1. Select a (sector) index.
This is the first step…do NOT chose your favorite companies first, and ignore the rest.
You must select an index of your choice from a well known index provider. For instance a (global, regional or
single country) sector index FTSE, Dow Jones (Stoxx), S&P, MSCI, or a local country index, such as Dax 30. To
make the task manageable, do not select an index with more than 100 constituents, and not less than 10
constituents.
2. Select an investment strategy you wish to evaluate, for instance an accounting variable (ratio) or a
momentum signal (e.g. a moving average). You may gain inspiration for ratios from your other classes.
3. Select a time period you will evaluate your strategy. The assignment specifies the period must end NO
EARLIER THAN 30 SEPT 2017. The assignment specifies rebalancing for at least 24 time periods (e.g. 24
monthly rebalances, or 3 months of daily rebalances). It is unusual to start a simulation in a period other
than January unless you have a valid reason. Your rebalance/measurement periods will occur on the last day
of each month.
4. Collect ALL the constituents for your chosen index at the first date point of your simulation, this may contain
stocks that are no longer in the index today, but were in the index at the date point you are analyzing.
5. Collect all the RAW components directly from the Report and Accounts of the companies from step 4 via
Bloomberg (or datastream or Reuters) in an automated way.
6. Deal with missing data items, or bad data etc. Store the data if appropriate in a database.
7. Calculate the ratio of your desired investment strategy, incorporating corporate actions adjustments if
necessary.
8. Based on your ratios, normalize your scores to deal with outliers.
9. Create a model portfolio as at the end of that month, that will be your portfolio for the next month (period).
You may construct your portfolio either as a long only portfolio with 100% invested, or as a cash neutral
100% long and 100% short portfolio to evaluate your investment strategy. If you select a long only portfolio,
assess if the portfolio is superior to the chosen index. For a cash neutral long short, you may assess the
strategy in terms of positive or negative performance.
10. For portfolio construction, you may select the portfolio construction methodology. Equally weighting your
forecasts is the simplest solution, or you can attempt an alternative weighting scheme based on your
forecasts, or (in the last session I will cover) you may elect to implement an optimizer to create your
portfolio.
11. Move to the next period (month) in your rebalancing window, collect the price, and dividend information to
calculate the total return of your portfolio over the month, and in the case of a long only portfolio the index
return also.
12. Repeat steps 4 – 11 for each period in the rebalancing window.
13. Once you have calculated the results over the entire simulation window, calculate the statistics for your
simulation, e.g. annualized return, annualized risk, Sharpe or Information ratio, turnover figures, plus other
statistics you have been taught in your other classes.
14. Write up your 4 -5 (2000 – 2500 words) page report explaining the results, why the results worked or did not
work with the benefit of hindsight, the steps you undertook to do your analysis. Explanations for choice of
coding languages etc, as per the assignment document. Some additional graphs and tables maybe appended,
but if your document is excessively long I will simply stop reading at the cut off point.
15. Submit your write up to the moodle, email it to me, and drop all of your code and your database files to the
LU Box by the deadline.