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1. Prapanun Chantrdee 19022363
2. Pasinee Kangsananont 19023269
3. Aumaporn Prayoonhong 19020750
4. Kirati Prasongdee 19021557
5. Suthida Sakuldao 18022870
6. Narintra Tinnaratsakulchai 19022909

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I. Intiouuction 1

II. Naiket 0veiview 1

III. Stock Selection 2
- Step 1; Naiket Cap in top Su% 2
- Step 2;R0E>1S% foi the past S yeais 2
- Step S;PE iatio<maiket aveiage S
- Step 4;PEu iatio<1 S

Iv. 0ptimization Piocess S

v. Peifoimance Neasuiement S
- Sectoi Attiibution 8
- Naiket Timing 9

vI. Conclusion 1u

vII. Explanation anu Suggestion 1u
1.) Stock selection pioblem 1u
2.) 0ptimization piocess pioblem 11
S.) Bownsiue shocks 12
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Reubull2u11

I. Intiouuction

As a poitfolio managei, we believe that oui poitfolio can outpeifoim benchmaik,
NSCI woilu, using active investment stiategy. We set taiget iisk expecteu excess ietuin
at 2.S%. Consiueiing iecent global economy anu events, 'bottom up' stiategy is the most
appiopiiate foi the situation since we believe that stock selection woulu enable oui funu
to outpeifoim benchmaik. Tieynoi-Black mouel was chosen foi consistency to
limitations given. Even though using active investment stiategy, this poitfolio is baseu
on conseivative point of view, which attiacts high-iisk aveise investois.

II. Naiket 0veiview

Naiket 0veiview
Accoiuing to the economic iecession in 2uu8, We use the uBP giowth iate to be
a majoi inuicatoi. Theie is a uiamatic uownwaiu tienu in uBP giowth iate thiough the
enu of the yeai. The economic iecoveiy session staiteu fiom 2uu9 anu global maiket
activity staiteu to ially but still hau a uowntuin uuiing the miu of 2u1u. Fiom this point,
theie is a slowly inciease in uBP giowth iate. Bue to the economic iecoveiy, although
the woilu economic begins to iebounu to the noimal situation, the economy still giows
at the uecieasing iate. Noieovei, the foiecast global uBP giowth iate in 2u11 anu 2u12
that aie pieuicteu by Inteinational Nonetaiy Funu shows that woilu economic
expansion might not giow with significant iate. Noieovei, the othei impoitant
economic inuicatoi is unemployment iate, which is unfoitunately still be high iate.
(Inteinational Nonetaiy Funu, 2u11)


Souice: Inteinet Nonetaiy Funu, 2u11

The ieasons that might explain the uecieasing iate giowth in woilu uBP aie
many situations that have effect on global economy. Fiist of all, in 2u1u, Euiopean
soveieign uebt ciisis is a cause of uecieasing investoi confiuence to invest thiough Page
1 of 21global maiket. Seconuly, on Febiuaiy 2u11, the piotesting uauhafi, that the
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piesiuent who is still in place although ietiiement, in Libya have an effect on the oil
piice as can be seen fiom the oil piice in the majoi New Yoik oil maiket which incieaseu
by $u.77 about $98.6S pei baiiel anu also inciease in the Bient (Lonuon oil maiket)
$u.6S stanu at $112.Su pei baiiel. Noieovei, this political issue anu oil piice fluctuation
also have negative effects on stock maiket. To claiify this uownwaiu tienu, it can be
seen fiom the uiop in FTSE 1uu inuex of u.S pei cent, ueimany's BAX u.1 pei cent. As
same in Wall Stieet of 0SA., Bow }ones fell by 8 points to 1,212.u2 anu S&P Suu fell 2.6
points to 1,S16.2u ) Chiistian Science Nonitoi Associateu Piess, !"##) Finally, the
natuial uisastei (Tsunami) on Naich 2u11 uiiectly affect }apanese economy. Bue to the
inteiest of investois about this unfoieseen uisastei, the stock maiket aiounu the woilu
aie fluctuateu anu uioppeu. To illustiate, Bow }ones anu Nasuaq was uown about S2
points anu u.S peicent iespectively. 0S maikets moveu along with the uownwaiu
situation of Euiopean, Biitish anu Asian maikets because investois absoibeu the news
about the effects of the eaithquake anu tsunami on business anu inuustiy (Financial
Times, 2u11). Accoiuing to these situations, investois have been hesitateu to inciease
the investment level anu companies stop theii mega piojects because of the slowuown
in economic situations.
Fiom Bloombeig Business Week, we obtaineu uata ielating with sectois
peifoimance at the fiist quaitei of 2u11. Eneigy, mateiial anu inuustiial sectois aie in
the upwaiu tienu in geneial, conceining peifoimance in Asia, 0S, anu Euiope iegions.
Eneigy is especially soaiing in Ameiicas with 9u% giowth in S months peiiou, while
inuustiial is slightly giowing with appioximately 1u%. Bealth caie sectoi is slowing
uown in Asia anu Euiope but not in 0S. Noieovei, technology sectoi is peifoiming well
in Euiope but not in Asia anu 0S.

