Weight:35% Format:2,000-word written report In preparation for this assessment, you are required to read and consider the following embedded scholarship article, in conjunction with the below...

Weight:35%
Format:2,000-word written report

In preparation for this assessment, you are required to read and consider the following embedded scholarship article, in conjunction with the below background information;

Santacruz, L 2016, ‘Asset allocation theory and practice in Australian investment management


’,The Journal of Wealth Management, vol. 19, no. 2, pp. 47-67.DOI:10.3905/jwm.2016.19.2.047.

Assessment brief

Bodie, Kane and Marcus (2018, p 193) state that;

‘[t]he investment decision can be viewed as a top-down process: (1) capital allocation between the risky portfolio and risk-free assets, (2) asset allocation within the risky portfolio across broad asset classes (e.g. U.S. stocks, international stocks, and long-term bonds), and (3) security selection of individual assets within each class’.

The focus of the interim assessment is on investment decisions in determining the ‘optimal risky portfolio(s)’ (HINT: see Bodie, Kane and Marcus (2018), chapter 7, especially Appendix A for using Excel Solver), using the 23-years of annual data across five asset classes provided in Appendix A Table 1. In completing this assessment report, you will gain an in-depth and critical understanding of investment management terminology such as diversification, diversifiable risk, minimum-variance portfolio, portfolio opportunity set, efficient frontier, the capital asset allocation (CAL) line, minimum-variance frontier, efficient frontier of risky assets, and the Sharpe ratio, etc.

Santacruz’s (2016, p. 47) paper discusses ‘asset allocation theory and practice in the Australian context’. The paper outlines the Markowitz mean-variance optimization model and many other models. Santacruz (2016) then conducts a survey to determine which models are preferred in practice. Other authors’ studies have investigated over diversification (e.g. McKay, Shaoiro & Thomas 2018), when diversification fails (e.g. Page & Panariello 2018), and under diversifications’ impact on portfolio returns.

Write a report which addressesthe following, basing your analysis on the data provided for numerical parts a. and b. (see Table 1, Appendix 1). Please make any assumptions clear if used to clarify any issues;

1. Briefly , discuss the five asset classes in Table 1 of Appendix 1. Using the data from Table 1, calculate the Arithmetic (AM), Geometric Mean (GM) and Standard Deviation (σ) of returns of each of the five asset classes. Briefly, discuss the risk-return characteristics of each asset class with reference to these measures.
   
   


2. Construct an efficient portfolio. Assume the risk-free rate over the period is 3.50%. Calculate the Efficient Frontier and Capital Allocation Line (CAL) for the five asset classes using the Excel Solver Tool (see prescribed textbook Chapter 7, Appendix A for guidance). You will also need to calculate and provide the ‘Bordered Covariance’ and ‘Correlation Matrices’. Discuss the implications of these five assets on efficient frontier and CAL. See the video below to help you address this question.
   
   


3. Synthesise the various Modern Portfolio Theory (MPT) models in the four credible source references listed in the Background section above to provide an in-depth and critical discussion of your results from parts a. and b. Why (or why not) is minimum-variance portfolio still liked by academics and practitioners? Why is MPT normative?

References

Bodie, Z, Kane A & Marcus, AJ 2018,Investments, 11thedn, McGraw-Hill Education (ISBN: 978-1-259-27717-7).

McKay,S,Shaoiro, R& Thomas, R2018,‘What free lunch? The costs of overdiversification


’,Financial Analysts Journal, vol.74, no. 1, pp. 44-57.

Page, S&Panariello, RA2018, ‘When diversification fails


’,Financial Analysts Journal,vol. 74, no. 3, pp. 19-32.

Santacruz, L 2016, ‘Asset allocation theory and practice in Australian investment management


’,The Journal of Wealth Management, vol. 19, no. 2, pp. 47-67.DOI:10.3905/jwm.2016.19.2.047.

Interim assessment requirements

• The required word length for this report is2000words (plus or minus 10%)
  
  


• In terms of structure, presentation and style you are normally required to use:
  
  
  • AIB standard report format (seetemplate)
  
  
  • AIB-preferred Microsoft Word settings
  
  
  • author-date style referencing (which includes in-text citations and a reference list).
  
  
  • These requirements are detailed in theAIB Style Guide.
    
    
  
  
  
  


• The reference list for this assessment should contain the following number of relevant references from different sources: 5–10.
  
  


• All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.
  
  


• Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your major assignment word length is beyond the allowed tolerance level (see Assessment Policy available on AIB website).