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BAFI1042 Equity Investment and Portfolio Management

Equity Portfolio Management Assignment

Assessment Task 3:            Equity Portfolio Management Assignment

Marks:                                   40 marks

Assignment Due Date:         Friday of Week  14; 13 June 2025, 5:00 pm Melbourne time

Word Limit:                           Maximum 3,500 words

(excluding ToC, Appendix and References)

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

Rubric/Marking Criteria:       A marking rubric is provided on Canvas

Format:                                 Please submit your report in PDF format

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 that 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 that 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 company’s 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 each company's financial ratios over the previous five years. The ratios used should demonstrate profitability, asset efficiency, and debt servicing capacity. The ratios should be relevant to each company and may not be the same for all your companies.

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 portfolio’s 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, 12 May 2025

Portfolio Names in Workspace

•    Passive: Student number Replication (e.g. s3254663 Replication)

• Active: Student number Active (e.g. s3254663 Active)

Benchmark Portfolio

•    BAFI 1042 Sem 1 2025

Portfolio Analysis period for both portfolios

•    Start Date: Monday, 12 May 2025

•    End Date: Friday, 6 June 2025

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 investment objectives of each portfolio

•   show the portfolio creation in LSEG Workspace as of the creation date, demonstrating the correct security weights in each portfolio

•   explain the reasoning for your stock selection and weighting relative to the index and how this will contribute to the investment objectives

•    report your results for each portfolio relative to the benchmark 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

•    provide a detailed attribution analysis of the returns on each portfolio with reference to the weight differences between the portfolio and the benchmark

•   describe any major market events that contributed to the return performance of the benchmark or your portfolios, if applicable

•    have you achieved (or not achieved) the goals for each of your passive and active portfolios?

•   You should embed screenshots of your portfolio analysis from  relevant  LSEG Workspace screens in the main body of your report for each section. Screenshots should be readable and clear

•   Screenshots alone are not sufficient for your analysis. You must find reasons for the  results that  have been achieved  by analysing the effects of differences  in security weights  between your portfolio and the  benchmark  and discuss them clearly and in detail

In your analysis, you should avoid making vague or overly simplistic comments that lack depth or detail. The discussion should go into the  underlying  reasons,  implications, or mechanisms for portfolio  performance  relative to the return and risk of the  benchmark portfolio. Your portfolio’s return differs from the benchmark due to the different weights assigned to each stock and sector compared to the benchmark. All your analysis should refer to these weight differences as they are the drivers of relative return and risk in your portfolio.

Your final report should take the viewpoint of a portfolio manager explaining the portfolio return to an investor client. Your client will want a thorough explanation of the return and risk on their portfolio. Points will be awarded where the main assertions and conclusions are supported by relevant data and/or referencing, and there is evidence of thorough research.

Finally, which of the two portfolios will you recommend for investment and why? Refer not only to portfolio return but also to risk and employ the relevant return-for-risk ratios that would support your conclusion for each portfolio.

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:

Crop your screenshots to show only the section inside the red box. The rest just takes up space on your report.

The index constituents, each of which 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 the 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 (Compared to the 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 one’s own. Plagiarism can occur in oral and written presentations and is never acceptable. The use of another person’s 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 University’s policy on plagiarism.