BEX5131 S1 2025- ASSIGNMENT

Due date: Tuesday, 20 May 2025, 11:55 PM

Weighting: 60%

This version: modified 18 April, 2025

This is an individual assignment.

Note: The final submission should be in Word or PDF format. You also need to submit the Excel with formulas for Question 1 and 2. If you cannot submit Excel, please state the steps and formulas you used to work out Question 1 and 2 clearly in the Word or PDF document you submit. If any two submissions from different students are the same, both will get zero points. Use of ChatGPT or other AI composition software is not permitted.

The extra documents provided to work on this assignment:

1.   Excel file with multiple indices for Question 2

2.   Documents from Hostplus and UniSuper for Question 3

Question 1 (35 points)

You will build a strategic asset allocation consistent with your risk profile. Each of you will be assigned a risk profile.

Find your assigned level of risk tolerance from the following table: your risk tolerance is assigned based on your first name.

Risk Tolerance Level	Student whose first name begins with the following letters.
Very low	A, B, C, D, E, F, G, H
Low	I, J, K, L, M
Moderate	N, O, P, Q, R, S
High	T, U, V, W, X
Very high	Y, Z

You are required to use this risk profile and assets from the Capital Market Assumptions (CMAs) given in Appendix 1 to create your strategic asset allocation (SAA).

You have been assigned an investor profile that describes your risk tolerance. You must answer the following questions based on the risk tolerance level assigned to you. Risk tolerance is defined in terms of the maximum acceptable loss (maximum drawdown) of your portfolio that you are comfortable with, as shown in Table 1.

Table 1: Risk tolerance

Risk Tolerance	Maximum acceptable loss
Very low	10%
Low	15%
Moderate	20%
High	30%
Very high	35%

A fund manager has provided you with five different defensive/growth asset combinations related to five different levels of risk: Conservative, Moderate, Balanced, Growth and High Growth. The portfolios are constructed from the inputs from CMAs (asset class long-term return and risk assumptions) in Appendix 1.

Table 2: SAA for different investor profiles

	SAA				Portfolio Volatility
	Global Equity	Global Bond Hedged*	Alternative Investments	Cash
Portfolio 1 – Conservative	14%	43%	8%	35%	3.27%
Portfolio 2 – Moderate	29%	38%	15%	18%	4.98%
Portfolio 3 – Balanced	41%	36%	17%	6%	6.38%
Portfolio 4 – Growth	65%	12%	20%	3%	9.10%
Portfolio 5 – High growth	78%	2%	18%	2%	10.57%

*Hedged means hedged in Australian dollars.

a)   Based  on  your  allocated  risk tolerance  from  Table  1,  choose  the  fund  manager’s portfolio that fits your assigned risk profile. To calculate the maximum drawdown of a portfolio, use this rule of thumb: Maximum drawdown = 3xVolatility. The volatility of the portfolios is provided in Table 2. Please mention your risk tolerance level when you answer this question. Explain why you selected this portfolio (i.e. how the chosen portfolio is consistent with your risk profile and others are not).     (2 points)

b)  Use these CMAs in Appendix 1 and Carver’s method to create your own SAA.

Prepare a table like Table 3 with asset classes on the columns and the cash weight of each asset class in rows to show your final constructed portfolio.

Follow these rules while creating your portfolio.

i)         Keep the cash allocation as it is in the portfolio suggested by your fund manager.

ii)        Keep the total allocation to Equity, Alternatives and Fixed Income as they are in  the portfolio suggested by your fund manager. For example, if you selected the    conservative portfolio, your allocation to Equity, Alternatives, and Fixed Income should be kept at 14%, 8% and 43%, respectively.

iii)       Use Carver’s method to allocate within Equity, Alternatives and Fixed Income.

For example, if you selected the Conservative portfolio in part (a) then 14% of

your portfolio should be allocated between AU Equity, DM ex-AU equity and EM equity using Carver’s method. And will do the same for Alternatives and Fixed Income assets.

iv)       There are several ways to break down your portfolio within Equity and Fixed

income using Carver’s top-down approach. For example, you can allocate within equity using a one-step breakdown or a two-step breakdown.

v)        If you are using the 'one-step breakdown', you need to allocate your equity

portfolio between AU Equity, DM ex-AU Equity and EM Equity in one step. You allocate among the five asset classes (AU Govt Bonds, AU Corp Bonds and AU    Inflation Linked Bonds, Global ex-AU Govt Bonds and Global ex-AU Corp Bonds) within Fixed Income in one step. Similarly, for alternative investments, you allocate between private equity, property, and infrastructure in one step.

If you are using the ‘two-step breakdown', you need first to allocate the Equity part of your portfolio between DM Equity and EM Equity. Then, in the next step,  allocate the DM Equity between AU Equity and DM ex-AU Equity. Similarly, for Fixed Income, in the first step, you first allocate between AU Fixed Income and Global ex-AU Fixed Income. Then, in the second step, allocate within AU-Fixed Income (AU Govt Bonds, AU Corp Bonds and AU Inflation Linked Bonds) and  within Global ex-AU Fixed Income (Global ex-AU Govt Bonds and Global ex-   AU Corp Bonds). For alternative investments, since there is no more than one breakdown, you can use the ‘one-step breakdown ’ results here.

