Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
EE590 Project Proposal
SAMPLE PROPOSAL
2
Proposed Work
1. Problem Statement
For federal employees, retirement planning and investment strategies differ slightly from those working in
the private sector. In the private sector, employers offer a 401(k)-retirement account. In the public sector,
employers offer a Thrift Savings Plan (TSP). While different in name, both have employer defined
investment funds with varying levels of risk and reward associated with them.
With the TSP, there are five funds that a portfolio can be diversified between (G, F, C, S, and I). There is
also an option to for an employee to utilize the Lifecycle Fund (L Fund). A comparison matrix of the
funds, as published on the TSP website, can be seen in Table 1 [1]. The lifecycle fund utilizes a
professional service that determines the fund allocation based on target date and risk allocation. With this
fund, individual risk preferences are not considered. All individuals that elect to allocate their investment
in this fund are grouped based on time horizon and individuals in the group all have the same investment
strategy.
Table 1: TSP Published Fund Comparison Matrix [1]
G Fund F Fund* C Fund* S Fund* I Fund* L Funds**
Description of
Investments
Government
securities
(specially
issued to the
TPS)
Government,
corporate,
and
mortgage-
backed bonds
Stocks of
large and
medium-
sized U.S.
companies
Stocks of
small to
medium-
sized U.S.
companies
(not included
in the C
fund)
International
stocks of
more than 20
developed
countries
Invested in the
G, F, C, S, and
I Funds
Objective of
Fund
Interest
income
without risk
and loss of
principal
To match the
performance
of the
Bloomberg
Barclays U.S.
Aggregate
Bond Index
To match the
performance
of the
Standard &
Poor’s 500
(S&P 500)
Index
To match the
performance
of the Dow
Jones U.S.
Completion
TSM Index
To match
performance
of the MSCI
EAFE
(Europe,
Australasia,
Far East)
Index
To provide
professionally
diversified
portfolios
based on
various time
horizons, using
the G, F, C, S,
and I Funds
Volatility Low Low to
moderate
Moderate Moderate to
high –
historically
more volatile
than C Fund
Moderate to
high –
historically
more volatile
than C Fund
Asset
allocation
shifts as time
horizon
approaches to
reduce
volatility
*The F, C, S, and I Funds are also have earnings from securities lending income and from temporary
investments in G Fund securities. These amounts represent a very small portion of total earnings.
**Each of the L Funds is invested in the individual TSP funds (G, F, C, S, and I).
3
This study focuses on optimizing the retirement plan of a federal employee utilizing personal investment
preferences. Individuals have different risk tolerances, diversification preferences, and opinions on
manager/fund performance. With the Lifecycle fund, these preferences are not considered. Using
historical data for the TSP funds and the Benchmark Indices, an interactive model will be developed
where a user can define their personal investment preferences and receive an investment strategy that
maximizes portfolio return per unit of risk.
This is an important study because it considers personal risk preferences for federal retirement investment
strategies. Currently, there are limited resources and funds available for TSP holders. Developing a tool
that not only provides an investment strategy, but also allows an individual to adjust their investment
preferences as they age encourages one to better optimize their portfolio.
2. Approach
For each of the TSP funds, the daily stock price is available from 2005 to 2020. In order to capture an
entire economic cycle in the analysis, historical data from Jan 1, 2005 to Dec 31, 2014 (10-year
timeframe) will be used for analysis and model creation. Historical data from Jan 1, 2015 to Dec 31, 2017
(3-year timeframe) will be used to validate the model.
There are two main components to the approach to this problem: analysis of manager/fund performance,
and portfolio optimization. The model will be developed in Excel.
Manager/Fund Performance:
There are five funds that will be analyzed in this study (G, F, C, S, and I). Each fund in the TSP is
modelled to match the performance of a market style/index. To determine the manager performance of the
TSP funds, each fund will be compared to its respective benchmark. Table 1 identifies each TSP’s
benchmark index under the “Objective Fund” row of the table.
To examine portfolio performance compared to the benchmark, beta and alpha, two metrics commonly
used to examine fund performance need to be calculated.
Beta Calculation:
To determine fund volatility, beta (β), will be calculated for each TSP fund.
=
( , )
( )
Beta will indicate how much the fund deviates from the overall market, where the overall market has a
beta equal to 1.0 [2]. If beta is greater than 1, the fund tends to have a higher risk and a higher reward; a
beta less than 1 equates to less risk and a lower reward [2]. By determining the beta for each fund, the
systematic risk for the fund will be determined and one can then calculate the alpha for each fund.
Alpha Calculation:
Alpha, α, is a metric used to evaluate fund performance compared to its benchmark. Derived from the
CAPM model, the formula for alpha is listed below [3]:
= ? ? ( ? )
4
? =
= ?
=
= , ?
For each of the TSP funds, alpha will be calculated. A positive alpha indicates the portfolio outperforms
the benchmark. A negative alpha indicates the portfolio underperformed the benchmark. Further, the
value of alpha is the percentage of over/underperformance compared to the benchmark [3]. The value of
alpha will be used when developing the portfolio optimization model.
Portfolio Optimization:
This study has identified multiple metrics to evaluate portfolio risk and compare fund performance to its
respective benchmark. Using the above metrics, along with conducting a mean variance analysis and
calculating the Sharpe ratio for the optimal portfolios, an informed decision regarding the investment
strategy for the TSP fund can be developed.