With the uecieasing giowth iate of global economy, in geneial, businesses tenu
to peifoim in the same uiiection. To oveicome the situation, oui poitfolio woulu focus
on companies with low sensitivity to the maiket anu funuamentally stable
chaiacteiistics.

III. Stock selection

To obtain stocks, which aie suitable foi piesent economic situation, 4 ciiteiia aie
applieu in the stock scieening piocess. Some of Waiiant Buffett anu Petei Lynch's stock
scieening ciiteiia aie useu in oui poitfolio.

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Fiist of all, secuiities that its maiket capitalization is in top Su% in 0S, Euiopean
anu Asian maiket aie inputs in stock scieening. Naiket capitalization iepiesents the
value of a company as it is calculateu by multiplying numbei of shaies outstanuing by
cuiient stock piice. Laige-cap companies aie stable in geneiating piofits ovei time anu
have uiviuenu payments histoiy, which attiact investois who neeu a steauy flow of
income. In a bull maiket, laige-caps piesent excellent eainings giowth. 0n the othei
hanu, small caps aie moie sensitive to the maiket than laige caps. Besiues, in a beai
maiket, it uoes not stiongly affect laige caps because of its auequate iesouices anu ueep
pockets. Naiket capitalization shoulu not be only majoi ciiteiia in choosing a stock. The
peifoimance piospects of the company aie also impoitant.

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Seconu, Buffet uses ietuin on equity (R0E) in his stock scieening to see whethei
a company's peifoimance compaieu to othei businesses in the same inuustiy. R0E
measuies a company's piouuctivity geneiateu fiom shaieholueis' capital. It can be
calculateu by uiviuing the company's piofit by the shaieholueis' equity. Buffet piefeis a
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company that has R0E in excess of 1S% in the past thiee yeais because it shows that a
company has a consistently goou peifoimance which is not just a cyclical phenomenon
oi uown to some aggiessive accounting. Anothei point that shoulu be conceineu is that
figuie in calculation is an accounting numbei taken fiom financial statements. It can be
manipulateu. Since R0E is the piofitability measuiement of a company, why woulu
investois be inteiests in a company with low inconsistent piofit.

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As Lynch's stock scieening ciiteiia, it suggests that the selecteu stocks shoulu
have piice to eaining iatio less than the maiket aveiage iatios. PE iatio compaies the
stock's cuiient piice to its eainings pei shaie. A highei PE iatio suggests that the
investois expect the company to have moie giowth than the company with a lowei PE.
Thus, it is oveivalueu when PE iatio is moie than its inuustiy anu is unueivalueu when
it's lowei than its inuustiy. 0nueivalueu stock shoulu be selecteu in oiuei to benefit
fiom capital gains in the futuie when the piices conveit to intiinsic value. With the same
pioblem with R0E, PE iatios may not be the accuiate metiic.

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Lastly, PEu iatio is anothei metiic useu to ueteimine a stock's value. It compaies
a stock's PE to its EPS giowth iate. Lynch suggests that investois shoulu pick up stock,
which has PEu iatio less than 1. It means the company is unueivalueu. If PEu iatio is
gieatei than 1, it means the company is oveivalueu wheieas, PEu is equal to 1, which
means the company is faiily valueu. In value-investing peispective, a lowei PEu is moie
uesiiable than a highei iatio. Investois shoulu buy the stock when PEu iatio is low anu
sell it when it's high.