Please show the SAAs using both the ‘one-step breakdown ’ and the ‘two-step breakdown ’.

You need to show the details of the steps, formulas and how you work out the allocations of your SAA. You need to submit Excel files. Please ensure that numbers are linked with each other by formula, not just entering the final calculation outputs in Excel. If you cannot submit Excel, please state the steps and formulas you used to work out the weights clearly in the Word or PDF document you submit.  (10 points)

Table 3: SAA

c)  Which one of the two SAAs you created in 1(b) following the one-step and two-step Carver’s top-down approaches will you choose based on returns? Explain. (2 points)

d)  Carver’s top-down approach used only the volatility information in constructing the SAA. However, expected returns are also important for building a portfolio.

1)  From the CMAs in Appendix 1, estimate the risk-adjusted return (Sharpe Ratio) of each asset class in your SAA that you picked from 1(c).   (3 points)

2)  Based on the risk-adjusted returns, are there any obvious asset classes that you would want to overweight or underweight (in other words, tilt the weights) any of these assets in your portfolio? (If an asset has a weight of 8% in your strategic asset allocation, and you decide to increase the weight to 10%, that will be an example of overweighting that asset class). Show your tilted weights in Table 4.  (2 points)

3)  Explain why you have tilted (or have not tilted) the weights from your SAA. (2 points)

Table 4. SAA with adjustments

e)  Which specific asset classes in your portfolio are most likely to benefit from a high inflation environment, and why? How would you adjust your allocation to protect real returns if inflation remains persistently above target levels? (2 points)

f)   How would your SAA change if interest rates were expected to drop sharply over the next 12 months? Which asset classes might you reduce exposure to, and which might you favour? Explain your reasoning. (2 points)

g)  Behavioural research suggests that investors often chase past performance. How might this behaviour impact the effectiveness of your long-term SAA? What strategies could you implement to counteract this bias? (2 points)

h)  Imagine  you  experienced  unexpected  financial  events  (e.g.,  inheritance,  major expense). How would you incorporate this change into your asset allocation? (2 points)

i)   Suppose within your equity portfolio, the price of AU equity increased by 50% and that of DM Equity fell by 50% and the price of EM equity remained unchanged. How will you rebalance your Global Equity portfolio? (2 points)

j)   Ifa prolonged bear market causes a sustained decline in portfolio value, how might loss aversion bias influence your actions? What rational strategies should an investor with your risk profile follow in such a scenario? (2 points)

k)  How would your asset allocation strategy change if you were five years away from retirement instead of your current age?  (2 points)

Question 2 (10 points)

You are provided a set of quarterly values of several indices between their inception dates and the latest quarter data available (attached). The Indices are

•    SPDAUDP Index: S&P 500 Dividend Aristocrats Price Index

•    SPDAUDT Index: S&P 500 Dividend Aristocrats Total Return Index

•    SPX Index: S&P 500 Index

•    SPXT Index: S&P 500 Total Return Index

Further information about the indices is available here:

https://www.spglobal.com/spdji/en/indices/dividends-factors/sp-500-dividend-aristocrats/#overview

https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

a)  Please calculate the annualised return of these indices over (4 points):

i.      their full data period

ii.      the last 20 years

iii.      the last 10 years, and

iv.      the last 5 years

b)  Based on the results in (a), please comment on the performance of the dividend

investment strategy using the S&P 500 Dividend Aristocrats Index versus the overall S&P500 Index (3 points)

c)  What could explain the difference in performance that you observe? (3 points)

Question 3 (15 points)

Students will assume the role ofa financial advisor and recommend investment options to a client assigned to you. You have a PhD in finance, specialising in investments, and are familiar with all the complexities of advanced investment strategies. Through twenty years of practical experience working with clients, however, you have concluded that simple heuristics work best most of the time. One such heuristic you rely on is based on a client's maximum acceptable loss and the expected maximum drawdown from growth assets. You use these figures to estimate the maximum percentage of the portfolio that should be allocated to  growth assets. Your client has a balance of $50,000. The expected maximum drawdown of the growth assets is assumed to be 40%.

The maximum acceptable loss of your client is based on the following table:

Maximum acceptable loss ($)	Students whose last name begins with the following letters
9,000	A, B, C, D
11,000	E, F, G, H, I, J, K
13,000	L, M, N
15,000	O, P, Q, R, S, T
17,000	U, V, W, X, Y
19,000	Z

Read the Member Guide from Hostplus and Unisuper How We Invest Your Money and Unisuper Fees and Costs (also attached) to answer the following questions.

a)  Which of the Core options would you recommend from Hostplus? Why? (3 points)

b)  Which of the Pre-Mixed options would you recommend from UniSuper? Why? (3 points)

c)  You want to evaluate the options you recommended for your client from a) and b).

Which of the super funds would you choose solely based on costs and fees? Show the calculation of the costs and fees. (3 points)

d)  What, in your opinion, can explain the difference in fees and costs charged by these two super funds? (2 points)

e)  Based on the past performance of Hostplus and Unisuper, which one of these two options would you recommend for your client? Explain your recommendation. (4 points)