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Assessment Task 3:              Portfolio ManagementAssignment

Marks/Weighting:                  30 marks, accounting for 30% of the total grade for this course

Assignment Due Date:         Friday of Week 14, 10th June 2022, 5:00 pm Melbourne time Word Limit:                                                  Maximum3,000 words

Submission Instructions:     The assignment will be submitted via Canvas, Turnitin

Rubric/Marking criteria:        A marking rubric is provided on Canvas.

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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 of the index
  2. An active portfolio to achieve your investment objective 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 result in your portfolio, achieving 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 higher amount.

The final submission should fulfil the following minimum requirements

For Passive portfolio

  • calculate the numbers 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 company’s industry
  • analyse the macroeconomic environment at the global and domestic level
  • identify the firms and sectors which you consider will outperform relative to the index and build your active portfolio to reflect your predictions
  • analyse and comment on financial ratios of each company over the previous five years. Examples of ratios that can be used-
  • Return on Equity
  • Net Profit Margin
  • Earnings Growth

Evaluateyour findings and select six companies for your active portfolio

  • after assessing the ten companies, select six to be included in your active portfolio
  • describe in 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 portfolio’s potential performance relative to the index?

Build your portfolios

portfolio management
  • create these two portfolios in Refinitiv Eikon, ensuring that all dates and numbers of shares are correct

Portfolio Creation Dates

Passive and Active

  • Start Date: May9th, 2022, Monday

Portfolio Names in Eikon

  • Passive: Replication Student number(Ex. Replication s3254664)
  • Active: Active Student number(Ex. Active s3254664)

Benchmark Portfolio

  • BAFI 1042 Sem 1 2022

Portfolio Analysis period for both portfolios

  • Start Date: May 9th, 2022
  • End Date: June 3rd, 2022

Observe your portfolios’ performances 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

For each portfolio

  • explain the reasoning for your stock selection and weighting relative to the index
  • attach screenshots of your portfolios created in Eikon
  • report your results for each portfolio
  • provide comments on 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 your portfolios with reference to the allocation and selection effects
  • What was the overall performance of the active portfolio, your passive portfolio and the benchmark index?
  • describe any major market events which contributed to the return performance of the benchmark or of your portfolios
  • have you achieved (or not achieved) the goal for your passive/active portfolio

Finally, which of the two portfolios willyou recommend and why?

Data for your report from Eikon

Eikon calculates the portfolio statistics you will require for your report. The information you will need can be found as listed below.

Total and Active ReturnBalanced Summary – Contribution
Contribution to ReturnEquity Summary – Performance/Contribution
Contribution to Portfolio WeightEquity Summary – Allocation
Allocation and Selection EffectsBrinson Single Currency
Contribution to Total RiskEx-ante Multi-factor Risk – Portfolio Summary
Contribution to Active RiskEx-ante Multi-factor Risk – Active Summary
Performance Ratios (Sharpe, Treynor)Return Statistics

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

ANZ.AXAustralia and New Zealand Banking Group LtdFinancial Services
QAN.AXQantas LtdAirlines
CSL.AXCSL LtdHealth Care
NCM.AXNewcrest Mining LtdBasic Materials
REA.AXREA Group LtdCommunication Services
RIO.AXRIO Tinto LtdBasic Materials
TLS.AXTelstra Corporation LtdCommunication Services
WBC.AXWestpac Banking CorporationFinancial Services
WPL.AXWoodside Petroleum LtdEnergy
XRO.AXXero LtdTechnology

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Suggested Table of Contents headings

Executive Summary

Intro/Purpose of the Report

Passive Portfolio Management

Passive Portfolio Summary

Active Portfolio Management

A Quick Glance at the Australian Economy (Macroeconomic Analysis)

A snapshot of the relevant sectors that we are comparing in the portfolio’s

Financial Sector, Health Care sector….etc

Company Outlook

Company Performance Ratio Analysis

Company Selection

Reasons for stock selection

Overweighted Securities

Underweighted Securities

Active/Passive Portfolio Summary

Evaluation of The Portfolio’s Performance (Comparative Analysis)

Portfolio Weights

Total Return and Active Return

Total Risk and Active Risk

Tracking Error

Attribution Effect-Allocation and Selection Effect

Information/Sharpe/Treynor ratios


Reference List