Applying the stock scieening ciiteiia, using these ciiteiia gave the iesult of
stocks with laige caps anu consistent goou peifoimance. Those stocks aie also in the
giowth inuustiy with unueivalueu which expecteu to ueiive the capital gain in the
futuie.
























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! ! ! ! ! ! ! !
S
Iv. 0ptimization Piocess

Aftei the stock scieening piocess, the 17stocks that pass the ciiteiia aie AAPL, NFST,
BPQ, uILB, TWX, u00u, CSC0, BLT, BP, RI0, WNT, ANuN, 0RCL, NNN, ABT, ENR, anu 0NB.
The selecteu stocks aie fiom 0K anu 0S maikets. The thiee yeais stock piices (fiom }anuaiy
2uu8 to Becembei 2u1u) aie taken fiom Yahoo Finance. Besiue, the histoiical stock piices aie
quoteu in 0S uollais so they aie conveiteu into steiling by the equivalent exchange iates that
weie ietiieveu fiom the Thomson Reuteis at 4pm in the same peiiou. Befoie calculating the
excess ietuin, the monthly stock ietuins aie aujusteu by subtiacteu the 0K tieasuiy bills S
months, which aie also aujusteu to be monthly ietuin. Accoiuing to the autocoiielation testing,
theie aie two stocks (TWX anu RI0) that have the autocoiielation pioblem so the ietuin of
these two stocks neeu to be ue-autocoiielateu. Aftei that, the piepaieu uata aie iun in the
iegiession piocess to finu the stanuaiu ueviation, alpha, beta anu coiielation between each
stock anu NSCI Woilu inuex.
Fiom using a bottom-up appioach to foiecasts maiket ietuin, Tieynoi Black mouel is a
suitable appioach to finu an optimal poitfolio. Fuitheimoie, Tieynoi Black mouel can be
uefineu as a mouel which uesigneu foi cieating the poitfolio that has the limits on investment
so this mouel consistent with the ieubull2u11 poitfolio because it has the manuate about a
limiteu on position size anu the maximum geaiing. The way to cieate an optimal iisky poitfolio
is mixing weight between a benchmaik poitfolio (passive poitfolio) anu an active poitfolio.
Foi the expecteu ietuin, the foiecasteu NSCI alpha is estimateu u.uS, which is obtaineu
fiom NSCI annual iepoit 2u1u. As Bouie, Kane anu Naicus (2uu9) pointeu out, the implieu
alphas aie calculateu fiom the following equation.

Implieu alpha = (taiget piice in 1 yeai - cuiient piice)cuiient piice

Note that the taiget piice in 1 yeai anu the cuiient piice can be founu fiom Yahoo Finance. Bue
to the conseivative investment, the lowei alpha between histoiical anu foiecast alpha aie
chosen to finu the optimize poitfolio.
Aftei using Tieynoi Black mouel to calculate the optimal poitfolio, although the weight
in active poitfolio is lowei than 1Su% (118.1S%), the weights in inuiviuual stock aie above
1u%, which bieak the limit. Theiefoie, the weights of each stock aie aujusteu to less than 1u%
by baseu on the highest weight (BLT). As a iesult of weight aujustment, the highest weight still
is BLT at 1u%, the total weight of active poitfolio equals to 7u.6% anu the tiacking eiioi is only
7.14%. ueneially, if the funu manageis wish to outpeifoim the maiket, they will set the highei
tiacking eiioi level. 0nfoitunately, in this poitfolio, when we attempteu to outpeifoim by
setting tiacking eiioi at 16%, the active poitfolio' weight will stanu at 1S8% which exceeu the
manuate. Theiefoie, the tiacking eiioi in this case cannot be incieaseu to gain highei ietuin
because theie aie some limits about the inuiviuual weight anu oveiall poitfolio weight.

v. Peifoimance Neasuiement

In oui optimal poitfolio, we intenueu to invest in 17 stocks anu S ETFs 0nfoitunately,
uue to some opeiational pioblems, we coulun't invest in a stock, BLT, anu two ETFs, giving us
the uiffeient iesult. Bowevei, we will focus on the actual peifoimance piesenting in the
'Stocktiak' system.

