PPM Case study 2 Group 3

Group 3: Joakim Millegard, Julienne Marie Morada, Yanming Sun, Yuan Tian, Tomislav Veceric
Page1
Master in Wealth Management
Personal Portfolio Management
Case study 2: Profiling and portfolio recommendation
Group 3:
Millegard, Joakim 016071723C
Morada, Julienne 0160003403
Sun, Yanming 0160588522
Tian, Yuan 016063490D
Veceric, Tomislav 0160695727
Luxembourg, December 17th, 2016

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Summary of the Composition
Investor’s Profile
The joint investors (Mr and Mrs Kindliss) are both retired, and they have two sons. They live a
comfortable life in Luxembourg and they own a house EUR 1.2 million in the area of Luxembourg.
They have slightly above average profile in terms of risk tolerance, and their joint investor profile
corresponds to “median-defensive”.
The assets of the investor are as follows:
Asset Value
Existing Portfolio 1,150,000€
Life Insurance 600,000€ (yield of 2.25% until maturity of mid-
2018)
Savings Account 500,000€ (annual yield of 0.9%)
Inheritance of Portfolio 850,000€
For the existing portfolio, as median-defensive investors1
, we assume that they have:
Asset Percentage Share
Cash 10%
Bonds 55%
Real Estate 10%
Equity 25%
Total 100%
The portfolio inherited from the brother is allocated as follows:
Global bonds 35%
Emerging market bonds 15%
Large Stocks 20%
Global Real Estate 20%
Gold 10%
Their current combined portfolio is as follows:
Cash 16.13%
Global Bonds 33.34%
Emerging Market Bonds 4.11%
Large Stocks 14.76%
Global Real Estate 9.56%
Gold 2.74%
Insurance 19.35%
1
Based on « A Guide to Our Risk Profiles » (2015) by Hase Osborne Asset Management.

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Question 1: Please provide with a recommendation to the customer regarding:
- The current composition of the portfolio and the adequacy with the client’s profile
- The changes that you recommend in order to match the investor’s needs.
I. Original Portfolio
The current portfolio that includes the one provided by their bank, the portfolio they
inherited from the brother, and their cash deposits and life insurances do not adequately fit their
risk profile. As they are described as median-defensive investors, the current combined portfolio
shows that they have too much cash in their portfolio. They are also described as having an above
average risk tolerance. This means that they can take in more risk than what they currently have.
They can include more stocks or emerging market bonds, hence these asset classes carries more
volatility and also can yield a higher return.
Based on the description of our investors, they also find that the returns of the current
portfolio are a bit short to sustain their standard of living. Hence, we can also optimize their returns
in their investments in real estate by taking into consideration which funds they should invest in.
Considering that gold has an expected negative return, they should consider letting go of their
investments in gold.
Figure 1 Allocation of the original portfolio
The original portfolio gives us the following figures:
E(R) 2.97%
StdDev 15.25%
Sharpe ratio 0.023247692
E[U(RP)3.5] -0.011026606
The level of the expected utility of our clients for a given risk aversion “A” (we assumed 3.5
in order to have a point of comparison) is negative. The standard deviation which represents the risk
is very high. Thus, we will adjust the allocations of the assets included into their existing portfolio to
maximize their returns, minimise the risk, and also to improve their expected utility.

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II. Portfolio with the Lowest Risk
If we simply consider the portfolio with the least amount of risk, we can propose the
following allocation:
Portfolio (Minimizing standard deviation)
iShares Barclays TIPS Bond Fund 0.01292%
SPDR Gold Shares 0.24012%
iShares Barclays Aggregate Fund 12.72596%
iShares JPMorgan USD Emerging Markets Bond 2.05929%
Vanguard REIT Index ETF 0.00000%
SPDR Dow Jones Intl Real Estate 0.08525%
iShares MSCI Emerging Markets Index 0.00000%
iShares MSCI EAFE Index 0.02352%
Vanguard Small Cap ETF 0.24249%
Vanguard Large Cap ETF 0.23811%
Vanguard Mid-Cap ETF 0.28306%
Cash 64.73443%
Branch 21 19.35484%
Weight 1
E(R) 1.400%
StdDev 0.47%
E[U(RP)3.5] 0.013961343
This optimization provides us with the lowest possible risk (standard deviation). The Sharpe
ratio which describes the efficiency of the portfolio is very high. Notably, there is zero allocation with
respect to the iShares MSCI Emerging Markets Index because of its negative expected return. The
weight of cash in the portfolio is significant which illustrates the low risk profile of this portfolio. The
share of the iShares Barclays TIPS Bond Fund is also negligible because of the high standard
deviation of this asset class. The return of this portfolio, however, is lower than the expected return
of the original portfolio. This is in line with the financial concept that the lower the risk, the lower
the return. For a better perspective, we provide the pie chart of this portfolio below:

