PAGE 3 FIN 640 TEAM PROJECT: PORTFOLIO CONSTRUCTION (15% of overall grade) Submission: Initial report: Feb 13; Final report: March 20, 2014 I. OBJECTIVE The objective of this project is to construct a portfolio for Mr. Donothing. He hires you to manage his money. You will do this assignment in a team of two. II. INVESTOR PROFILE Mr. Donothing is a real person. He is 50 years old and single. He does not work. He survives based on an inheritance of $10 million. He is an amphibious person: he spends his time in cruise lines. He needs $550 per day throughout the year for cabin charges and food. He needs another about $25,000 for secretarial services and incidental expenses. He wants to settle in Pompano Beach, Florida at 55, get married and have a child. The type of the house he wants to buy sells today for $500,000. His cash needs would remain more or less unchanged after he settles on land. In investing his money, consider necessities of life, precautionary needs, need for lump-sum expenditure in the future, retirement needs and insurance needs. After investing appropriate sums to meet some of these needs, if there is money left over, you can consider active investing: try to beat the market. Two approaches to beating the market are: asset allocation (market timing) and identifying mispriced securities. III. POLICY STATEMENT The first step will be to construct a policy statement. This will specify the type of risk you are willing to take, and the investment goal(s) and constraints. This statement is periodically updated as investor needs change. The statement helps the investor decide on realistic but challenging investment goals after learning about the prospects of the markets and the risks. It also creates the standard by which the performance of the portfolio is judged. A policy statement should incorporate the investor’s objectives (risk and return) and constraints (liquidity, time horizon, tax factors, legal and regulatory constraints, and unique needs and preferences). Chapter 2 goes over the inputs that you need for the policy statement. IV. CONCEPTUAL NOTES: ASSET ALLOCATION ISSUES One approach used in trying to outperform the market is asset allocation: identifying how much to invest in stocks, bonds, cash, real estate, precious metals, international assets, etc. After you have assessed the proportion you should invest in stocks, bonds, cash, etc., you might delve into the issue of security selection: selecting individual securities in each asset category (stocks, bonds, cash, etc.). A. Economic Analysis The starting point for asset allocation is economic analysis. Based on short-run and long-run forecasts made by economists, try to make some assessment about short-run and long-run direction of the economy. Economists look at a host of macro-economic variables to help us in assessing the direction of the economy. The more important ones are: · Money supply and interest rates (which determine easy of cr.

1. PAGE
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FIN 640
TEAM PROJECT: PORTFOLIO CONSTRUCTION
(15% of overall grade)
Submission: Initial report: Feb 13; Final report: March 20, 2014
I. OBJECTIVE
The objective of this project is to construct a portfolio for Mr.
Donothing. He hires you to manage his money. You will do this
assignment in a team of two.
II. INVESTOR PROFILE
Mr. Donothing is a real person. He is 50 years old and single.
He does not work. He survives based on an inheritance of $10
million. He is an amphibious person: he spends his time in
cruise lines. He needs $550 per day throughout the year for
cabin charges and food. He needs another about $25,000 for
secretarial services and incidental expenses. He wants to settle
in Pompano Beach, Florida at 55, get married and have a child.
The type of the house he wants to buy sells today for $500,000.
His cash needs would remain more or less unchanged after he
settles on land.
In investing his money, consider necessities of life,
precautionary needs, need for lump-sum expenditure in the
future, retirement needs and insurance needs. After investing
appropriate sums to meet some of these needs, if there is money
left over, you can consider active investing: try to beat the
market. Two approaches to beating the market are: asset
allocation (market timing) and identifying mispriced securities.
III.

2. POLICY STATEMENT
The first step will be to construct a policy statement. This will
specify the type of risk you are willing to take, and the
investment goal(s) and constraints. This statement is
periodically updated as investor needs change. The statement
helps the investor decide on realistic but challenging investment
goals after learning about the prospects of the markets and the
risks. It also creates the standard by which the performance of
the portfolio is judged. A policy statement should incorporate
the investor’s objectives (risk and return) and constraints
(liquidity, time horizon, tax factors, legal and regulatory
constraints, and unique needs and preferences). Chapter 2 goes
over the inputs that you need for the policy statement.
IV. CONCEPTUAL NOTES: ASSET ALLOCATION ISSUES
One approach used in trying to outperform the market is asset
allocation: identifying how much to invest in stocks, bonds,
cash, real estate, precious metals, international assets, etc. After
you have assessed the proportion you should invest in stocks,
bonds, cash, etc., you might delve into the issue of security
selection: selecting individual securities in each asset category
(stocks, bonds, cash, etc.).
A. Economic Analysis
The starting point for asset allocation is economic analysis.
Based on short-run and long-run forecasts made by economists,
try to make some assessment about short-run and long-run
direction of the economy.
Economists look at a host of macro-economic variables to help
us in assessing the direction of the economy. The more
important ones are:

