Construction of investment portfolio worth € 100 000 diversified across 9 countries using the Bloomberg Terminals.

1. International April 21
Investments 2012
Prepared and
Submitted By:
Portfolio Construction worth EUR 100, 000 Team 3 Investors
Bloomberg ALPHA Naveen PRASAD
Niranjan VALLUR
Himanshu SHARMA
IÉSEG School of Management, France

2. Table of Contents
Guidelines for Portfolio Construction ..................................................................................................... 2
Our Objective .......................................................................................................................................... 2
Country Allocation .................................................................................................................................. 2
Analysing the Country Return and Risk............................................................................................... 2
Correlation between the Indices ........................................................................................................ 4
Sector Allocation ..................................................................................................................................... 5
Equity Allocation ..................................................................................................................................... 8
Bonds Allocation ................................................................................................................................... 10
Calculating Return, Volatility and Sharpe Ratio .................................................................................... 12
Return and Volatility ......................................................................................................................... 13
Efficient Frontier and the Sharpe ratio ............................................................................................. 13
Portfolio Details .................................................................................................................................... 13

3. Guidelines for Portfolio Construction
 The reference currency is Euro
 Total current value of the portfolio is EUR 100, 000
 Cash investment will yield 0% return
 Country analysis should be done and the possible restrictions should be studied before
deciding to invest on a particular country
 As a private investor, we cannot invest in India
 Consider only investable securities for a French based private investor
Our Objective
• The primary goal is Capital Appreciation
• Diversify the portfolio to at least 8 countries
• Invest in a minimum of 7 currencies
• Invest for a medium term (1 year)
• Invest in both Equity and Fixed Income Securities
• Limit the risk to 15%
Country Allocation
In order to decide on a country, we first studied the forecasted performance of the different
currencies in one year time. By using Bloomberg’s WCRS function, we sorted the currencies on the
descending order of forecasted total return for a period of one year.
Analysing the Country Return and Risk

4. Analysing the Currency Return
Simultaneously, we also studied the forecasted volatility of the different currencies in one year time
and sorted the currencies on the descending order of forecasted implied at-the-money volatility for
a period of one year
Analysing the Currency Risk

5. Correlation between the Indices
Finally, keeping both the factors in mind and weighing them rationally, we decided on a list of most
favorable countries to invest in. We came up with a list of 15 such countries initially and then studied
the correlation (using Bloomberg’s CORR function) between the major indices of these countries.
Thereafter, we eliminated the indices which had high correlation value with respect to the French
Index (CAC 40 index).
For example, as can be seen from the below screen, FTSE 100 Index had a correlation of 0.921 w.r.t.
CAC 40 Index. As this was high, we removed it.
Correlation between the initial list of indices

6. We then repeated this step multiple times and finally came up with a list of 10 most favorable
indices and thus the countries to invest in.
Correlation between the final list of indices
Sector Allocation
To decide on the Sectors to invest in, we studied the top performing sectors across each of the
selected countries using Bloomberg’s MMAP function.
Explaining this with the Example of Australia
1. Long Term Growth Estimate – We checked the long term growth aspect of the sectors in
that particular country. We mainly focused on the Median; higher the median higher the
potenial for the sector to flourish in the future.

7. 2. P/E Estimate – A valuation ratio of a company's current share price compared to its per-
share earnings. Checking of P/E implies that the companies in that particular sector are
doing good. Here also we checked the median, Higher the median higher the chances of
good returns.

8. 3. Price/Book Ratio - A ratio used to compare a stock's market value to its book value. A
lower P/B ratio could mean that the stock is undervalued. So we picked the sectors with high
P/B ratio.
Finally, based on the all of the above criteria we selected the most favourable list of Sectors to invest
in, namely: Telecommunication, Health Care and Oil & Gas.
We repeated this for all the countries and came up with the list of sectors to invest in, as can be seen
in the below table:
Countries Selected Sector
Argentina Consumer Services, Financial
Australia Telecommunication, Health Care, Oil & Gas
Brazil Basic Materials, Consumer Services, Health Care
France Health care, Financials, Oil & Gas, Consumer Services
Mexico Health care, Industrials, Telecommunication
Russia Financials, Consumer Services, Technology, Industrials, Utilities
Singapore Financials, Health Care, Consumer Services
South Korea Consumer Goods, Consumer Services, Health Care, Industrials
Taiwan Oil & Gas, Health Care, Telecommunications, Consumer Services
United States Technology, Health Care, Consumer Services, Oil & Gas
*Sectors as per ICB

