BFF3121– Investments and Portfolio Management

Semester 1, 2024

Instructions for RPM Assignment – Part 2

Important Instructions:

1.   For any technical issues relating to your trading account should be directed to  Mrs Alpana Trivedi (alpana.trivedi@monash.edu).

2.  All the calculations and analyses MUST be done in an Excel Spreadsheet Template.

This Excel spreadsheet should be submitted with the report.

It should be named as follows: BFF/BFB3121_Portfolio Project_xxxxxx.

Replace xxxxx with your own student ID.  Use BFF3121 or BFB3121 according to your own cohort.

3.  You also need to produce a 3-5 minutes (maximum) video presentation (see page 7 of this document).

4.  All the return calculations should be presented as decimals, not percentages, and approximated to six decimal points.

5.   Late submission penalty: Initial penalty is 5% if assignments are delayed by up to 72 hours. Then 5% penalty per day (including weekends and holidays) of the total marks earned.

6.  Assessment type: Individual

7.  Weight: 25%. (20% for report + 5% for video presentation); Marks: out of 125.

8.   Word limit: Maximum 5 pages (Font: Times New Roman; Font size: 12; Line space: 1)

9.   The trade confirmation will appear in your trade management module and transaction log module. Detailed transaction history should be downloaded to an Excel spreadsheet and submitted as a separate tab in the supplied Excel Template.

10. Excel will be checked to ensure correctness of the procedure, not for marking. If your calculation goes wrong, your findings/interpretation in the report will also go wrong for which you will lose marks.

11. Regularly check “RPM Q/A forum” to post/discuss RPM related issues.

Data sources

ASX200 Index: Yahoo finance web site (https://finance.yahoo.com/)

Australian 90 day T-bill rates:  Use the 90 days bank discount rate as the risk-free rate. You can visit RBA (www.rba.gov.au) or Australian Department of Treasury (treasury.gov.au)

Please use 90-day Bank bill rate for March 2024 to proxy Risk-free rate and use the same Risk- free rate for the whole trading period.

Two separate files have been uploaded to assist you with the above. You will find Weekly-Monthly Conversion of Risk-free Rate and the associated 90-day BAB rate file (source RBA).

You must quote your relevant data sources in your report.

Your Trading Journey:

Objective

The objective of this project is for you to manage a portfolio by investing $500,000 of your imaginary money in any stocks, options, or futures that are traded on the Australian, US and other international stock exchanges and to fulfill your assigned client’s investment goals. You can also execute short selling, and trade on margin at an annual interest rate of 4%. There is no need that your portfolio should necessarily outperform. the market. What you are expected to do is to use the concepts you learn in this unit to take buy/sell/hold decisions of securities, trade frequently, analyse the performance of your portfolio and submit the report together with a 3-minute video presentation along other necessary files.

Project Background

The investment project started when your account in 'Rotman Portfolio Manager' (RPM) with a cash balance of $500,000 on Monday in Teaching week 2 on 4rth March 2024 (Melbourne, Australia time). This is the week  1 of your eight-week investment horizon. You then take buy/sell/hold decisions of securities throughout each week over an investment period of eight weeks. Your investment period ends on Saturday in teaching week 9, 4rth May 2024. You were required to undertake at least 3 trades per week.

It is very important that you use the investment concepts that you learn in this unit in your buy/sell/hold strategies/decisions. These concepts include the following: financial instruments and markets; historical returns of various financial assets; risk aversion and capital allocation; assets allocation and security selection; risk-return trade-off; diversification and risk reduction; market risk and diversifiable risk; margin trading and short selling; fundamental analysis and any observable market anomalies; and equity valuation and detecting mispriced securities. In addition, you should also monitor the performance of various stock markets, domestic/regional/global economies, and other domestic/regional/global events to develop a sense of what is happening before taking buy/sell/hold decisions.

You can invest a portion of your money (i.e. idle cash) in risk-free money market funds that will earn 1% per annum. The trading simulation has been set-up assuming that the money that you did not invest in risky securities is invested in money market funds earing the above rate. This means that you do not need to specifically invest in money market funds. However, the maximum amount you can invest in money market funds at any time is $100,000. This means that all the remaining money should be invested in risky securities. If you invest more than $100,000 in money market funds (i.e. you have left your investable fund as unused cash for more than 3 weeks), you will lose a total of 5% of your overall marks.

It is very important that you download the entire trading history of your account to an Excel spreadsheet on the last day of trading. This should provide evidence that you have engaged in active trading during the eight-week investment horizon. We will cross check this trading history with your trading account for authenticity. This trading history should be submitted with your report inserted in the second tab of Excel file. If you don’t submit the trading history, your report will not be marked and you will get zero marks for the project.

