3. Create 3 Asset Allocation(s) (up to 30% - maximum 1500 words): The SEF’s BoD would like to evaluatethree different SAA, using three different portfolio construction techniques. Each asset allocations willbe constructed using (i) quarterly real returns, and (ii) data from Q3 1994 to Q1 2010 [do not use dataup to Q2 2021]. Allocations must be whole numbers (for example a 9.5% allocation to US small capgrowth should be changed to either 9% or 10%), and allocation to each market and asset class must bein multiples of 5% (for example a 4% allocation to emerging market equities must be changed to 5%).This requirement does not impact the sub-capitalisation or issuers. These allocations adjustments maybe programmed OR can be adjusted manually. Sub-capitalisation/issuers that will be used in SAAconstruction will be restricted to the selection made in section 2 above.
Part 1 Investment choice is a trade-off between risk and return, and the trade-off varies according to the expectations and positions of each investor. If the sole purpose is to maximize the rate of return on investment, the portfolio manager will, for example, invest funds in high-risk assets that have a high risk of failure. Such an investment plan will not do any good to risk-averse investors. According to the balance of risk and return, the increase in conversion risk will increase future returns. According to the balance of risk and return, only when investors are willing to bear a higher risk of failure, investment capital will produce higher returns. The best return can be expressed in nominal or actual terms and an absolute return target, while the relative return target can be relative to the index or even the output of the same group. According to the risk-return compromise, only when the investor accepts a higher random probability, the investment Capital can obtain higher profits. The trading theory that combines high risk and high return is risk/reward trading. The trade-off between risk and return or a number of different considerations, especially the investor's risk level, the investor's retirement years, and the loss of replacing assets. Time is also important when evaluating a portfolio of necessary risks and compensations. For example, if the investor has the ability to invest in stocks in the long-term, this allows investors to rebound from the risk of a bear market and participate in a bull market, and if the investor can invest in the short-term, the same stock with higher risk is recommended as long as it is. Investors can use risk-return trading to evaluate their overall investment, which is one of the key aspects of every investment decision. Too much risk or less than the preferred profit opportunity. Return target: 3.5% of US$25 million, which equals US$875,000. Actually reached 2.5%. Since Americans’ GDP grew by 2.2%, we took that into account to be as reasonable and fair as possible. Value at Risk (VaR) is a financial parameter used to calculate investment risk. Opportunities exceeding a certain number are expressed as value at risk. The risk at 95% downside risk is $77,120. Part 2 US govt Bonds A government bond is a government debt security that supports government expenditures and commitments. Public bonds can pay periodic interest payments known as coupon payments. National government bonds are also called low risk assets, since they are supported by the issuing government. Government bonds contribute to federal budget deficits and are used to collect money for a number of programmes, for example roads. The Federal Reserve Bank, however, still uses government bonds to manage the country's cash provision. In reality, the U.S. treasury is risk-free for those holding bonds before maturity. There is a risk to those who sell their obligations in advance or invest in long-term treasury funds. Importance of US govt bonds are as under: · Pay a permanent dividend on interest income · Low chance of US bonds default · State and municipal charges are exempt. · A reselling liquid industry · Using mutual funds and ETFs to evaluate US Investment Grade Corp bonds The US Investment Grade Corporate Bond Fund is a high-quality US-denominated corporate bond portfolio, which is actively controlled. Based on the PIMCO systems up and down, this fund is widely diversified through sectors, issuers and continents. Bonds with a lower chance of failure and with better rates, either Baa (by Moody's) or BBB, (by S&P and Fitch) or higher. Bonds with a lower default risk. These bonds are generally sold with lower returns than lower creditworthiness bonds. Importance: Credit evaluation is very relevant since the risks involved with the purchase of a certain bond are conveyed. A credit rating for investments shows a low loan default risk, making it especially an appealing investment vehicle for cautious investors. US Broad Market Equities The US Wide Market Index MSCI covers large US stock. The index consists of 2,944 constituents, representing about 99 per cent of US equity, spanning big, medium, small and micro capitalizations. An index is an instrument used in the stock basket to track results. The approach used for calculating an index will change, but each one has the end goal of using a benchmark to see the group's average price shifts for a period of time. Investors who prefer to maximise diversification benefits can invest in the securities involved in an index or invest in other financial instruments, such as some index funds, which consist of the stocks in the index. Advantages: Low Expenses: The loss ratio is smaller than 0.20 percent, as in most index funds, which amounted to 20 dollars per $10 thousand invested. Low costs contribute to the boost of returns in the long term, particularly when less charges amount to more money over time. Low Turnover: The main explanation for the reduced index funds costs is that they are not sold and substituted