Portfolio Management

 General information

  1. This is a group assignment. Each group preferably consists of three students
    (Maximum four students). The organisation of a group is based on the members’
    voluntarily uniting. Students are expected to actively discuss and work with the other
    members of their group. However, group assignments must not refer to or be similar
    to the work of any other group; any collusion of this form will be treated as academic
    misconduct and penalised. A list of student names and uow email addresses will be
    available in Moodle for you to contract each other to form group. You are encouraged
    to contact by using Webex or Zoom.
  2. Each group will submit one co-authored report that will be marked out of 100 and
    scaled to 15% (i.e. maximum 15 marks) of the overall assessment of this subject.
    Because the different parts of this assignment are theoretically and methodologically
    integrated and the knowledge and skills used in this assignment are related to the final
    examination, it is strongly recommended that the members of a group work
    collaboratively from beginning to end. Each student should be involved in all parts of
    this assignment, rather than each member being in charge of specific parts
    independently. Please ensure that each member in a group makes an equal
    contribution to the assignment as far as possible. The 15 marks consist of 10 marks
    for group performance and 5 marks for individual member performance. The marks
    for group performance will be allocated equally to every member of the group. The
    marks for individual member performance may be discriminately allocated to
    members with unequal contributions that are identified by the subject coordinator
    after discussion with all members of the group. Free riders should be reported to me
    and may be penalised.
  3. You are expected to take this assignment as an opportunity to develop your
    spreadsheet computational skills. Make use of Microsoft Excel to do your calculations
    and graphs. In doing this assignment, you are encouraged to refer to the textbook,
    journal articles and any other material that may assist you in understanding what you
    are doing in this assignment. Ensure that you adequately cite your references and
    other sources from which you have gathered information in compiling your report.
     Background information of the research project
    The FIN923 Securities Firm (F923SF) has a large pool of employee superannuation
    funds of $200 million. Recently the F923SF directors and investors (clients) have
    become unhappy with the performance of the superannuation and dismissed the fund
    manager. Dr Shiguang Ma, who is an executive of F923SF has invited you to be the
    new fund manager. The basic policy of the superannuation fund trustees is to invest
    the fund in a well-diversified portfolio. Being a fund manager you are asked to
    prepare an investment strategy and present this report to the board members in a board
    FIN923/FIN423 Assignment. 2
    Consistent with the fund’s investment objectives, firstly, you need to be familiar with
    stocks listed in Australian Stock Exchange (ASX) and relevant market indexes such
    as S&P/ASX200. Then, you are required to structure various portfolios including
    consideration of market portfolio, riskless assets and other specific
    restrictions/conditions. Finally, you are to develop a research report with appropriate
    analyses that will show your investment strategy and meet fund trustee’s policy.
     Initial work
    Choose 7 stocks listed on the Australian Securities Exchange (ASX). The stocks must
    be from three (or more) different industries and are component stocks in
    S&P/ASX200. A list of component stocks of S&P/ASX200 will be provided. Go to
    the Yahoo Finance website or Bloomberg terminal to download 37 monthly share
    prices for each stock from 1st January 2017 to 31st January 2020 (for each stock,
    you will get 37 end of monthly prices for calculation of 36 monthly returns). Be sure
    to choose the “adjusted close” price, as all of the necessary adjustments (such as for
    dividend allocations and stock splits etc.) required to calculate returns have been done
    already. Extract the same period data for the stock market index ASXS&P200.
    Alternatively, students may download the data of their stocks from any other reliable
    internet source. However, in this case students must ensure that stock prices have
    been adjusted for capital structure changes such as bonus, rights issues or share splits
    and dividend payments in order to calculate total returns. This information is available
    from several websites and industry magazines such as ‘Shares’ or ‘Personal
    Investment’. Assume that the risk-free rate (Treasury Note) is 1.2% per year in the
    sample period. The annual risk free rate is converted into monthly risk free rate by
    dividing it by 12.
    Although the stocks with negative average/expected returns are acceptable for
    inclusion in your portfolio, too many stocks with negative returns in your portfolio
    would incur difficulty in analyses. Thus, it is better for you to calculate the expected
    returns of candidate stocks and take consideration of stock return when you make
    your final choice of 7 stocks for your portfolio. The coordinator/lecturer of FIN923
    reserves the right to ask you to change your selected stocks, so that the 8 stocks will