3. · Money supply and interest rates (which determine easy of
credit availability);
· Retail sales, unemployment rate, personal income, personal
consumption, new-car sales, consumer credit (these and other
variables help to assess consumer spending);
· Budget deficit (which reflects government spending);
· Merchandise trade deficit (which reflects relative strength of
exports compared to imports);
· Industrial production, capacity utilization, order for durable
goods, business inventories, non-residential construction,
capital outlays (these and other variables including some
covered earlier, help to assess the level of business activity).
If these and other variables suggest a continued growth of the
economy then investing the major part of your money in stocks
might appear an attractive prospect. The possibility of recession
might suggest that a larger portion be devoted to bonds. An
uncertainty in the state of the economy in the near future might
suggest that if you have new money to invest, you should invest
in money market instruments as a temporary “parking-place” –
which can subsequently be easily divested and invested in
stocks and/or bonds when the direction of the economy is
known with more certainty.
You do not have to collect raw data and analyze each of the
macroeconomic variables listed. Financial services companies
analyze various macroeconomic variables and provide outlook
about the economy through such publications as:
· (Standard and Poor's Industry Surveys;
· Standard and Poor's The Outlook;

4. · Valueline Investment Survey;
· Moody's Bond Survey -- for bonds;
· Wiesenberger Investment Companies Services -- for mutual
funds;
· Business Week provides a 2-page "Business Outlook" in
every issue;
· The Wall Street Journal (WSJ) provides commentary on the
economy -- The Outlook -- every Monday in the 5th column of
the first page. The WSJ provides economic statistics and
commentary in the second page and third page every day.
To these, add Fortune, Forbes, Money. All of these sources –
and many more – are available at the Library. For further help
contact the Reference Section in the Library. Also you will find
information in the internet.
Even if strong indications suggest that the economy will
continue to grow at a healthy rate, portfolio theory still suggests
that our money be diversified among different asset classes:
stocks, bonds, cash, etc. -- maybe more in stocks and less in
bonds and cash. Through this, even if a stock investment goes
sour, the position in bonds and/or cash would offset the losses
incurred.
B. Industry/Sector Analysis
Once you get an idea (via economic analysis) as to how much to
invest in stocks/bonds/cash/etc., you then have to select
securities from these categories through industry/sector
analysis. The objective is to identify promising sectors within
the economy in which you might invest. Even in a bull market
all sectors of the economy do not grow/benefit to the same
degree. During your economic analysis, note the
industries/sectors which are considered by experts to be highly

5. prospective.
C. Company/fund Analysis
Analyze the companies to identify the most promising/mispriced
stocks and/or funds within the most promising
industries/sectors.
V. REPORT
You will submit an initial and final team reports on your
exercise. The format of the reports will be as follows:
Submit initial report on: February 13, 2014. Submit as many of
the Report Sections [see below] as you have been able to
complete, but at least include (1) investor profile, (2) policy
statement, (3) economic analysis, (4) asset allocation decision,
(5) criteria for industry selection (Appendix 2A), (6) analysis of
one industry using the criteria listed (Appendix 2B), (7) criteria
for company selection (Appendix 3A), (8) analysis of one
company using the criteria listed (Appendix 3B). You will
include analysis of additional industries and companies as well
as analysis of other assets in the final report.
Submit final report on:
March 20, 2014 (You can do modifications to your initial
portfolio. Also, resubmitInitial Report with Final Report.)
Cover Page:
Provide title of report, course, names of team members, section,
name of instructor and date of submission.
Table of Contents:
List each section of report as well as appendixes showing page
numbers on which they appear. That means you have to number
all pages of the report.
Management Summary:
13 to 15 pages (1.5 spaced) containing sections 1 through 6
listed below. Include section headings.

6. Appendixes:
As required. No page limit.
REPORT SECTIONS
A.MANAGEMENT SUMMARY
1. Introduction: ¼ of a page
State briefly the objective of the report
2. Investor Profile and policy statement: 2 to 3 pages
Provide a brief but clear sketch of the investor in terms of the
short-run and specific long-run goal(s) he likes to achieve, level
of return sought, level of risk tolerance, tax status, investment
horizon, etc. (Please note that the investment
vehicles/instruments you select has to match with these factors.
For example, if you assume a low level of risk tolerance for the
investor, you may choose not to invest in high beta stocks or in
junk bonds).
3. Economic analysis/outlook: 2 to 3 pages
Follow guidelines given under "Economic Analysis", and any
guideline to be given in class. The analysis should contain
adequate data and statistics to support your assessment about
the near term (one to four quarters) direction of the economy.
Provide detailed analyses as appendix(es) and include synopsis
of it in the management summary. Refer to the sources of
statements, data and statistics as footnotes. Refer to such
appendixes in the relevant part(s) of your management
summary. The last paragraph of this section should outline your
asset allocation decision (that is, given the economic scenario
and the goals and preferences of the investor, how much would
you put in stocks, bonds, cash, etc.? You can invest in any other
type of asset category).
4. Industry/sector analysis: 3 to 4-page summary (detailed
analysis as appendixes: 1 to 2 pages per industry)