at a high rate—called turnover. There could be more than 50 percent turnover for certain active funds managed in non-index funds, while index funds are typically under 5 percent turnover. Broader Diversification: The majority of index funds are diversified, since they invest in a wide range of stocks. Wide index funds, however, offer more variety, meaning they participate in more than smaller index funds in the number of shares. Passive management: Like all index funds, large equity index funds are run aggressively and the investor does not deliberately attempt to overcome the benchmark index. Instead, they try to monitor the success of the index that eliminates any investment risk. Tax efficiency: Low sales minimise investor taxes. Low sales. In the event of mutual funds selling holdings at an excess amount, the capital gains are produced. Capital returns trigger taxes on capital gains—less churn avoids higher turnover extra taxation (The Balance, 2021) Developed Market Ex US Equities Developed exchange-traded fund (ETFs), by having exposures to hundreds or thousands of positions around the most industrialized economies of the world, may aid investors achieve comparatively inexpensive large consolidation. Here, we glance at the five largest established ETFs in management assets (AUM). 1. Vanguard FTSE Developed Markets 2. ISHARES MSCI EAFE ETF 3. ISHARES core MSCI EAFE ETF 4. Schwab International Equity ETF 5. ISHARE MSCI EAFE small – cap ETF A developing or mature investment sector is one of the most economically and financialally developed countries. Its financial markets, with a high level of control and supervision, stock trading and strong liquidity in its debt and equity markets are being established One sub-asset class is a large asset class sub-segment that is divided down to include greater or greater accurate recognition of the properties in the sub-class. Sub Asset classes are grouped by common features, which also show large asset class features. We will divide each Asset class into percentage as per the risk and return factor. This Allocation are the following: · US broad market equities · Developed market ex us equities · US govt bonds · Us investment grade corporation bonds We initially choose US wide market equities because we considered them to be more stable in terms of risk and return. Second, in order to diversify, we have developed market equities. Third, we want US government bonds, which have a lower probability and a more secure yield. Finally, we choose US investment grade corporate bonds. References The Balance, 2021. [Online] Available at: https://www.thebalance.com/investing-in-broad-market-index-funds-4153405 Portfolio Theory and Management III Group Assignment I. General Instructions 1. This assignment has a maximum group size of 3 students. Students will form groups in MyUni for the course and submit the assignment through the group. Students who wish to complete the assignment individually must contact the course coordinator (
[email protected]) to seek approval. 2. The due date for the assignment is Wednesday, the 26th May (11:59pm). Each additional working day (does not include Saturday, Sunday or public holidays) incurs a 3 mark penalty which will be deducted from the total mark for the assignment. Late assignments must be submitted by the 7th of June (11:59pm) after which no assignments will be accepted. 3. Index data for US, Developed and Emerging markets is provided in the Assignment module and is adequate to complete the assignment. The data is provided from Q3 1994 to Q2 2021 (note that some data series does not start from Q3, 1994 and CPI data series ends in Q2, 2021). Column labels/headers provide index details. Bonds’ data is provided in annual yields (% annual returns) while Equities and CPI indexes are in quarterly values which must be converted to real returns prior to commencement of the assignment. Teams must ensure that the returns for both asset classes and CPI are either in quarterly format or in annual format. 4. Students should familiarize themselves with the communication skills guide (attached in the Assignment Module). Plagiarism in assignment from any source will be investigated by the Academic Integrity Committee. 5. This assignment is worth 30 marks and is also weighted 30% of the total course assessment. A maximum word count for each section is provided. You are required to provide a word count for each section to show that you have not exceeded the word limit. mailto:
[email protected] II. Assignment Brief The Sustainable Earth Foundation fund started by philanthropists Jacob E. Newman and Meling Hoi in 2000 with a seed capital of US$ 25m. The SEF’s mission is to provide funding for approved projects in developing economies and targets spending 3.5% per annum (of the fund’s real value) on a rolling 12 quarters. The foundation’s investment objective is to try to grow the fund in real terms, but not at the cost of the fund’s real value eroding over a rolling 12-quarter basis. Current SEF fund’s investment team had established an asset allocation of 35:65 [defense:growth] and had invested in only traditional asset classes from developed economies. The current SAA are as follows: Asset/Sub-Asset Allocation Minimum Range Maximum Range US Govt. Bonds 25% 20% 30% US Investment grade Corp Bonds 10% 5% 15% US Broad Market Equities 40% 30% 50% Developed Market ex US Equities 25% 15% 35% The SEF fund’s BoD is open to investing in bonds from developed and emerging market (excluding agency/securitised bonds) and listed equities both markets. The BoD has further stated that the SEF fund will not invest in any alternative investments, nor will the portfolio manager use derivatives, short positions, or leverage. Cash will not be held by the fund unless it is a residual amount (from sale of assets or remaining yields from equities or bonds). The SEF Board of Directors