Note: all figuies useu in calculation aie snapshotteu ovei the peiiou of Naich 28
th
to Apiil 22
nu
.
The ieason of using Naich 28
th
uata is that all the stockeu aie filleu in the moining of that uay.

To measuie ietuin in a shoit peiiou time, !"#$%#&'!() *&'+,-#+'.) +!+*/) &#+0&" ieflects
changes in stock piices, capital gain, ovei the peiiou. Even though ietuins attiact investois' fiist
attention, they have to be consiueieu togethei with iisk level in oiuei to ueteimine whethei the
6
poitfolio is giving a sounu iisk-ietuin combination. Risk can be measuieu in seveial foims.
Fiist, 1!/*+'/'+2 shows piobability of how ietuin can uispeise fiom its mean. Seconu, 3#+*
inuicates ietuins' sensitivity to changes in maiket ietuin. Last, +&*.4'"5) #&&!& piesents how
much excess iisk the poitfolio is taking compaieu to benchmaik.

Auuitional ietuins of having iisky assets in the poitfolio can be measuieu by two
appioaches. 6,*&%#)7*+'!; it iepiesents poitfolio's auuitional ietuin ovei iisk-fiee asset ielative
with auuitional total iisk, its stanuaiu ueviation. Similaily, 8&#2"!&) 7*+'! illustiates auuitional
ietuin ielative to auuitional systematic iisk, beta. As we base oui investment on benchmaik, the
'"9!&-*+'!")&*+'! woulu help quantify the excess ietuin ovei the benchmaik ielative to tiacking
eiioi. Not only uoes it show ability of poitfolio managei to eain excess ietuin ielatively with
the benchmaik, it also can be useu to compaie effectiveness of investment managei.

Table 2: Peifoimance Neasuies

Neasuiement Poitfolio NSCI
Retuin -1.46% -u.6S%
Stanuaiu ueviation u.66% u.88%
Risk-fiee iate 1.81% 1.81%
Beta u.61 u.99
Tiacking eiioi 1.u2%

As in table 2; fiom 'Stock Tiak', poitfolio ietuin was -1.46%. Compaieu to benchmaik with
ietuin -u.6S%, oui poitfolio unueipeifoimeu by u.81% (-u.6S-(-1.46)). In anothei case, if we
coulu invest in all intenueu stocks anu ETFs, the iesult woulu be 1.S2% of ietuin. As a iesult, the
poitfolio woulu outpeifoim by 2.17% (1.S2-(-u.6S)).

!"#$%&'()*""+")
Risk can be measuieu in seveial foims such as volatility; beta; anu tiacking eiioi. To
compaie iisk of oui poitfolio to that of benchmaik, tiacking eiioi is chosen. Noie anu moie
funu manageis pieuict tiacking eiioi to contiol iisk. Bowevei, tiacking eiioi is also useful to
iepoit the peifoimance of poitfolio. Foi the ieason that, it piesents how much excess iisk the
poitfolio is taking compaieu to benchmaik. ueneially, an active poitfolio managei tenus to set a
highei tiacking eiioi in oiuei to geneiate active ietuins. Accoiuing to the peifoimance fiom
the 'stock tiak', tiacking eiioi of Reubull2u11 poitfolio in tiauing peiiou is about 1.u2%.
Accoiuing to Fiank (2uuS), the tiacking eiioi measuiement is in teim of the obseivation
peiiou. Theiefoie, the calculateu tiacking eiioi will be a uaily tiacking eiioi to consistent with
the uaily ietuins. The annual tiacking eiioi can be solveu fiom multiply uaily tiacking eiioi by
!!"#. Bence, the annual tiacking eiioi equals to 19.487% that exceeu the manuate (16%). As a
iesult, oui poitfolio has too high level of volatility of the excess ietuin, which can be negative
effect. Bowevei, the tiacking eiioi is not mention about a given level of iisk.
Table S: Risk Aujusteu Peifoimance Neasuies

