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.