RPM Part 2 - Assignment Requirements:

Please read individual sections and requirements very carefully. There are multiple sections that lists all the requirements. Try to follow the sequence of the requirements while preparing your report and video presentation.

Section A:

Data Collection and Some Preliminary Workouts:

You are to perform. the role of a portfolio manager whose performance will be judged against the ASX200 Index, which means that you will be evaluated against a highly diversified equity portfolio. To do that you are required to collect the value of ASX200 index and the value of the risk-free asset (i.e. the rate of Australian 90-day T-bill rate) starting from your teaching week 2 (i.e. when you started trading). You were also instructed (in week 0) to download your weekly portfolio values during trading weeks.

Enter these data into the excel spreadsheet. All the analyses should be performed in this spreadsheet.

You then use the following equation to calculate the holding period rate of return (HPR) for each week for your portfolio and the ASX200 index:

[NOTE: During the eight-week trading period, the only thing you needed to do is to trade frequently, collect weekly values of your investment portfolio. You now collect data for ASX200 Index and risk-free asset, and calculate weekly holding period returns].

Please Note: You must show all your calculations along with formulas in your Excel file. If we are unable to verify your formulas, then it’s not possible for to assess your work. You will end up losing a lot of marks failing to show all calculations, regression and all related outputs.

Section B:

Contents of the Report: Excel Calculations

Risk and Return Calculation:

1. Weekly values of the portfolio, ASX200 Index and risk-free asset (T-bill rate).   2. Weekly returns for the portfolio, ASX200 Index and risk-free asset (T-bill rate).

3. Monthly returns for the portfolio, ASX200 Index and risk-free asset (T-bill rate).

(You need to convert weekly returns into monthly returns in each week using the effective rate concept discussed in class.)

4. The arithmetic average, geometric average and standard deviation of monthly returns of the portfolio and ASX200 Index.

Performance Evaluation:

In light of in-class excel applications (during tutorials), lecture 5,6 and lecture 7 demonstrations, you are required to apply the relevant model(s) to analyse and interpret the regression output, relevant ratios and variables of your dataset. (Recall that you have learned how to run, interpret and analyse regression in excel). Carefully read the following requirements to evaluate your portfolio’s performance:

A. Evaluate the performance of your portfolio relative to the total risk of the portfolio in light of the following:

(i)   Report the Sharpe measure for your portfolio.

(ii)  Report the Sharpe measure for the ASX200 Index.

(iii)  Report the M2  measure for your portfolio.

B. Evaluate the  performance of your  portfolio  relative to  both  systematic/market  risk and residual risk. You need to use the approach that uses the systematic/market risk and residual risk as the measure of portfolio risk. Calculate and evaluate in light of the following:

(i)    Report the beta of your portfolio together with a reference to its statistical significance.

(ii)   Report the correlation coefficient between your portfolio and the market, and the proportion of the variability of portfolio return explained by the market movements.

(iii)  Show that the variance of your portfolio is equal to the total risk of your portfolio (Note: theoretically this should be equal to the sum of market and diversifiable risks. Calculate and check if yours is close or approximately same).

(iv)  Report the Treynor measure for your portfolio.

(v)   Report the Treynor measure for the ASX200 Index.

(vi)  Report the Jensen’s alpha for your portfolio.

(vii) Report the information ratio for your portfolio.

(viii) Calculate the expected return using CAPM.

It is important that you evaluate the performance of your portfolio under both these approaches. Use monthly returns for evaluating portfolio performance.

Section C:

Writing the Report:

Organising the Excel File:

All the calculations and analyses should be done in Microsoft Excel Template. On the top corner of the spreadsheet, you need to provide the following information: (1) Your name; (2) Your student ID; and (3) Your trade ID. You can use Excel functions in your calculations and analyses. Your Excel file should also be submitted with the project report. If the Excel file is not submitted, you will get zero marks for the project. Your written report relies on your excel calculations and outcomes.

Written Report Structure:

This will be a standard business report. When preparing the report, you need to refer to the Excel spreadsheet whenever necessary. It is important that you reproduce Excel calculations in the tables and other necessary sections of this report.

Your report can be structured as follows:

Preliminaries (5 marks):

The first page of the report should contain a letter to your manager. Remember, your report  should be written to your boss - as a report on your performance over the eight weeks of trading. The second page of your report is the title page. The third page of your report is the table of  contents.

Note: Next five pages contain the performance analyses. The five-page limit applies only to this section. In other words, the letter to manager, title page and the content page are excluded from the five-page limit.

Introduction (5 marks):

Provide a brief introduction of your client’s investment goals. Briefly explain what you did, what is the outcome and what contains in the remainder of the report.