9. In a similar fashion, we selected the Countries and Sectors for Investment in Bonds.
Equity Allocation (80%)
Using Bloomberg’s EQS function we obtained a list of equities for different countries based on
certain defined criteria.
The criteria we chose can be seen from the below screenshot:
Taking the Example of Argentina, below is the list of Equities we obtained after screening:
Ticker Short Name P/E:Y Alpha:Y- Beta:Y- P/B:Y
1 1
Consumer Services
(5 securities)
TV AR Equity GRUPO TELEV-CED 26.7384 0.09662 0.32533 3.566
LVS AR Equity LAS VEGAS SANDS 26.054899 0.32503 0.57390 3.991
SBUX AR Equity STARBUCKS-CEDEAR 23.452801 0.41800 0.26883 6.333
COSTC AR Equity COSTCO WH-CED CE 23.3263 0.15173 0.38489 2.793
COST AR Equity COSTCO WH-CED 23.3263 0.56571 0.50445 2.793
Financials (4 securities)
APSA AR Equity ALTO PALERMO SA 101.9080 0.12616 0.51698 3.263

10. AIG AR Equity AMER INTL-CEDEAR 40.70180 0.12553 0.30505 0.419
MLEA AR Equity MILLEA HOLDINGS 24.04579 0.06033 0.33672 0.903
HDB AR Equity HDFC BANK LTD-CE 23.2076 0.56623 0.00147 4.2654
We then analyzed the various factors (P/E, Beta, P/B, etc.) and selected the top 3 equities and then
the best equity in terms of capital appreciation.
For Argentina, the top equity was: ALTO PALERMO SA (APSA AR Equity)
Similarly for Brazil:
Ticker Short Name P/E:Y Alpha:Y- Total Beta:Y- P/B:Y
1 Return 1
YTD
Consumer Services (7
securities)
IMCH3 BZ Equity IMC 551.3 0.1 30.1 0.7 1.3
RADL3 BZ Equity RAIADROGASIL 60.0 0.3 55.9 0.7 1.9
LLIS3 BZ Equity RESTOQUE COM 41.2 0.3 35.3 0.8 7.9
LAME3 BZ Equity LOJAS AMERIC 31.1 0.2 26.6 0.9 15.5
PCAR3 BZ Equity PAO ACUCAR 24.2 0.4 25.1 0.3 2.3
ESTC3 BZ Equity ESTACIO 21.1 0.0 29.4 0.8 2.4
DAGB11 BZ Equity DUFRY GROUP-BDR 20.8 0.1 43.8 0.7 2.7
Health Care (5
securities)
AMIL3 BZ Equity AMIL 33.6 0.0 13.7 0.6 3.9
ODPV3 BZ Equity ODONTOPREV 32.4 0.1 21.2 0.6 6.2
FLRY3 BZ Equity FLEURY SA 28.8 0.0 12.7 0.7 2.0
CREM3 BZ Equity CREMER 25.7 0.1 28.0 0.7 1.6
TEMP3 BZ Equity TEMPO PART 20.2 0.1 8.4 0.6 1.9
For Brazil, the top equity was: RAIADROGASIL (RADL3 BZ Equity)
We did this for all the countries and populated a list of equities that would give highest capital
appreciation.
(The complete analysis for all the countries can be seen in the attached excel sheets sent along with
this document)
The final list of Equities we decided to invest in are:
Equity Beta Expected Weight Portfolio RFR EMR ERP
Return Contribution
APSA AR Equity 0.516986 12.74% 1.50% 0.19% 1.94% 15.57% 7.26%
AUT AU Equity 1.275899 29.89% 4.26% 1.27% 3.67% 14.13% 10.09%
RADL3 BZ Equity 0.669692 14.80% 4.67% 0.69% 12.61% 14.63% 1.24%
MMXM3 BZ Equity 1.346423 17.01% 1.50% 0.26% 12.61% 14.63% 1.24%
AC FP Equity 1.250633 26.05% 4.16% 1.08% 3.15% 11.82% 9.64%

11. ENTC FP Equity 0.627192 14.64% 9.26% 1.35% 3.15% 11.82% 9.64%
PINFRA* MM 0.647042 12.35% 1.50% 0.19% 6.51% 11.70% 3.85%
Equity
DIXY RM Equity 0.937799 22.58% 12.50% 2.82% 4.11% 15.17% 8.63%
INFO SP Equity 1.266067 31.27% 1.57% 0.49% 2.48% 11.46% 13.76%
006730 KS Equity 1.038366 22.50% 12.50% 2.81% 3.79% 14.25% 7.56%
059210 KS Equity 1.448989 29.90% 1.50% 0.45% 3.79% 14.25% 7.56%
4105 TT Equity 1.092323 27.96% 10.52% 2.94% 1.29% 13.15% 12.56%
2707 TT Equity 0.972566 25.03% 12.50% 3.13% 1.29% 13.15% 12.56%
ULTI US Equity 1.15859 22.99% 12.50% 2.87% 1.87% 10.69% 9.41%
VMW US Equity 1.166746 23.14% 9.56% 2.21% 1.87% 10.69% 9.41%
Bonds Allocation (20%)
Using Bloomberg’s SRCH function we obtained a list of bonds for different countries based on
certain defined criteria.
The criteria we chose can be seen from the below screenshot:

12. Taking the Example of New Zealand, below is the list of Bonds we obtained after screening:
Short Name Coupon Maturity Currency Bid Price Bid Bid Yield S&P Rating
Macaulay To
Duration Maturity
KIWIBANK LTD 7.72 20/03/2017 NZD 100.273 0.07 7.65 A+
KIWIBANK LTD 8.75 30/09/2018 NZD 106.317 1.36 7.49 A+
ANZ NATIONAL BAN 6.25 13/03/2019 NZD 102.529 5.66 5.80 AA-
BANK NEW 6.1 20/12/2018 NZD 101.754 5.45 5.78 AA-
ZEALAND
ANZ NATIONAL BAN 6.08 20/09/2018 NZD 101.816 5.36 5.73 AA-
BANK NEW 6.215 20/12/2018 NZD 103.022 5.44 5.66 AA-
ZEALAND
ANZ NATIONAL BAN 6.85 16/02/2018 NZD 105.946 4.85 5.63 AA-
AUCKLAND 5.843 22/03/2022 AUD 102.973 7.64 5.45 AA
COUNCIL
ASB BANK LIMITED 6.06 08/06/2017 NZD 103.106 4.38 5.35 AA-
ASB FINANCE LTD 5.7583 17/08/2015 AUD 100.541 0.04 5.31 #N/A N/A
AUCKLAND INTL AI 5.47 17/10/2017 NZD 100.96 4.79 5.26 A-
WATERCARE SVCS 5.685 26/10/2018 NZD 102.714 5.53 5.19 AA
ASB BANK LIMITED 6.908 15/09/2016 NZD 107.037 3.84 5.09 AA-
BANK NEW 6.425 30/06/2017 NZD 106.117 4.41 5.06 #N/A N/A
ZEALAND
BANK NEW 5.73 15/07/2016 NZD 102.513 3.74 5.06 AA-
ZEALAND
ASB BANK LIMITED 5.255 19/12/2017 NZD 101.004 4.86 5.05 #N/A N/A
AUCKLAND INTL AI 8 15/11/2016 NZD 112.256 3.81 4.95 A-
ANZ NATIONAL BAN 6.315 16/02/2016 NZD 104.659 3.40 4.95 AA-
DUNEDIN CITY TRE 6.57 17/07/2018 NZD 108.862 5.16 4.90 AA
AUCKLAND INTL AI 8 10/08/2016 NZD 112.165 3.69 4.82 A-
BANK NEW 6.905 15/09/2016 NZD 108.2417 3.84 4.79 AA-
ZEALAND
COCA-COLA AMA 6.65 22/07/2021 AUD 113.634 7.08 4.80 A-
NZ
DUNEDIN CITY TRE 7.81 15/10/2017 NZD 114.304 4.60 4.80 AA
ASB BANK LIMITED 6.1 20/10/2015 NZD 104.177 3.18 4.78 AA-
We then analyzed the various factors (Maturity, Bid Macaulay Duration and Bid Yield to Maturity)
and selected the top 3 bonds and then the best bond in terms of capital appreciation.
For New Zealand, the top bonds were: KIWI 7.72 03/20/2017 Corp and KIWI 8.75 09/30/2018 Corp