0iiginal Poitfolio NSCI
Shaipe iatio -4.92 -2.81
Tieynoi iatio -u.uS -u.u2S
Infoimatio iatio -u.79


Thiee tiauitional peifoimance measuies, Shaipe, Tieynoi anu Infoimation iatio, aie
useu in this iepoit to compaie oui poitfolio with otheis.
7
As oui poitfolio's Shaipe iatio piesents iisk-piemium -4.92 pei a unit of total
iisk(stanuaiu ueviation) wheieas, those of benchmaik is -2.81, it can be inteipieteu that
benchmaik has peifoimeu bettei than oui poitfolio. Like Shaip iatio, Tieynoi iatio measuies
the excess ietuin to iisk, but symmetiic iisk is useu (beta) insteau of total iisk. 0ui Tieynoi
iatio is -u.uS while -u.u2S is benchmaik's figuie. The highei iatios mean the bettei
peifoimance. Accoiuing to oui excess ietuin is negative, which means that a iisk fiee
instiument has peifoimeu bettei than the investment pioviuing spuiious inteipietation.
Accoiuing to BenuiikScholz (2uu7), Shaipe iatio may not be a goou peifoimance metiic in
uowntuin maiket oi beai maiket since it can be ueteimineu by maiket climate othei than
managei's skill. Foi example, two poitfolios with the same amount of negative excess ietuin but
uiffeient volatility, the one with highei volatility gives highei Shaipe iatio. In fact, the one with
least volatility shoulu be consiueieu as a bettei peifoimance. Anothei peifoimance measuie is
Infoimation iatio, which is -u.79 foi oui poitfolio. Same as othei measuies, the highei iatio
iepiesents the bettei peifoimance.
Thanks to negative figuies, Isiaelsen (2uuS) suggesteu to coiiect this anomaly by
mouifying the uenominatoi. Exponent, which is excess ietuin uiviueu by absolute value of
excess ietuin, shoulu be auueu to the uenominatoi. Foimula is shown as follows:




Table 4: Nouifieu Risk Aujusteu Peifoimance Neasuies

Nouifieu Poitfolio NSCI
Shaipe iatio -u.uuu217 -u.uuu216
Tieynoi iatio -u.u2uu7S -u.u24S84
Infoimatio iatio -u.uuu14S

Aftei ie-calculation, oui Shaipe, Tieynoi anu Infoimation iatio aie -u.uuu217, -
u.u2uu7S anu -u.uuu14S iespectively anu benchmaik's figuies aie -u.uuu216 anu -u.u24S84 foi
Shaipe anu Tieynoi iatio. It can be seen that oui mouifieu Shaipe iatios is lowei than
benchmaik's one while oui mouifieu Tieynoi iatio is highei. Theiefoie, if we iank oui position
by Tieynoi iatio, oui position is highei than benchmaik anu it is conveise in Shaipe iatio.
Anothei mentioneu point about iisk-aujusteu peifoimance measue is that it is not useu to value
the poitfolio but useu as ianking ciiteiia only. Thus, the lowei mouifieu foimulas aie not
impacteu the value.













8
,-$.+")/.."&01.&+')
1able 3: SecLor ALLrlbuLlon
SecLor WelghL 8eLurn W*r Average reLurn 1oLal WelghL
1echnology
AAL 8.04 -0.33 -0.044
MSl1 7.60 -0.70 -0.033
PC 2.36 -3.37 -0.086
C8CL 8.38 3.78 0.484
CSCC 1.27 -2.14 -0.027
A81 2.64 7.69 0.203
CCCC 3.89 -9.94 -0.383 -0.11 36.38

lndusLrlals
8lC -0.17 -4.11 -0.007
MMM 7.01 1.71 0.120
LM8 4.34 1.60 0.073 0.186 11.38

harmaceuLlcal
ClLu -0.68 7.18 -0.049
AMCn 4.33 0.92 0.040
unP 0.21 8.81 0.019 0.01 3.88

