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Formulation of an Investment and Asset Allocation Strategy (Essay Sample)


AC6102 Interim Assignment (30% of Final Grade)
 You are a new Irish based portfolio manager serving international clients. You have
€500 million of capital to invest and are currently formulating an investment and asset
allocation strategy.
 Assuming your investment holding period is medium term (5 to 7 years), outline how
you would construct your portfolio and apportion capital to various assets.
 Please outline your overall investment philosophy and general viewpoint on potential
returns during the holding period.
 In terms of specific allocation please indicate the reasoning behind the asset selection.
Submissions should make reference to metrics covered in class (but not limited to):
 Geo-political risk, asset class risk, fundamental risk, specific risk.
 In terms of risks identified submissions should outline how these risks can be
managed on an ongoing basis.


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Portfolio management has widely been reviewed on in literature. A lot of focus has been for firms to identify what to invest on and the asset mix to include. It has been shown, that managers have to be very keen when managing multiple asset mix (Harlow, 1991). Thus through research there are three major identified stages to making a good portfolio and would be used in the current analysis to come up with an optimum strategy.
First, is the asset allocation strategy, followed by portfolio construction, and third is performance evaluation. Hence in formulation of the asset allocation strategy it is important to consider the level of risk. This will result into determination of what is picked as investment assets. Then it could be important to make consideration of how active the mix is, and to reduce risk for first investment it would be important to start with domestic assets (Fabozzi & Markowitz, 2011). However, if expanding to the international market, then use of external managers would be paramount.
As the managers, allocation of £500 million from a holding period of five years would be as follows. First, it would begin by asset allocation strategy. At this point choice of the assets to include in the portfolio would be done. At this point diversification, returns, widening the investment portfolio, and ability to add value would be the most important factors considered in the choice. Thus getting to the alternative investments, the firm would mix assets as shown on the table below. The basic rationale that cuts across all investments is their ability to contain the international market that is influenced by a lot of external factors. The alternatives chosen ensures that there was a strong growth link with the traditional investment of stock, bond and cash (Zariphopoulou, 2009). Besides, the alternatives were chosen for their low correlation with traditional investment. In addition, it was noted that they are not liquid and are unregulated by US securities exchange commission. Also they offer high returns on investment and due to their diversified nature, they reduce the overall risk.

Rational for choice

Private equity

Choice for use of growth capital to be able to expand and serve the international market. It would also build relationship and networks for the firm.

Hedge funds (fixed income and global market funds)

Meant for earning high return on investment. They are liquid and thus can be used for emergency cases. In addition, they were selected as they creates a sense of stability and flexibility for the company. They would also allow for use of strategies like market neutral, volatility arbitrage, and quantitative strategies to ensure the firm is protected. Can also make use of wide range of derivatives to ensure returns are high.


Choses as a major hedge towards inflation since when dealing with the external market, macro-economic factors cannot be controlled by the firm. In addition, they are not sensitive to public equity markets and their value varies with respect to demand and supply. Besides they have low correlation with traditional stocks and are stable. They ca also be linked to economic growth.

After allocation and assets alternatives to be chosen are identified, it is important to do a portfolio construction. At this point allocation of the funds available would be made and analysis of how the weights placed on each influence others is analysed. At this point the main objective of the portfolio is to ensure high returns, future increase in value, and diversification. Thus the level of tolerance to risk would be considered s moderate. There will also be considerations made to ensure cost efficiency. After this consideration, the manager will then implement the Blackrock’s portfolio to construction thus benchmark, budget, invest, and monitor the investment (Booth, 2004). We now know that we need to allocate £500, holding for 5 years and with a need for high returns in the future. Since the investor has moderate tolerance to risk, then will chose a moderately aggressive portfolio, as shown on the table below:


Fixed income securities (commodities)


Equities (private equity)


Cash and equivalents (hedge funds)


Finally would be the specific allocation. At this point the capital available would be allocated to the different assets. The return on investment for a moderate risk investors has been seen to be at 7%-8% (Fabozzi & Markowitz, 2011). For the current analysis a return on investment of 8% would be considered. For portfolio analyses, the manager wold assess the future va

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