Portfolio strategy and outcome (20 marks):

In this section:

-Explain the investment concepts you used in your investment strategies and buy/sell/hold transactions/decisions, and other domestic/global circumstances considered in these decisions/strategies. Any significant strategic decision changes that you have made through compared to Part 1 of the project? Specifically, how you achieved diversification for your client in an adverse market condition.

-Was there any influential news/event that altered your investment decision?

-Creating a table, present your observations for the following and explain what you observe: portfolio value at the end of each week; ASX200 index value at the end of each week.

-During your last week of trading, you were asked to diversify your investment regardless of your client profile. Briefly explain if your last week of trading had any significant difference given that you had unrestricted investment options.

Note: Make sure you refer to the relevant section of your appendix that has link with the report (Use footnotes/citations etc.).

Portfolio returns and descriptive statistics (15 marks):

Present the following from week 1 to week 8 in a table.

-Weekly returns for the portfolio, ASX200 Index and T-bill rate (risk-free asset); and -Monthly returns for the portfolio, ASX200 Index and T-bill rate (risk-free asset).

-Arithmetic average, geometric average and standard deviation of monthly portfolio returns, ASX200 Index returns.

Based on the results, compare, and interpret these between your portfolio and ASX. You may mention any stocks (s) that performed well/worse that affected your overall performance.

Portfolio performance relative to total risk (20 marks):

In this section you will:

-present and discuss the performance measures based on the total risk

-critically evaluate the performance of your portfolio. Remember to compare with the market (i.e. ASX200).

Did your portfolio under/over perform based on M2?

What you could have done to improve the overall performance?

If you are a risk averse investor with an aversion score of 2, what would be your overall utility?

[Note: Your video presentation includes the above performance evaluation]

Portfolio performance relative to market risk (20 marks):

In this section you will:

-present performance measures based on the market risk

-critically evaluate the performance of your portfolio. Remember to compare with the market (i.e. ASX200).

Based on your Beta, can you interpret your portfolio’s risk exposure compared to market?

Based on your CAPM calculation, is your portfolio’s actual return above/below? Is it generating any alpha? Interpret any positive/negative alpha of your portfolio.

[Note: Your video presentation includes the above performance evaluation]

Conclusion (5 marks):

This section concludes your report. In this section you should discuss whether your portfolio strategy worked or not. In other words, if your portfolio performed better than the benchmark ASX200 Index, you should tell us why you think your portfolio outperformed and what you could have done to improve your portfolio’s performance further. Similarly, if your portfolio underperformed the benchmark, you should tell us why you think your portfolio underperformed and what you could have done to improve your portfolio’s performance.

Presentation and Referencing (5+5=10 marks): Report structure; professional style; Format of tables; Use of graphs; Presentation and reference to appendices etc. Refer to Learn HQ for relevant resources. For referencing any standard style is fine.

Note that you must submit your trading history in the relevant tab of Excel template, not in your appendix. Appendices are excluded from five-page limit. Cite any references used following a standard referencing style. Reference list is excluded from five-page limit.

Video Presentation:

Prepare a 3-5 minutes (maximum) video presentation about your trading journey experience highlighting the portfolio performance relative to total risk and market risk and comparing it with benchmark (i.e., ASX).

You must show your face in the video presentation. Video can be prepared using zoom (for example) and using other means. The file must be in .mp4 format for your submission.

Your presentation may include power point slides/words/pdf/excel to demonstrate your key findings of your trading journey.

Your video should include the important indicators/ outcomes/analyses from the Portfolio performance relative  to  total risk and Portfolio performance relative  to  market risk

section of your written report (see page 6 of this document - red highlighted notes).

You should also highlight what lessons you have learned and how you can improve further in future to better accommodate your client’s needs. You may also include anything else that you believe have influenced your overall trading journey.

Submission Guidelines

Use the submission link available on Moodle site to submit your report and other documents. Before hitting the submit button, make sure that you have attached the following files:

1. Written Report – either a Word file or a pdf file. (Named as follows: BFF3121 _Portfolio Project_xxxxxx. Replace xxxxx with your own student ID.

2. Excel file containing your calculations and analyses.

(Named as follows: BFF3121 _Portfolio Project Analysis_xxxxxx. Replace xxxxx with your own student ID).

The same Excel file should contain the detailed trading and transaction history in the second tab. You must use the template provided in Moodle.

3. Submit your 3-5 minutes video presentation in .mp4 format.

If you don’t submit any of these files, your submission will be rejected and you will be given zero marks.

Refer to the assessment task schedule on Moodle for the due date. I strongly advice that you submit the report and other necessary files in advance without waiting for the last minute.

Email submissions are not accepted under any circumstance. No need to submit an assignment cover sheet.

Due Date: Week 11, Friday 17th  May 23:55pm.

Approximate Grade Release Timeframe. 20 Business days after submission.