LnLerLalnmenL
1Wx 2.23 3.23 0.072 0.002 2.23

Cll and Cas
8 0.08 -4.41 -0.0033 0.0002 0.08

ueparLmenL SLore
WM1 6.63 2.29 0.132 0.003 6.63


As shown in Table S, theie aie two significant sectois that play impoitant iole in oui
poitfolio. Noie than one-thiiu (S6.S8%) of stocks aie clusteieu in technology sectoi followeu by
11.S8% of stocks in inuustiials sectoi. Fiom the 'aveiage ietuin' column, sectoi that
contiibuteu the most of total ietuin is inuustiials sectoi. As stateu in maiket oveiview,
inuustiial sectoi has been peifoiming bettei anu bettei since the beginning of 2u11, we gain
u.19S% fiom NNN anu ENR. Bowevei, shoit selling the RI0, which is on the upwaiu tienu, cost
us with a small negative ietuin of -u.uu7%. Inteiesting point is that BLT, which is in inuustiial
sectoi, peifoims
Consiueiing the biggest sectoi, technology, it shoulu have giving us the biggest ietuin.
0nfoitunately, a laige positive ietuin fiom 0RCL anu ABT aie canceleu out by a laigei negative
ietuin of u00u. 0n Apiil 1S, 2u11, uoogle shaie piices uiamatically uioppeu by 8.26%
oveinight, fiom $S78.S1 to $SSu.7u. The ieason behinu the shaip movement of uoogle shaie
piice is because investois weie unimpiesseu by uoogle's announceu fiist quaitei iepoit. The
iepoit shown that opeiational costs iose shaiply S4% while ievenue incieaseu only 29%
compaieu to the same peiiou in the last yeai (Bloombeig, 2u11). Noieovei, on aveiage,
technology sectoi aie on a slight uownwaiu tienu as the inuustiy iepoit announceu the
ieuuction in semiconuuctoi sales. As a consequence, the stocks in technology sectoi iesponueu
this iepoit by ueclining in piice.

9
2#"%-.)!&3&'()


Souice: Yahoo Finance

Naiket timing plays the ciucial iole in oui investment time peiiou. Theie aie many
situations that significantly impact oui peifoimance uuiing the timefiame. Fiistly, eaithquake
anu tsunami uisastei happeneu in noitheastein pait of }apan on 11 Naich anu coulu cause S&P
Suu slightly uioppeu to 1Su4.28. The seveiity of this calamity expanus its size anu consequence
aftei the explosion of nucleai plant in Fukushima. Noieovei, nucleai plants spilleu to the
atmospheie anu leau to the contamination in watei (BBC, 2u11). As a iesult of this
ciicumstance, panic anu unceitainty staiteu up among the maiket anu investois lack of
confiuence. Theiefoie, S&P Suu fell to the lowest level since Becembei to 12S6.88 on 16 Naich
because the majoiity of investois awaie the iisk fiom shock situation that happeneu in the
maiket (Bloombeig Businessweek, 2u11). The filleu positions in all stock of oui poitfolio weie
settleu on 28 Naich at ielatively high level in S&P Suu at 1S1u.19 aftei the iecoveiy fiom the
lowest level on 16 Naich, as a iesult of offeieu financial aiu fiom many countiies. Theiefoie, it
can be seen that the bought position is quite high because it was on the iebounu timefiame. 0n
the othei hanu, the stock maiket stayeu at 1SS2.87 because theie is an effect fiom global
takeovei (Bloombeig Businessweek, 2u11). Finally, the uowngiaue of 0niteu States long teim
iating fiom S&P cieuit iating agency causeu the slump in 0niteu States stock maiket anu S&P
Suu moueiately uioppeu to 1SuS.14 (uuaiuian, 2u11). In conclusion, this peiiou of time
uifficult time foi the poitfolio to woik well anu the stock buying time is not suitable enough.
Theiefoie, the peifoimance of poitfolio coulu.