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III. Optimal Portfolio considering the risk profile
However, considering the risk profile of our investor, he is median-defensive. As a median-
defensive investor, we have optimised a portfolio that fits their risk-tolerance:
Optimal portfolio (Based on the investor´s risk profile)
SPDR Gold Shares 0.00000%
iShares JPMorgan USD Emerging Markets
Bond
3.96760%
Cash 9.79749%
Branch 21 19.35484%
Weight 1
E(R) 3.834%
SdtDev 3.44%
E[U(RP)3.5] 0.036267424
13%
2%
65%
20%
Portfolio with lowest risk iShares Barclays TIPS Bond
Fund
SPDR Gold Shares
iShares Barclays Aggregate
Fund
iShares JPMorgan USD
Emerging Markets Bond
Vanguard REIT Index ETF
SPDR Dow Jones Intl Real
Estate
iShares MSCI Emerging
Markets Index
iShares MSCI EAFE Index
Vanguard Small Cap ETF
Vanguard Large Cap ETF
Vanguard Mid-Cap ETF
Cash
Branch 21

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Based on our calculations, in order to get higher returns, we propose taking investments out
of the iShares Barclays TIPS Bond Fund, SPDR Gold Shares, iShares MSCI Emerging Markets Index.
These are the ones with negative expected returns and/or higher standard deviations. Evidently, this
proposal increases expected return and expected utility, and decreases the risk for the investor as
compared to the original portfolio. There is a notable increase in the Sharpe Ratio as well.
The pie chart for this optimal portfolio is as follows:
This is in line with the allocations as suggested by the investor´s profile as above average risk
tolerant and their desire to have more returns from their portfolio. We provided the constraints of
less cash to have a higher expected return. We also included more of the Vanguard REIT Index ETF as
it provides higher expected returns, and is not as risky as the others. This Vanguard REIT Index ETF
was also included as it has a low correlation with the iShares Barclays Aggregate Fund.
In general terms, the allocations are as follows:
Optimal Portfolio
Bonds 37.76016%
Stocks 28.01278%
Real Estate 5.07473%
Cash 9.79749%
Branch 21 19.35484%
This is a sufficiently balanced and diversified portfolio which the investor would be very
satisfied with as proved by the high expected return and utility.
37.76%
3.97%
4.25%0.82%4.92%4.00%
7.94%
7.18%
9.80%
19.35%
Optimal Portfolio based on risk profile
iShares Barclays Aggregate
Fund
iShares JPMorgan USD
Emerging Markets Bond
SPDR Dow Jones Intl Real Estate
Cash
Branch 21

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Question 2: Please update your proposal with the inclusion of recommended UCITS funds.
To satisfy our clients (Mr and Mrs Kindliss) we have incorporated two out of three UCITS
recommended to our clients by Mrs Kindliss’ brother in law.
In order to do that in the variance/covariance matrix we have replaced the Gold with the
UCITS LU0432616737 (Invesco Balanced Risk Allocation Fund) adding its standard deviation and
expected return. As this UCITS is a Hedge fund it has similar characteristics as the gold, mainly
preserving the capital when equity markets are falling, and as such, we can assume that it also has
the same correlations as gold with the other asset classes.
In the same way we have replaced the iShares JPMorgan USD Emerging Markets Bond with
the UCITS LU0280437673, which stands for the Pictet-Emerging Local Currency Debt PEUR. As they
both tracks emerging market debt - we expect them to behave somewhat the same over time.
However, we acknowledge the fact that one is denominated in local currency, which should top up
volatility, in comparison with the USD denominated. We have assumed that these two funds have
the same correlations with other asset classes in our portfolio.
In the optimisation of the final portfolio of our clients we have taken into account their
desire to incorporate two of the UCITS funds for at least 25% altogether. Also, we have taken into
consideration their Insurance contract Branch 21.
The optimal portfolio which maximises the Sharpe ratio, and takes into consideration the
constraints given by our clients is as follows:
Optimal portfolio (Max Sharpe Ratio)
Invesco Balanced Risk 12.50000%
Pictet Emerging Market 12.50000%
Cash 5.00000%
Branch 21 19.35484%
Weight 1
E(R) 4.855%
StdDev 4.32%
E[U(RP)3.5] 0.045279452
This optimal portfolio provides the expected return of 4.855% which is significantly higher
than the expected return of our clients’ initial portfolio and also provides them to sustain their
standard of living.

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The standard deviation of 4.32% corresponds well with Mr Kindliss’ above average risk
tolerance. Also, the expected utility which the expected return of this portfolio provides to our
clients is positive, which should give them the satisfaction of smart and sustainable investing.
The pie chart for this optimal portfolio which includes UCITS funds is as follows:
The optimisation of the investment portfolio of Mr and Mrs Kindliss was subjected to their
wishes and the inheritance. The incorporation of their insurance contract, cash deposits, Mr Kindliss
brother’s portfolio and two UCITS funds into the final portfolio was a challenging task.
In spite of that we believe that the final result of our optimisation will entirely satisfy our
clients with regard to the expected return of their portfolio of financial assets and the level of risk
taken.
In general terms, the allocations in the portfolio with UCITS are as follows:
Optimal Portfolio
Bonds 36.33173%
Stocks 24.58962%
Real Estate 2.22381%
Hedge funds 12.50000%
Cash 5.00000%
Branch 21 19.35484%
0.02269%
12.50000%
23.80905%
12.50000%
2.22381%3.88647%
11.16560%
9.53756%
5.00000%
19.35484%
Optimal Portfolio with two new UCITS funds
iShares Barclays TIPS Bond Fund
Invesco Balanced Risk
iShares Barclays Aggregate Fund
Pictet Emerging Market
SPDR Dow Jones Intl Real Estate
iShares MSCI Emerging Markets Index
Cash
Branch 21

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