Equity Portfolio Management Assignment

Assessment Task 3: Equity Portfolio Management Assignment

The assessment is submitted as an individual assignment

You will be given funds to invest in the share market. You are required to construct two $1,000,000 equity investment portfolios:

1. A passive portfolio replicating the return and risk of the index
2. An active portfolio which has the aim of outperforming the index

You will then prepare a report in which you can explain your investment strategy for constructing a passive and an active portfolio and then evaluate the investment performance of each in terms of absolute and relative return, risk and attribution effects to explain the differences in performance of each portfolio. You will be given an equally-weighted index of ten companies selected from companies listed on the Australian Stock Exchange.

This assessment replicates the tasks that would be undertaken by portfolio managers in a real-world investment company. For the passive portfolio, your task will be to replicate, as closely as possible, the risk and return characteristics of the benchmark index. For your active portfolio, your task will be to select stocks and sectors which will aim to achieve a higher return than the index.

Your task is not necessarily to produce a positive return. If the markets fall in value, then your passive portfolio should fall in value by a similar degree. Your active portfolio should aim to outperform the return on the index: if the index falls, your portfolio should fall by a lesser amount; if the index rises, then your portfolio should rise by a greater amount. Note that there is no requirement to outperform the index for this assignment.

The final submission should fulfil the following minimum requirements

For Passive portfolio

• calculate the number of shares required for your passive portfolio to replicate the composition of the index

For Active portfolio

Assess all ten companies and sectors from the index

• analyse the outlook for each companys industry
• analyse the macroeconomic environment at the global and domestic level
• identify the firms and sectors that you consider will outperform relative to the index and build your active portfolio to reflect your predictions
• analyse and comment on the financial ratios of each company over the previous five years. Some possible ratios that could be used:
• Return on Equity
• Net Profit Margin
• Growth in Earnings
• you should use relevant ratios for each company

Evaluate your findings and select six companies for your active portfolio

• after assessing the ten companies, select six to be included in your active portfolio
• describe the reasons for your selections (around 5 bullet points for each stock)
• also, describe the reasons why you have not chosen the other four firms (around 5 bullet points for each stock)
• assign portfolio weights for each of your companies and discuss why you have chosen the weights in comparison to the weight of each stock in the index
• calculate the number of shares required for each company to create a portfolio with the initial weights you have selected for your active portfolio
• why are some companies overweight in your portfolio, and why are others underweight?
• what do these active weights mean for your portfolios potential performance relative to the index?

Build your portfolios

• create these two portfolios in LSEG Workspace, ensuring that all dates and numbers of shares are correct

Portfolio Creation Dates

Passive and Active

• Start Date: Monday, 13 May, 2024

Portfolio Names in Workspace

• Passive: Student number Replication (Ex. s3254663 Replication)
• Active: Student number Active (Ex. s3254663 Active)

Benchmark Portfolio

• BAFI 1042 Sem 1 2024

Portfolio Analysis period for both portfolios

• Start Date: Monday, 13 May, 2024
• End Date: Friday, 7 June, 2024

Observe your portfolios performance over the analysis period

• as the share prices change over the evaluation period, you will be able to watch how the returns on the index, your active portfolio and your passive portfolio react

Report Summary should include the following minimum points

• discuss your investment goals and stock selection strategies
• what was the overall performance of the active portfolio, your passive portfolio and the benchmark index?

For each portfolio

• explain the reasoning for your stock selection and weighting relative to the index
• attach screenshots of your portfolios created in Workspace
• report your results for each portfolio
• provide comments on the total return/risk and active return/risk of your portfolios
• discuss the sectors and securities active weights in your portfolio
• analyse the active return of both your portfolios with reference to the allocation and selection effects
• describe any major market events that contributed to the return performance of the benchmark or of your portfolios, if applicable
• have you achieved (or not achieved) the goals for each of your passive and active portfolio?

Finally, which of the two portfolios will you recommend for investment and why?

Data for your report from Workspace

Workspace calculates the portfolio statistics and provides charts you will require for your report. The information you will need can be found in Workspace as listed below:

The index constituents, which each have a 10% weighting, are as follows:

Suggested Table of Contents headings

Executive Summary

Introduction Investment Goals and Objectives for each portfolio

Passive Portfolio Management

• Passive Portfolio Shares Calculation

Active Portfolio Management

• A Quick Glance at the Australian Economy (Macroeconomic Analysis)
• A snapshot of the relevant sectors that we are comparing in the portfolios

Financials, Materials, Real Estate etc

• Justification of company selection in active portfolio

Company Outlook

Company Performance (including Financial Ratio Analysis)

Reasons for stock selection (or omission) and weight allocation in portfolio

• Active Portfolio Shares Calculation
• Workspace Screenshot for Portfolios Created (showing student number and portfolio name)

Active and Passive Portfolio Summary

• Evaluation of the Portfolios Performance (Comparing to benchmark)
• Portfolio Weights
• Total Return and Benchmark-relative Return
• Total Risk and Active Risk
• Tracking Error
• Attribution Effects

Allocation and Selection Effect explained in detail

• Information/Sharpe/Treynor ratios

Conclusion recommend the final investment decision

Reference List

Appendix

References and Citations

Use proper citations and references and include a list of references you use in your report. Failure to do so will result in a lower grade. RMIT provides a website that explains the use of the Harvard reference system.

Please consult it here:https://www.lib.rmit.edu.au/easy-cite/

Some useful resources for this assignment include

Reilly, Frank K., Keith C. Brown and Sanford Leeds,Investment Analysis and Portfolio Management(11th Edition),Thomson South-Western, 2019.

You should also conduct your own analysis using the companies websites, annual reports, LSEG Workspace, IBISWorld and any other sources you consider to be relevant for your report. The more resources you use for your research, the better your analysis will be.

Assignment submission procedure

All assignments must be submitted online through the course Canvas Turnitin for a plagiarism check. An assignment cover sheet must accompany them.

An Important Note on Plagiarism

What is Plagiarism?

Plagiarism is the presentation of the work, ideas or creation of another person without appropriate referencing, as though it is ones own. Plagiarism can occur in oral and written presentations and is never acceptable. The use of another persons work or ideas must be acknowledged. Failure to do so may result in charges of academic misconduct, which carry a range of penalties, including cancellation of results and exclusion from the course.

Students are advised to read and understand the Universitys policy on plagiarism.