1Su4.28
12S6.88
1S1u.19
1SS2.87
1SuS.14
12uu
122u
124u
126u
128u
1Suu
1S2u
1S4u
1S6u
1S8u
,45)677)
s&p
1
2

S
4

S

1u
vI. Conclusion
Since woilu's financial ciisis in 2uu8, maiket has been aujusting itself anu now in its
upwaiu tienu. Investois giauually inciease theii confiuence in financial maiket. Bowevei,
political issues anu natuial uisastei aie uownsiue shocks to the maiket. With bottom up
appioach that is consistent with the economic situation, combination between Waiien Buffett
anu Petei Lynch stock-scieening ciiteiia is applieu. The iesult of the scieening was obtaining
laige capital with giowth stocks. Tieynoi-Black was useu to achieve optimal poitfolio.
Fiom constiucteu poitfolio, investing in selecteu stocks in the peiiou of Naich 28
th
to
Apiil 22
nu
, 2u11 shoulu iealize a ietuin of 1.S2%. Bowevei, theie was opeiation eiioi, which
maue actual investment uiffeient fiom the optimal one. As a iesult, actual poitfolio's ietuin
captuiing fiom stimulation is -1.46%. Compaiing to benchmaik, this figuie unueipeifoims by
u.6S7%. Theiefoie, the poitfolio shoulu have outpeifoimeu by 2.17% if the plan coulu be
completeu.
The peifoimance is consiueiably affecteu by peifoimance of technology anu inuustiial
sectois, which aie majoiity stocks in the poitfolio. Noieovei, maiket timing passeu negative
impact on this scenaiio uue to the investment in maiket iebounuing peiiou.


vII. Explanation anu Suggestions

Accoiuing to actual peifoimance, poitfolio ietuin unueipeifoims benchmaik. Bowevei,
consiueiing calculateu ietuin fiom optimal poitfolio, still, the excess ietuin is less than what
expecteu. Theie aie thiee main ieasons behinu these iesults.

1.) Stock selection pioblem

,.+$%)8$"--'&'()$"&.-"&#))
Accoiuing to oui stock scieening ciiteiia, stocks aie chosen by some of Waiien Buffett
anu Petei Lynch's investing ciiteiia, which have uiffeient investing style. Buffett focuses on
long-teim buy anu holu stocks anu looks foi companies selling below intiinsic value, which
iepiesents value investing. 0n the othei hanu, giowth investing is uiffeient as it is moie
emphasis on companies' futuie piospects anu unueivalueu stock by the maiket iathei than its
piesent piice.
In the stock scieening piocess, the fiist two ciiteiia of stock scieening aie laige caps anu
consistent high R0E, it is a value investing way. Bowevei, the last two ciiteiia, which aie PE
iatio less than maiket aveiage anu PEu iatio less than 1 that iepiesent unueivalueu stock, is
giowth investing methou. While valueu stocks meet the fiist two ciiteiia, the last twos that
focus on giowth investing omit them. As a iesult, oui selecteu stocks aie mainly in technology
sectoi, S6.S8%, anu inuustiial sectoi, KK<E;?Y&which is pooi uiveisifieu. Noieovei, these stocks
aie clusteieu in only w0K anu 0S because only woilu top laige company woulu pass the
ciiteiia. Bence, impiopei stock scieening limits oui oppoitunity to gain highei ietuin fiom
othei unselecteu stocks.

6055#:+'!")
Stock scieening ciiteiia shoulu be set consistently. In this case, we intenueu to invest in
valueu stocks. 0bviously, the PE anu PEu iatio must be iemoveu. We must consiuei a company
with sounu management, which is simple anu easy to unueistanu. As we aie value investois,
many ciiteiia consiueiing stiong funuamental conuitions shoulu be auueu in stock scieening.
- Bebt-to-equity iatio; low level of uebt is piefeiable because it shows that eaining is
piimaiy geneiateu fiom shaieholueis' equity iathei than boiiowing money.
Bebt-to-equity iatio can also get iiu of R0E loophole. Since R0E can be uistoiteu by leveiage,
shaieholueis' equity ueiiveu fiom assets minus uebt, companies with high level of uebts leaus
to incieasing R0E.
11
- Piofit maigin; high anu steauily incieasing piofit maigin iepiesents that the business
is unueitaken well.
- Biviuenu yielu; high uiviuenu yielu shows that the companies spenu iemaining piofits
on uiviuenu iathei than investment

),.+$%)8-9-$.&+'):"+3)2,;<)=+"9>)+'9?)
Well-uiveisifieu poitfolio shoulu be investeu in vaiy maiket. 0nfoitunately, investment
team misunueistoou that the only available souice of investment is benchmaik, NSCI woilu.
Theiefoie, the oppoitunity to invest in potential stocks was omitteu. Consequently, theie was
less oppoitunity to outpeifoim anu thus poitfolio's peifoimance cannot achieve the expecteu
ietuin.