    not be totally the same across any two groups.
    Further instruction on data collection and using excel “solver” will be available in
    eLearning in week 3. Necessary demonstrations will be in the lecture or tutorial of
    week three or four.
     Research project
    Section One. Risk and return analyses [15 marks]
    Calculate monthly returns, expected (average) returns and standard deviations of
    returns for each of the 7 stocks and the market index. Calculate correlation
    coefficients and covariance for each pair of two stock returns, each pair of a stock and
    the index returns and then put the results into a the matrix. The rows and columns of
    the matrix must be appropriately labelled. Provide comments on the risk and returns
    of individual stocks in comparison with market.
    stock code: QAN, FLT
    QAN, FLT
    FIN923/FIN423 Assignment. 3
    Section Two. Portfolio construction and analyses [25 marks]
    Establish the portfolio opportunity set that is constructed with your selected 7 stocks
    by using Excel Solver (The Excel_Solver_Demo will be provided in Moodle). The
    opportunity set will be best presented in graphical form. Broker requirements and
    regulatory restrictions generally prohibit short selling for the fund. As such, it is
    prudent to assume that short selling is impossible in this section. Highlight the
    efficient set and discuss where the individual stocks lie in the graph in relation to the
    opportunity curve and efficient set.
    Section Three. Portfolio recommendation [10 marks]
    Recommend two portfolios of A and B to the Board of Directors with appropriate
    explanation, i.e., why you recommend those two portfolios. Your discussion should
    a. Details of the global minimum variance portfolio (including weights and dollar
    b. Details of the portfolios A and B (including weights and dollar amounts)
    Note: Global minimum variance portfolio is not allowed for your
    Section Four. Portfolios with riskless assets and CAL [20 marks]
    As a matter of policy, you point out to the board of directors that a portfolio
    consisting of only equities can be risky. You advise that an alternative portfolio could
    include other investments such as fixed interest securities. Consequently, the Treasure
    note is included in the possible portfolios with other 7 stocks. Thus, you reconstruct
    the efficient set that is the Capital Allocation Line (CAL). Provide comments on (i)
    the optimal portfolio (the tangency portfolio), (ii) recommend portfolio C restructured
    from the risk free asset and portfolio A, (iii) recommend portfolio D restructured from
    risk free asset and portfolio B. Compare your solution of portfolios C and D with your
    previous equity-only portfolios A and B.
    In this section, short selling of the riskless assets is allowed and short selling of risky
    assets is allowed under the constraint that the proportion Xi>= −5 (or others such as
    −3 by your definition)
    Section Five: Systematic risk and unsystematic risk components [20 marks]
    Partition the total risk (variance) of each of each stocks into their respective
    systematic and unsystematic risk components. Compute the beta and alpha of each
    stocks. Provide appropriate comments / discussion on the results obtained in this
     Report format [10 marks]
  4. The report must be typed and neatly presented in a professional format. The results
    or summaries of your calculation and your analyses must be briefly shown as tables
    and/or figures in the body of the report. The data collected and details of calculations
    can be shown as appendices to the report. You are required to make your report
    professionally. The length of the report should be no more than 2,500 words
    QAN, FLT
    FIN923/FIN423 Assignment. 4
    (including reference and excluding appendices). Use 12 point font size, Times New
    Roman, 1.5 line spacing and standard margins.
  5. The report should be structured as follow (necessary tables and figures with
    appropriate analyses are required to appear main context):

Signed cover sheet
Executive Summary
Section One (with section title)
Section Two (with section subtitle)
Section Three (with section subtitle)
Section Four (with section subtitle)
Section Five (with section subtitle)
Reference list
 Assignment submission:

  1. Group members and stock codes (due at 18th September)
    Your group is required to submit the names, student ID numbers of your group and
    the codes of your selected stocks by the end of week four. Please download an excel
    form from the Assignment Section of Moodle. Fill in the form as required and submit
    the form through the link.
  2. Soft copy research report (due at 14th October)
    It is a university policy to process assignment in Turnitin system before submission.
    Thus, you are required to submit a soft copy of research report into the TURNITIN
    system; which is available on Moodle site of FIN923. The file name should be the
    group leader’s name and ID. Only one submission with one file from a group is
    required. (More information will be provided in due time)
  3. Soft copy of an excel file of your computation (due at 14th October)
    Your excel file of calculation is also required to be submitted through “Group
    Assignment of Computation” in Moodle. The file name should be the group leader’s
    name and ID. Only one submission with one file from a group is required. (More
    information will be provided in due time)

Sample Solution