FINM 3008/6016 Portfolio Construction

ANU Research School of Finance, Actuarial Studies and Statistics

FINM 3008/6016 Portfolio Construction

Assignment

General Instructions and Information

1. The assignment involves producing a report that offers portfolio construction adviceor a client based on specified circumstances and objectives. The assignment is to beundertaken in groups of 4 to 6 students. All students must sign up for an assignmentgroup at Wattle by week 5. If you have to do the assignment as an individual task, youneed the lecturer’s approval to do so.

2. Assignment SummaryDue DateMonday October 14th, 2024 Weighting (%) 30% of course grade

Objectives

 Build and submit quantitative/qualitative analysis models that areappropriate for the client’s circumstances

 The models should be built based on client’s objectives andconstraints and be able to produce a matrix of portfolio measuresfor further analysis

 Conduct analysis of asset allocation problem based on client’sobjectives and constraints Research potential aspects that the client is concerned about

 Write-up the portfolio construction advice and your analysis in a

report formatMarking Marking criteria are attached at the end.Required SubmissionsFile 1: Final report in either Word or PDF formatFile 2: Quantitative/qualitative analysis model(s) in Excel format Page 2Submission Requirements

1. Online submission at Wattle. No hard copy or email submission isaccepted. Only one submission from each group is required.

2. Upload your files in Excel, Word or PDF format. Please note thatWattle will not accept certain types of PDF files (such as protected PDF). If you plan to submit your report as a PDF file, it istherefore strongly recommended that yottempt to do so welli advance of the submission deadline, to ensure the format isacceptable. When you submit Excel file, if possible, submit aWindows based Excel file instead of a Mac version.

3. You must click “submit” to finalize the submission. No changes cabe made after submission. The submission link can only be reopened by the lecturer manually if you’d like to make changesto your submitted files.

4. The usual assignment cover is not required for online submissions.
5. To correctly record your assignment marks, make sure you havecorrectly signed up for an assignment group at Wattle.

6. All files submitted to be named as follows:FINM(course code) Group (Letter) - (description)

Example 1: FINM3008 Group A - Model.xlsxFINM3008 Group A - Report.docxThe maximum size of each file is 50MB.

Penalties and Extensions: Late submissions of assignments are not accepted. Students will receive a mark of zero for the

assignment if it is submitted after the due date without the lecturer’s approval. Page 3

Guidelines

1. The assignment should be written as a ‘business report’ by a consultant for their client.It should be easily readable with most important messages upfront. The articles writtenby industry practitioners and journalists provided in this course can be good guides towriting in the portfolio construction context, for instance, their writing style, wordchoice, “story-telling” and the way of using jargons that are easily understood byreaders with common-sense knowledge of the economy and financial market, etc.

2. The word limit for report is 3,000 words, which refers to the text contained in the bodyand appendix (if there’s important analysis to support your recommendation in theappendix). It excludes: title or contents page, tables, and any notes to tables thatdescribe the analysis or assumptions, figures, references. This word limit is “soft” innature. You won’t get penalty if getting over the limit with a small margin (i.e.,within10%). The message is that the word limit imposed should be sufficient for theassignment. “Trimming” and “cutting” are part of the exercise that you have to do todeliver your insights to your client within a page limit in business writing. In practice,your clients are busy. It is always the best if you can deliver your mainmessageswithin a short period of time. If your report exceeds the limit by more than 10%, youmight lose marks in the presentation and formating category.

3. Ideally the report should be ‘standalone’ for your client to understand the analysis andthe reasoning behind your recommendation. You should aim for the examiner not toeed to look at the Excel file to understand your report. Note: this doesn’t mean thatyour examiner do not look at your Excel file. If the examiner needs to dig into themodels to understand your analysis, it would mean that the analysis is either poorly setout, inadequately explained, or looks like it may be wrong.

4. Marks for ‘effectiveness of communication’ will reflect not only the appearance of theport, but also the general ease by which the report can be read and the analysis andmessages can be understood. Try to代写 FINM 3008/6016 Portfolio Construction use generous font sizes, ampleparagrappacingand borders. Make sure that tables and charts are formatted and labelled well.Make sure your sentences are coherent and arguments are sound. If the examiner isleft wondering about your main messages or what you have done, you will lose marks.

5. All sources should be acknowledged with proper referencing. Consistent Harvarderencing style is required. The standard for proper referencing is that a third personan replicate your analysis, if needed. You should not use any artificial intelligencetools (e.g., ChatGPT) to write the report.

