BEX3131 - ASSIGNMENT

Due date: Friday, 20 Dec 2024, 11:59 PM

Weighting: 60%

This is an individual assignment.

Note: The final submission should be in Word or PDF format. You also need to submit the Excel if you use it. 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.   Member guide 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
Low	H, I, J, K, L
Moderate	M,N, O, P, Q, R
High	S, T, U, V, W, X
Very high	Y, Z

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

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) ofyour portfolio you are comfortable with, as shown in Table 1.

Table 1: Risk tolerance

Risk Tolerance	Maximum acceptable loss
Very low	10%
Low	15%
Moderate	25%
High	30%
Very high	40%

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 Capital Market Assumptions (CMAs): asset class long-term return and risk assumptions in Appendix 1.

Table 2: SAA for different investor profiles

a)   Based on your allocated risk tolerance from Table 1, choose the 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 3. 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).     (4 points)

b)  Use these CMAs in Appendix 1 and Carver’s method to create your own SAA instead of using manager’s SAA. Follow these rules while creating your portfolio.

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

ii)        Keep the total allocation to Equity, Alternatives and Fixed Income as they are in the portfolio suggested by your manager. For example, if you selected the conservative portfolio, your allocation to Equity, Alternatives, and Fixed Income should be kept at 14%, 11% and 40%, respectively.

iii)       Use Carver’s method to allocate for allocation withinEquity, 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 distribute your portfolio withinEquity and Fixed

income using Carver’s method. For example, you can allocate within equity using the method i) one-step approach: AU Equity, DM ex-AU Equity and EM Equity   in one step or method ii) top-down approach: DM or EM in the first step and then AU Equity, DM ex-AU equity and EM equity in the second step. Similarly, you can allocate within fixed income using the one-step or top-down approach.

Please show the SAA using either method i) the one-step approach or ii) the top- down approach. Explain why you prefer the method you used. (2 points)

You need to show the details of the steps and formulas and how you work out the allocations of your SAA. If you use Excel, please also provide the template with formulas and show a screenshot of your Excel worksheet in your submitted answer workbook.  (9 points)

c)   Compare the expected rate of returns of the portfolios suggested by your investment manager and the one you created. Which one would you prefer? Why?  (4 points)

d)  From the table below, estimate the Sharpe Ratio of the portfolio created by Carver’s method and your investment manager. Which portfolio would you choose? Explain your selection. Use your estimates from the previous question for portfolio returns in  columns (2) and (5) of Table 3 (You need to do this exercise only for the portfolio you selected from Table 2, not all the portfolios listed in the Table 3.). (4 points)

Table 3: Performance of the portfolios

e)  Will you change your allocation if you have twice the amount of wealth you have now?   (2 points)

f)   Suppose you are 45 years old. How would your portfolio strategy change if you were instead a recent university graduate just starting to invest? Would you adjust your portfolio? If yes, how and why? If no, why not? (2 points)

g)  Suppose you are 45 years old. How would your portfolio strategy change if you were nearing retirement? Would you modify your portfolio? If yes, how and why? If no, why not?  (2 points)

h)  What adjustments would you make to your portfolio if inflation were significantly higher than its long-term average? Why? (2 points)

i)   How would you rebalance your portfolio in response to market volatility exceeding your assigned maximum drawdown? (2 points)

j)   How might behavioural biases, such as loss aversion or overconfidence, influence your portfolio decisions during a significant drawdown?  (2 points)

Question 2 (10 points)

You are provided with two sets of daily values of the following indices between 2015 and 2023 (attached):

•   S&P/ASX200 Total Return Index

•    S&P/ASX200 Franking Credit Adjusted Annual Total Return Index Tax Exempt

Further information about the indices is available here:

https://www.betashares.com.au/wp-content/uploads/2020/03/Betashares-SP-ASX-Australian-Technology-ETF-ATEC-Index-Methodology.pdf

https://www.spglobal.com/spdji/en/documents/additional-material/faq-asx-franking-credit-adjusted-indices.pdf

a)  Please calculate the annualised return of the two indices over the last nine years (using the data file provided) (3 points)

b)  Explain what franking credit is and explain the difference (if any) between these two returns you calculated (3 points)

c)   Suppose a retiree who retired on Jan 1, 2023, with a portfolio of 1 million invested in 20% Global Shares (MSCI World Index, daily values are attached), 20% Australian Shares (ASX 200 Index), and 60% Global Bonds (Barclays Global Aggregate Bond Index, daily values are attached). The retiree can receive the full franked dividend.

Please calculate the portfolio value at the end of 2023 and the value added from franking credits. (4 points)

Question 3 (15 points)

Students will assume the role of a financial advisor and recommend investment options to a client assigned to you. The age of your client and their risk tolerance are based on the following table:

Age of your client and risk tolerance	Students whose last name begins with the following letters
20, Low	A, B
20, Moderate	C, D, E
20, High	F, G
28, Low	H, I, J, K
28, High	L
40, Moderate	M, N, O, P
40, High	Q,R, S, T
55, High	U, V, W, X, Y, Z

Background

Suppose you are a financial advisor. 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 upon is the client’s age as the starting point for the percentage invested in defensive assets as the basis for choosing an investment option for a client saving for retirement. So, a 25-year-old client would be advised to invest in an option with at least 25% in defensive assets.

You then adjust this percentage upward to Age minus ten if the client is more tolerant of risk and increase it by ten per cent if the client is less tolerant.

Your clients are considering Hostplus and Unisuper. Read the Member Guide from HostplusandUnisuper(also attached) to answer the following questions.

a)  Which of the Core options would you recommend from Hostplus? Why? (2 points)

b)  Which of the pre-mixed options would you recommend from Unisuper? Why? (2 points)

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

Based on past performance, which one of these two options would you choose? Explain your recommendation. (5 points)

d)  Your client has reviewed the recommendation from part a) and requested you

recommend a strategy with exposure to socially sustainable investing from Hostplus. Given your heuristic-based process for recommending options, is there a suitable sustainable investment diversified option? If not, what should you recommend? Explain your answer. (3 points)

e)  Your client has also considered Hostplus Life option because he/she is not actively engaged with the super and doesn’t often switch investment options as age grows.  Will you recommend the Hostplus Life option? Explain your answer. (3 points)