25721 Investment Management Assignment Part I Autumn 2024

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25721 Investment Management

Assignment Part I – Worth 15%

Autumn 2024

Assessment Task

This assessment task must be completed by you as an individual. You are required to complete three short answer questions. The first question requires a written answer on your current investment decision making while questions two and three require the use of data for mean-variance optimisation calculations and written answers. The calculations can be done in EXCEL, but your answers must be pasted into WORD and formatted for submission. You must provide explanations and discussion of your work and answers.

· Data Description - The data to be used in the Assignment is in the EXCEL worksheet titled AssignmentPartIData_2024Spring.xlsx. The worksheet contains monthly closing prices from January 2014 to January 2024 for stocks in six (6) listed financial institutions, the ASX200 and the Reserve Bank of Australia’s (RBA) cash rate target. Note: The cash rate is expressed as a percentage per annum (p.a.). The simple monthly cash rate can be estimated by dividing the annual rate by 12.

· EXCEL Calculations - You should complete the Lecture 1: Exercises on EXCEL and go through the calculations in Lecture 2: Weights Optimum Portfolio before beginning work on the Assignment. This will give you a basic understanding how to use EXCEL to do calculations. To assist you doing some of your calculations you might like to go to EXCEL “Options” and include the “Add-ins”, “Solver” and “Analysis Tool Pak”.

Submission Requirements

Due date – A softcopy of the Assignment and your EXCEL spreadsheet must be submitted online on Canvas by 11.59pm Thursday 28^th March 2024. 

· Late submissions will not be accepted.

· Your Assignment will only be marked if you attach the cover sheet (available on Canvas) to the front of your Assignment and write your student number, name and sign the cover sheet.

Format – The final Assignment, including all text, tables and figures must be submitted in a WORD document with a minimum font size of 12.  The Assignment, excluding the cover sheet and pages with graphs/diagrams, should not exceed 10 pages in length.

· Post questions on “Discussions” in Canvas. Note that email is not an efficient way for asking questions about the assignment. You can also arrange a Zoom consultation with Tiffany.

· If any parts of your Assignment are found to not be your own work or contain sentences that are identical or similar to those in assignments submitted by other students; on a solution or feedback sheet provided to students in a previous semester; or copied from a source and not correctly referenced, a breach of Student Rule 16.2.1(1) http://www.gsu.uts.edu.au/rules/student/section-16.html) will have occurred. This breach will be reported to the University as Academic Misconduct and you will receive a mark of zero for the assignment.

Question 1: Investing in Banks - 5 marks (3 marks for content and 2 marks for expression) 

You are interested in buying shares in Australian banks but one of your friends tells you that they could collapse, like several overseas banks did in 2023. Write a brief explanation of whether you agree or do not agree with your friend.   

Note: The only references that you can use to answer this question are: (i) Reserve Bank of Australia., (2023) Box A: Recent International Bank Failures – Causes, Regulatory Responses and Implications, The Financial Stability Review, April 2023, pp 16-24; (ii) O’Brien, K., (2023) Investing in ASX bank shares, The Motley Fool; (iii) Lecture slides and (iv) the textbook Bodie, Z., Kane, A., and Marcus A.J, 2022, Essentials of Investments, 12^th edition, McGraw-Hill Education.

Question 2: Return and Risk- 5 marks (3 marks for content and 2 marks for expression) 

The EXCEL Worksheet, AssignmentPartIData_2024Autumn.xlsx, contains share prices of six financial institutions listed on the Australian Securities Exchange (ASX).

(i) In your own words write a brief description of one characteristic of each financial institution that makes it different from the other financial institutions. Each description cannot be longer than two sentences.

(ii) Calculate the expected return and risk of each of the financial institutions and the correlation coefficients for each pair of financial institutions. Summarise your estimates in tables.

(iii) Select the two financial institutions that you think will be the best ones to invest in. Explain in your own words why you chose these two financial institutions and not the others.

Note: The following statistics need to be estimated - monthly average continuous returns for each of the entities, the ASX200 and cash rate; sample standard deviations of the monthly continuous returns for each of the financial institutions and the ASX200; and sample correlations based on the monthly continuous returns for each pair of the six (6) companies.

Question 3: Optimal Portfolio - 5 marks (3 marks for content and 2 marks for expression) 

Create a two-asset portfolio with shares in the two financial institutions you selected in Question 2.  Your risk aversion factor is 4, you have $2,500,000 to invest and short selling is allowed.

(i) Construct the optimum portfolio containing only shares in these two financial institutions. Report your estimates of the expected return and risk of this portfolio and the dollar amount and weights you invest in each of the financial institutions in a table.

(ii) Write a brief explanation in your own words why the weights in (i) on each of the financial institutions are not the same.

(iii) Draw the position of the optimal portfolio you constructed in (i) on a mean-standard deviation diagram using an efficient frontier and a utility curve. The diagram can be hand drawn.

(iv) Explain in your own words why the portfolio has this position on the diagram in (iii).

(v) You decide to also invest in a risk-free asset. Construct the optimum portfolio containing a risk-free asset and a risky asset portfolio. The risky asset portfolio only contains the two financial institutions.  Report your estimates of the expected return and risk of this portfolio and the dollar amount and weights you invest in each of the financial institutions and the risk-free asset in a table.

(vi) Write a brief explanation in your own words why the weights in (v) on each of the financial institutions and the risk-free asset are not the same.

(vii) Draw the position of the optimal portfolio you constructed in (v) on a mean-standard deviation diagram using an efficient frontier, capital allocation line and a utility curve. The diagram can be hand drawn.

(viii) Explain in your own words why the portfolio has this position on the diagram in (vii).

Note: Use the statistics calculated in Question 2 to estimate the weights, return and risk. Assume the average cash rate will be the return on the risk-free asset.