ETF were very high in
the earlier periods so to ensure that the portfolio meets the investor’s goal its shares
were sold and replaced with MMKT ETF.
8

Portfolio Management RIT Cases
Appendix 1: A screenshot showing the proposed portfolio weights of different asset classes
and the percentage chance of achieving the portfolio goals.
9

Portfolio Management RIT Cases
Appendix 2: A screenshot showing the impact of investing 100% funds in any single ETF
having an expected annual return higher than the required annual return of the investor.
10

Portfolio Management RIT Cases
Appendix 3: Screenshots showing the effect of adding Domestic debt ETF and Money
Market ETF, with expected annual return lower than the required annual return of the
portfolio.
11

Portfolio Management RIT Cases
Appendix 4: Screenshots comparing a lower expected return portfolio with a higher expected
return portfolio.
Portfolio A
Portfolio B
12