7. Based on criteria you consider to be appropriate, select
sectors/industries in which you would invest. Criteria might
include potential competition, stability, industry helpers,
historical and prospective growth rate, return on investment,
return on equity, stability, etc. Selection criteria should match
the needs and preferences of the investor. For example, if the
level of investors risk tolerance is low, one of the criteria for
selecting industries would be their ‘stability’. (But how do you
measure stability? Mention that in the section on criteria).
Include as appendix detailed analysis and relevant data on
industries/sectors you opt to invest in. Justify why you decide
to invest in some industries over others. The management
summary would contain synopsis of the detailed industry/sector
analyses included as appendix(es).
5. Company/fund/money market instrument analysis: 3 to 4-
page summary (detailed analyses as appendixes: 1 to 2 pages
per company)
In case of investment in mutual funds, you will include analysis
of the promising funds (stock funds, bond funds, money market
mutual funds) to rationalize why you would select a particular
vehicle. Rationalize as to why you select certain
companies/funds over so many others. Selection must be based
on some well thought out criteria as you do for industry
analysis. Include as appendix(es) relevant historical data on
each instrument selected. The outcome of industry/sector
analysis and company/fund/money market instrument analysis is
the resolution of the security selection decision. (The outcome
of economic analysis, as indicated earlier, is the resolution of
asset allocation decision). Once again, include detailed
company/fund/money market instrument analysis as
appendix(es) and summarize your analyses in the management
summary.
6. Conclusion: ½ a page
How does your final portfolio look like in terms of its
composition? What overall expected return does it promise? Is
the expected return for the long-term portfolio enough to meet

8. the long-term goal(s)? Does the portfolio seem to meet the
needs and preferences (including risk tolerance) of the investor?
B. Appendixes
1. Appendix 1. The first appendix would be a table of the
following suggested format:
Composition of Portfolio
# of shares
Annualized
Price (as of
purchased
Amount
expected
Instrument(give date))(if applicable)invested
return (%)
Annualized expected return must be realistic. Take transaction

9. costs – commissions, interest paid on margin loan – into
account. Disregard taxes in calculation of expected returns.
Provide at the end of the table overall (weighted-average)
expected return.
2. Appendix 2.. List and explain criteria you used for selecting
industries/sectors for investing. State acceptable ranges you set
for each criteria. (“We selected industries which grew based on
average roe by at least 25% over the last 5 years.”)
3. Appendix 2B, 2C, 2D, etc. Provide analysis for different
industries/sectors selected (1 to 2 page per industry/sector).
4. Appendix 3A. List and explain criteria you used for
company/fund/investment analysis. State acceptable ranges you
set for each criteria. (“We selected companies which grew based
on roe by at least 35% over the last 5 years.” You can set a
higher acceptable level here compared to the level for industry
selection.)
5. Appendix 3B, 3C, 3D, etc.Provide analysis of
companies/funds/instruments selected (1 to 2 page per item).
6. Appendix 4, 5, 6 etc. Put after this any other appendix(es)
you may want to include.
7. Numbering appendixes. Number all the appendixes (Appendix
l, Appendix 2, etc.). Provide title (caption) below that and
sequentially number each page. For example:
Appendix 3A
Criteria for company analysis
8. Finally, note well:
(i)
Throughout the exercise, carefully review and apply principles,
concepts and techniques covered in this course.
(ii)
If you choose not to invest internationally, put your reasons in
Appendix 4.
(iii)
Extra work in terms of meeting the requirements of this project

10. will receive extra credit (this applies also to the individual
project).
(iv)
Number all appendixes andrefer to them in the main report as
(Appendix 1, p.15) or, (App. 1, p. 15).
(v)
Indicate the extent of research you did by providing references
to various sources you researched (including references to
readings in Reading Packet).
(vi)
Very important: Nonconformity to guidelines given will cause
loss of points. It may be worthwhile to appoint a team member
who will ensure conformity to guidelines. SEEK
CLARIFICATIONS FROM ME WHENEVER NEEDED.
(vii)
Broad criteria for grading are:
(a) Rationale of the portfolio (how well the portfolio fits with
preferences of the investor, and with economic prospect).
(b) Extent of research done and reflected in report.
(c) Extent to which concepts and techniques have been applied
in the project.
(d) Extent to which the guidelines given for this project in this
assignment and in the class has been followed.
(TEAMPROJ)