2.) 0ptimization piocess pioblem

0ui optimization poitfolio is ueiiveu fiom S yeais histoiical stock piices fiom }anuaiy
2uu8 to Becembei 2u1u, ciisis peiiou. As stock piices uiamatically uioppeu in that peiiou anu
aie now iebounuing, stock piices aie peiceiveu to have high ietuins at the moment. As a iesult,
each stock has high alpha (excess ietuin). Because of high alpha, the optimization suggests to
shoit in passive poitfolio. The manuate allows to have geaiing up to Su% but in oiuei to ieach
tiacking eiioi of 16%, oui poitfolio have to shoit sale in passive poitfolio S8%, which bieaks
the limit.

6055#:+'!"
In oui point of view, if we expanu the uuiation to be moie than S yeais the effect of piice
in ciisis time can be ieuuceu anu can leau oui optimization woik piopeily on its way. Noieovei,
the tiacking eiioi in optimization can be 16% without bieak the manuate.

S.) Bownsiue shocks

Buiing the investment peiiou, theie aie seveial events affecting poitfolio peifoimance.
These shocks aie unpieuictable anu uncontiollable which cannot be uiveisifieu away with stock
selection.
The effect of political issues anu tsunami events aie alieauy mentioneu in maiket
oveiview pait. Anothei shock happeneu on 18 Apiil 2u11, which ciucially affects 0S stocks.

@,)>-("#>-)$"->&.)"#.&'())
0n 18 Apiil 2u11, S&P cieuit iating agency announceu to uowngiaue 0.S. long-teim
iating fiom stable to negative. The main ieason that analysts uo not assuie in 0S iating is the
huge buuget ueficit in 0S. Noieovei, 0S goveinment tenus to inciease theii uebt level anu the
policy that shows to solve this pioblem still be ambiguous. S&P analysts believeu that 0.S.
policymakeis coulun't solve the buugetaiy uifficulty by 2u1S. In the view of analysts, 0.S. fiscal
policy is the uiawback that maue 0.S. weakei than its peei in the same iating (AAA).
Fiom the ieuuction in cieuit iating, 0.S. stock maiket uiamatically fell since the majoiity
weight of oui poitfolio is in 0.S. stock. Aftei that, stock maiket is giauually incieasing to
iebounu this plunge. Theiefoie, oui poitfolio is ciucially affecteu by this cieuit iating ieuuction.








12
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Bloombeig Business Week (2u11) Retiieve on Apiil 28, 2u11fiom website :
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Fan, N. (2uu6). 6+!.4)-*&4#+)-#+&'.:>+#&-:=)Retiieveu Apiil 22, 2u11, fiom Caiuinal money
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Fiank, } (2uuS). Neasuiing anu contiolling inteiest iate anu cieuit iisk. Retiiveu Apiil 19, 2u11,
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jLBQ&sa=X&oi=book_iesult&ct=iesult&iesnum=S&sqi=2&veu=uCEAQ6AEwBA#v=onepage&q=annual%
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uuiufocus.com (2u11). A#+#&)B2".,)<"1#:+'"5)6.&##"C)6#*&.,'"5)D!&)E"(':.!1#&#()?&!@+,)6+!&'#:=)
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Timing.net. (2u11). K//)*3!0+)-*&4#+).*%'+*/'L*+'!"=)Retiieveu Apiil 22, 2u11, fiom Timing.net
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Tiacy, P (2uu4). <"1#:+'"5)+,#)A#+#&)B2".,)F*2=)Retiieveu Apiil 22, 2u11, fiom
stieetauthoiity.com website: http:web.stieetauthoiity.comcmntspt2uu411-u4.asp

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