6. In the second task of this assignment, each member of the group is expected to takethe lead in providing an expected return forecast for at least one asset class. Makesure you clearly indicate which member is responsible for an asset class. For example,you can have a table to summarize this. If an asset’s expected return isorecasted byall team members, then label it as TeamAsset class Expected return Forecast provided byAustralian equities x% above cash rate John Doe (Uni. ID)

World equities y% above cash rate Jane Doe (Uni. ID)Australian cash z% Team

… … …Page 4

THE ASSIGNMENT

Happicity Pension Plan Investment Board (HPPIB) is a defined contribution superannuation

fund for Happicity public sector employees with an AUM of $3 billion. HPPIB investment team isheaded by the CIO (Chief Investment Officer), Sarah Connor, who is in charge of the day-to-dayoperations of the fund. Every five years, Sarah submits a Strategic Investment Plan (SIP) to theboard of trustees of HPPIB for approval. The most important purpose of the plan is to decide theasset allocation of HPPIB for the next five years. This year, Sarah needs to prepare a new SIPfor the next five-year period. She has asked you, a team of asset allocation experts, to preparereport to help her draft the plan.HPPIB has reached a mature stage with each year’s contributions to the plan approximately the

relatively stable income. For performance evaluation purposes, the board of HPPIB has electeda benchmark portfolio, which is the average portfolio of similar pension funds. The board

assumes that the benchmark portfolio invests in each asset class passively, except for assetclasses without any passive investment option.HPPIB currently invests inAustralian Equities, World Equities, Fixed Income, Real Estate andCash. Its investments in Australian Equities and World Equities are actively managed byexternal investment teams, while its investments in other asset classes are passively managed.etails about the current asset allocation have been provided to you. Sarah also provides youthe schedule of asset management fees that HPPIB would pay for each type of investment.

Through the initial meeting with the CIO, you come to understand that in the report, you need to

address the following issues:

1. Provide an independent assessment of HPPIB’s investment performance over the period oJune 2019 to June 2024. During the meeting, Sarah informed you that all external activeinvestment teams delivered similar performance as passive indexes beforededucting anyfees during the past five years. Sarah also asks you to evaluate the performance of the fundover longer horizons, such as over the past 10, 15, or 20 years, to determine whether thefund’s performance is improving over time. The asset allocation over the pas20 years hasremained the same. In this exercise, assume that the fund’s portfolio is rebalanced monthlyand rebalancing does not incur transaction costs.

2. Determine a new strategic asset allocation for the next five-year period with a more efficient

risk-return trade-off so that the fund is better positioned to achieve its mission and

performance objectives. Sarah would like you to provide an overview of the characteristics

of each recommended asset class and explain how they might contribute to the portfolio

return and risk considering the specified objectives and constraints. She also asks you to

provide a detailed forecast of the expected return of each asset class in the next five years

and document the reasons behind your forecast. In constructing the portfolio, practical

issues should be adequately addressed, for example, the availability of some investments,

liquidity considerations, and asset management fees.

3. The next Australian federal election is expected to be held in 2025, and it is expected to be a

tight race between the Labor Party and the Liberal/National Coalition. Sarah would like to

know how the outcome of this election will impact the performance of her portfolio. She asks

you to conduct an analysis of the potential effects of the election result. You do not need to Page 5

predict which party will be elected (since such predictions are often unreliable), but you

should analyze how each party, if elected, will affect the risk and returns of different asset

classes. You can base your analysis on the historical performance of various asset classes

under different political leadership or on the proposed policies of each party.

When Sarah submits the SIP to the board for approval, HPPIB board members, consisting of

business executives of large companies and top-level public officers, always ask tough

questions to challenge the proposal. Therefore, Sarah asks that you support your

recommendations with numerical analysis detailing what outcomes they might expect from the

new portfolio and supplement numerical analysis with qualitative discussions or robustnesschecks to add confidence to your recommendations. She also requires that ou provideadditional explanations for any significant change in asset allocation relative to the current

allocation or the benchmark.Sarah has specified the objectives and constraints of the fund as follows and asks you todemonstrate that your recommendations meet these objectives and constraints as much as

possible:

(a) Five-year outcome: she wants the fund to generate the highest Sharpe ratio possible in five

years. She considers the fund’s investment horizon as long-term and that focusing on theend-result would most benefit its members.

(b) Absolute return target: she requires that the portfolio generates an annualized return at

least 3% above the expected inflation. The most recent inflation number is 3.5% year-on

year. The RBA has a long-term inflation target band between 2 to 3%. You need to makeyour own assumptions about the inflation rate over the next five years.

(c) Not losing money: she wants to limit the chance of the portfolio declining in value over 5years (i.e., generating negative compound returns) to no more than 20%.

(d) Relative performance: she asks that the annualized tracking error of the fund versus thebenchmark to be no greater than 2%.

(e) Portfolio constraints: she asks that the allocation to equities, including all types of publicequities, should be within 15% range of the benchmark allocation. In orderto maintain

lexibility, she asks that no more than 20% of the portfolio be invested in illiquid assets, and

hat at least 2% of the portfolio remains invested in cash. No borrowing or short sales arepermitted.

ASSET ALLOCATION AS OF LATEST MONTH ENDPage 7Guidance

Workshops Assignment workshops will be held through the semester until week 10.

 Please email me your questions regarding the assignment. I will collect the questionsand answer them at workshops. In this way, I can avoid answering the same questionredundantly.

 Please note you are expected to have reviewed all lecture, tutorial, and workshopmaterials and listened to all recordings before you come to consultations.Some Helpful Hints