QUALITATIVE RESEARCH OF CASE STUDIES
January 24, 2024Essay Assignment
January 25, 2024Word limit: 2000
Individual/Team: Individual
Due date: 20/12/2023
Weighting: 51%
This assignment has two parts, Part 1, 36 points and Part 2, 15 points.
Note: The final submission should be in both Word and PDF format. If any two submissions from different
students are the same, both will get zero points. Use of ChatGPT or other AI composition software is not permitted.
PART 1 (36 points)
Task overview
In Part 1, students will build a strategic asset allocation consistent with their risk profile. Each student will be assigned a risk profile.
Find your assigned level of risk tolerance from the following table: Your risk tolerance is assigned based on your first name.
Risk Tolerance Student whose first name begins with the
following letters.
Very low A, B, C, D, E, F, G
Low H, I, J, K
Moderate L, M, N, O, P, Q, R
High S, T, U, V, W
Very high X, Y, Z
Students are required to use this risk profile and select assets from the Capital Market Assumptions given in Appendix 1 to create your strategic asset allocation.
Detailed questions
1. You have been assigned an investor profile that describes your risk tolerance. You must answer the following questions for the risk tolerance level assigned to you. Your financial goal is to save for retirement. Risk tolerance is defined in terms of the maximum loss (maximum drawdown) of your portfolio you are comfortable with, as shown in Table 1.
Table 1: Risk tolerance
Risk Tolerance Maximum acceptable loss
Very low 10%
Low 15%
Moderate 20%
High 30%
Very high 40%
2
a) From the following reference portfolios in Table 2 and the information provided in Table 3, choose the one that fits your assigned risk profile. To calculate the maximum drawdown of a reference portfolio, use this rule of thumb: Maximum drawdown = 3xVolatility. Please mention your risk tolerance level when you answer this question. (4 points)
Table 2: Reference portfolios
Global Equity Global Bond Hedged*
Portfolio 1 100% 0%
Portfolio 2 70% 30%
Portfolio 3 45% 55%
Portfolio 4 20% 80%
Portfolio 5 5% 95%
*Hedged means hedged in Australian dollars.
Table 3: Capital Market Assumptions (Expected 10-year annualised)
Correlation Coefficient
Expected
Return
Expected
Volatility
Global Equity Global Bond
hedged
Global Equity 7.20 13.37 1 0.11
Global Bond Hedged 4.56 3.50 0.11 1
b) Explain why you selected this reference portfolio (i.e., how the chosen reference portfolio is consistent with your risk profile and others are not). (4 points)
c) What is your reference portfolio’s expected rate of return and volatility? (show calculation) (3 points)
2. Now, you must find your strategic asset allocation (construct the policy portfolio). Use the capital market assumptions given in Appendix 1 for your strategic asset allocation. Use Carver’s Top-down approach.
a) Prepare a table like the one below with asset classes on the column and the weight of each asset class in rows to show your final constructed portfolio. (The table 4 is an example. Add/delete rows according to the assets you choose.). Your portfolio must satisfy the following conditions:
i. You must include at least five asset classes (other than cash) in your portfolio.
ii. You cannot have more than 5% of your portfolio allocated to cash.
iii. If you decide to include alternative asset classes in your portfolio, divide Global Equity allocation between Equities and Alternatives.
iv. Your allocation to Alternatives cannot exceed 10% of your portfolio. (10 points)
Table 4: Strategic Asset Allocation
(This is only an example. Add/delete rows according to the assets you choose)
Reference
portfolio
Cash
Weight
Reference
portfolio
Cash
Weight
Strategic Asset
Allocation
Cash
Weight
Asset
class
Global
Equity
Equity
AU Equity
DM ex-AU Equity
EM Equity
Alternatives ≤10%
Private Equity
Core Real Estate
Global
Bond
Hedged
Global
Bond
Hedged
AU Govt Bonds
AU Inflationlinked Bonds
Cash ≤5%
b) Suppose you are 45 years old. Would you change your reference portfolio and strategic asset allocation if you were 20 years younger? If yes, how? If not, why? (4 points)
c) Suppose you are 45 years old. Would you change your reference portfolio and strategic asset allocation if you were 20 years older? If yes, how? If not, why? (4 points)
3. Carver’s Top-down approach used only the volatility information in constructing the strategic asset allocation. However, expected returns are also important for building a portfolio.
a) From the capital market assumptions in Appendix 1, estimate the risk-adjusted return (Sharpe Ratio) of each asset class in your strategic asset allocation. (2 points)
b) Based on the risk-adjusted returns, are there any obvious asset classes that you would want to overweight or underweight (in other words, tilt the weights) any of these assets in your portfolio?
