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Case Study – Quantitative Portfolio Strategy

Optimal Portfolio Construction

 1) Given the specified benchmark, the investable universe and the permitted issuer list, construct a portfolio with as high a yield as possible subject to the following constraints:

 a. GBP only

 b. Corporates, Quasi&Foreign Government & Sovereign only (Sector Lvl 1)

 c. Rate-Duration & Spread-Duration matched within +-1y at the portfolio level

 d. At least as highly rated as the benchmark at the portfolio level

 e. +-2% of relative ticker exposure vs the benchmark (exception: UKT)

 f. +-5% of relative sector exposure vs the benchmark (Sector Lvl 3)

 g. +-5% of relative exposures to maturity buckets vs benchmark (1-3, 3-5, 5-7, 7-10, 10-15, 15-25, 25+)

 h. +-5% of relative exposures in ratings buckets vs the benchmark (AAA/AA/A/BBB/BB)

 i. No more than 5% OW to each of AT1, T2 and SNPR vs benchmark

 2) Describe the resulting benchmark-relative active risks in your portfolio. Which of them do you like, and which would you aim to mitigate if allowed to deviate from pure yield maximisation?

 3) What alternative optimisation target / set-up can you think of that could be useful instead of yield maximisation?

 4) How much overlap is there between your portfolio and the portfolio from 1)? Assuming you rotated the portfolio from 1) to your portfolio, how much economic benefit would you generate and how much would you expect to lose to transaction costs (under reasonable assumptions)?

 5) What data sources can you think of that would have been useful in further improving the quality of the above portfolio optimisation?