13. Similarly for Australia:
Short Name Coupon Maturity Currency Bid Bid Bid Bid Yield S&P
Price Macaulay Risk To Rating
Duration Maturity
MACQUARIE BANK 4.8267 31/05/2017 AUD 99.56 0.00 0.00 10.35 BBB
IAG FINANCE NZ 8.46 #N/A Field Not Applicable AUD 101.10 0.19 0.10 10.19 A-
AMP GROUP FINANC 6.875 23/08/2022 GBP 86.77 7.12 5.99 8.88 BBB+
MACQUARIE BANK 6.5 31/05/2017 AUD 99.81 0.08 0.08 8.60 BBB
INSURANCE AUST 9.105 21/11/2017 NZD 102.75 0.53 0.56 8.47 A+
COM BK AUSTRALIA 0 07/07/2029 AUD 26.80 17.18 4.27 7.96 AA-
MACQUARIE BK LTD 6 21/09/2020 EUR 89.26 6.47 5.58 7.78 BBB
NATL AUSTRALIABK 0 06/03/2032 AUD 23.35 19.84 4.31 7.61 AA-
NATL AUSTRALIABK 0 30/03/2032 AUD 23.88 19.91 4.42 7.46 AA-
ST GEORGE BANK 10 09/05/2018 AUD 104.56 1.00 1.01 7.38 A-
WESTPAC BANK/SYD 0 01/10/2030 AUD 27.02 3.41 0.86 7.37 AA-
BNP PARIBAS/AU 7 24/05/2016 AUD 98.77 3.49 3.43 7.36 AA-
COM BK AUSTRALIA 0 30/07/2042 USD 12.07 0.24 0.03 7.24 #N/A
N/A
BNP PARIBAS/AU 5.845 24/05/2016 AUD 93.33 0.06 0.05 7.17 AA-
WESTPAC BANKING 0 24/09/2025 AUD 39.57 13.39 4.95 7.17 AA-
COM BK AUSTRALIA 0 26/08/2025 AUD 39.97 13.32 4.97 7.13 #N/A
N/A
COM BK AUSTRALIA 0 26/08/2025 AUD 39.97 13.32 4.97 7.13 #N/A
N/A
LLOYDS TSB BK AU 7.5 02/10/2015 AUD 101.28 3.06 3.01 7.07 A
SYDNEY AIRPORT F 4.5717 11/10/2027 AUD 81.22 0.19 0.13 7.09 AA-
SUNCORP METWAY I 6.75 23/09/2024 AUD 93.61 2.23 2.00 7.05 A-
COM BK AUSTRALIA 7.39 18/05/2026 AUD 103.03 3.41 3.53 7.04 AA-
COM BK AUSTRALIA 0 20/04/2027 AUD 36.20 14.97 5.06 7.03 #N/A
N/A
BNP PARIBAS/AU 6.75 18/03/2015 AUD 99.47 2.64 2.56 6.95 AA-
INSURANCE AUSTRA 7.5 15/12/2036 NZD 105.89 3.94 4.14 7.00 A-
LEASEPLAN AUST 7.75 24/02/2014 AUD 101.30 1.70 1.69 6.96 BBB+
BNP PARIBAS/AU 5.53 18/03/2015 AUD 94.84 0.13 0.12 6.84 AA-
For Australia, the top bond was: RAIADROGASIL (IAGAU 9.105 11/21/2017 Corp)
We did this for all the countries and populated a list of bonds that would give highest capital
appreciation.
(The complete analysis for all the countries can be seen in the attached excel sheets sent along with
this document)
Calculating Return, Volatility and Sharpe Ratio

14. The portfolio was created in such a way to get the maximum return out of the invested securities.
The minimum expected return from each of the security was calculated taking into account of the
country risk and the invested equity risk. The portfolio weightage was allocated so that each of the
securities will provide the expected return and the portfolio on the whole gives a maximum possible
return.
Return and Volatility
The volatility of the securities was calculated taking the daily price of the security in their base
country converted to Euro currency for the last 2 years; then the daily log return was calculated.
Next, we constructed a covariance table to statistically compute the expected returns and the
variability of those stock returns to optimize our portfolio. Most of the stocks we picked were low
and inversely correlated which reduces the risk associated with the overall portfolio. So the
unrelated movements in stock prices would have the cumulative effect of lowering overall portfolio
risk. A typical portfolio should have the lowest variance for a given expected return.
Efficient Frontier and the Sharpe ratio
Our next step was to build an efficient frontier for selected stocks in our portfolio. This can be done
by weighting the covariance table and assigning weights to the individual stocks. We begin with the
covariance table and add arbitrary weights along the rows and columns. These weights add up to a
total of 100 percent which is the portfolio leverage. This represents the weighting of each of the
securities in the portfolio. The weights of the rows and the columns are kept the same.
The statistics used for the calculation and for optimization include the portfolio average return,
which is the excess return over risk free rate, the capital allocation to the each of the securities and
the standard deviation of the portfolio. We make sure the volatility of the returns is annualized.
The final objective is to find a portfolio set with the lowest standard deviation and use the Excel
Solver function to maximize the Sharpe ratio, which is the ratio between the excess return over the
expected return to the standard deviation or the volatility of the returns and this is the measure risk-
adjusted performance. Constraints are added as a sanity check like the total allocation is 100
percent; the risk of the return doesn’t exceed 15 percent and others.
We noticed some of the securities got assigned extremely low and high weights when the solver
tried to optimize the Sharpe ratio. To reduce the disparity we added additional sanity constraints for
minimum and maximum weight allocation for individual stocks.
Results
Equity:
Total Return – 22.76%
Total Risk – 11.42%
Bonds:
Total Return – 9.19%

15. Total Risk – 0.27%
Overall Portfolio:
Total Return – 20.05%
Total Risk – 9.2%
Portfolio Details
We created the portfolio by running the Bloomberg’s function PRTU.
The name of the Portfolio is THE 3 INVESTORS
We wrote the trade ticket using the function PTT.
The history of the trade tickets (using the function PTD) is included in Appendix 1 with this report.