(If an asset has a weight of 8% in your strategic asset allocation, and you decide to increase the weight to 10%, that will be an example of overweighting that asset class). Show you tilted weights in a table (Use Table 5 as an example). (2 points)
c) Explain why you have tilted (or have not tilted) the weights from your strategic asset allocation. (3 points)
Table 5. Strategic Asset Allocation
(This is only an example. Add/delete rows according to the assets you choose)
Reference
portfolio
Cash
Weight
Reference
portfolio
Cash
Weight
Strategic Asset
Allocation
Cash
Weight
RiskAdjusted
Return
Tilted
Weight
Asset
class
Global
Equity
Equity
AU Equity
DM ex-AU Equity
EM Equity
Alternatives ≤10%
Private Equity
Core Real Estate
Global
Bond
Hedged
Global Bond
Hedged
AU Govt Bonds
AU Inflation-linked
Bonds
Cash ≤5%
PART 2 (15 points)
In Part 2, students will play the role of a financial advisor in a Super Fund and recommend investment options to a client assigned to them. The age of your client and their risk tolerance are based on the following table:
Age of your client and risk tolerance Student whose last name begins with the following letters
28, Moderate A, B, C
28, High D, E, F, G
38, Low H, I
38, High J, K
46, Low L
46, Moderate M, N
55, Low O, P, Q, R
55. Moderate S, T, U, V
55, High W, X
65, Moderate Y
65, High Z
Background
Suppose you are a financial advisor at UniSuper. You have a PhD in finance, specialising in investments, and are familiar with all the complexities of advanced investment strategies. Through twenty years of practical experience working with clients, however, you have concluded that simple heuristics work best most of the time.
One such heuristic you rely upon is the client’s age as the starting point for the percentage invested in fixed interest, cash and credit as the basis for choosing an investment option for a client saving for retirement. So, a 25-year-old client would be advised to invest in an option with at least 25% in fixed interest, cash and credit.
You then adjust this percentage upward to Age minus ten if the client is more tolerant of risk and increase it by ten per cent if the client is less tolerant.
Additionally, you believe the minimum allocation to fixed interest, cash and credit should be at least 20 per cent and a maximum of 80 per cent.
Problem
You have been assigned a client with a specific level of risk tolerance and age. Use this document by UniSuper to answer the following questions.
a) Which of the UniSuper pre-mixed options would you recommend? Why? (2+5 points)
b) What would be the expected return in excess of CPI for this option, based on UniSuper projections? (3 points)
c) Your client has reviewed the recommendation and requested you recommend a strategy with exposure to sustainable investing. Given your heuristic-based process for recommending options, is one of the pre-mixed sustainable investing options suitable? If not, what should you recommend? Explain your answer. (5 points)
Appendix 1: Capital Market Assumptions (10-year Annualised)
Asset Class Nominal
Expected
Returns
(%)
Expected
Volatility (%)
FIXED INCOME
Cash 2.90 0.71
AU Credit 4.84 2.82
AU Govt Bonds 4.39 4.27
AU Inflation-Linked Bonds 4.70 6.45
AU Aggregate Bonds 4.60 5.10
World ex-AU Bonds hedged 4.37 3.48
EQUITIES
AU Equity 9.71 14.22
U.S. Equity 5.10 13.11
DM ex-US Equity 8.42 11.37
EM Equity 8.35 15.10
DM Equity 8.10 12.50
DM ex-AU Equity 7.00 12.37
DM ex-US ex-AU Equity 8.04 11.20
ALTERNATIVES
Core Real Estate 6.99 12.20
Infrastructure 8.80 16.90
Gold 4.17 16.40
Private Equity 9.57 15.42
Diversified Hedge Funds 7.20 6.20
Note: AU = Australian. DM= Developed Markets, EM = Emerging Markets, hedged means hedged in Australian dollar