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Case 3:Templeton Growth Fund Presented By: Zhu Zhu

Case 3:Templeton Growth Fund Presented By: Zhu Zhu Mehmet Can. Assignment. Analyze Templeton Growth Fund in terms of international diversification, rates of return and determine its risk Construct an internationally diversified optimal portfolio

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Case 3:Templeton Growth Fund Presented By: Zhu Zhu

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  1. Case 3:Templeton Growth Fund • Presented By: Zhu Zhu • Mehmet Can

  2. Assignment • Analyze Templeton Growth Fund in terms of international diversification, rates of return and determine its risk • Construct an internationally diversified optimal portfolio • Build an optimal constrained portfolio • Compare the performance of construct optimal portfolio and optimal constrained portfolio & with Templeton’s Growth Fund, the MSCI USA,and the MSCI World Index. • Use 2010 new data and compare the out-of –sample performance

  3. Constructing the OP

  4. Constructing the OP

  5. Driving the OP • Portfolio Variance: sp2 = bp2sm2 + sep2 = (Sjwjbj)2sm2 + Sjwj2sej2 • Reward to Market Volatility RVOL = (ri – rf) / b ri = country return rf= risk free return bi= Systematic risk

  6. Driving the OP • Unsystematic Risk: sei2 = si2 - bi2sm2 where si2 = Variance of country return sm2 = Variance of market index bi= Systematic risk • Cut off ratio: Ci= Cnum / Cden Cnum =sm2Sj=1i(rj – rf) / (bj / sej2) Cden = 1 +sm2 Sj=1i (bj2 / sej2)

  7. Driving the OP • Modern Portfolio Theory and Investment Analysis • Ranks assets according to RVOL from highest to Lowest • The optimal portfolio consists of investing in all stock for which RVOLi > C* • C* is the last value of Ci that is less than the RVOL of an individual country. • Zi = (bi/sSi2)(RVOLi – C*) • This Z is then used to calculate w Where: wi = Zi / SjZj

  8. Constructing the OP

  9. Constructing the OP

  10. Optimal Portfolio

  11. Deriving the weights of the Constrained Optimal Portfolio • Countries with weights above the cap are reduced to the cap limit of 6.5% and a floor of 35% for the US

  12. Optimal PortfolioZiwiMSCI USD riSD rfWeighted riWeighted BiSDRVARRVOLBrazil 1.5689010160.863943659121.25%0.5370.1%1.0475672921.28727610.4639377Sweden0.0367701630.02024815460.17%0.1710.1%0.0121823910.01579360.0034624Singapore 0.1989049690.10953061167.29%0.2170.1%0.0737084460.10405410.0237681South Korea0.0113999280.00627757669.42%0.3940.1%0.0043576780.00822360.0024734Hong Kong 055.20%0.3610.1%000Total11.1378158071.41534730.49364172.303930.80356 Constrained Optimal Portfolio

  13. Comparison of Various Portfolios • Portfolios under comparison: • Optimal portfolio • Constrained optimal portfolio - Floor for US weights: 35% - Caps for other country indexes: 6.5% • MSCI world index • MSCI USA

  14. Comparison of Various Portfolios

  15. Conclusion: • Even though the optimal portfolio worked very well in 2009, the year when it was constructed. However, the superior performance is not guaranteed for the future years. • The composition of the optimal portfolio should be continuously re – adjusted over the investment horizon to reap better returns with lower risks.

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