BEX3131 S1 2025- ASSIGNMENT
Due date: Tuesday, 20 May 2025, 11:55 PM
Weighting: 60%
This version: modified 18 April, 2025
This is an individual assignment.
Note: The final submission should be in Word or PDF format. You also need to submit the
Excel with formulas for Question 1 and 2. If you cannot submit Excel, please state the steps
and formulas you used to work out Question 1 and 2 clearly in the Word or PDF document you
submit. 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.
The extra documents provided to work on this assignment:
1. Excel file with multiple indices for Question 2
2. Documents from Hostplus and UniSuper for Question 3
Question 1 (35 points)
You will build a strategic asset allocation consistent with your risk profile. Each of you 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 Level Student whose first name begins with the
following letters.
Very low A, B, C, D, E
Low F, G, H, I, J
Moderate K, L, M, N, O, P, Q
High R, S, T, U, V, W, X
Very high Y, Z
You are required to use this risk profile and assets from the Capital Market Assumptions
(CMAs) given in Appendix 1 to create your strategic asset allocation (SAA).
You have been assigned an investor profile that describes your risk tolerance. You must answer
the following questions based on the risk tolerance level assigned to you. Risk tolerance is
defined in terms of the maximum acceptable 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 35%
A fund manager has provided you with five different defensive/growth asset combinations
related to five different levels of risk: Conservative, Moderate, Balanced, Growth and High
Growth. The portfolios are constructed from the inputs from CMAs (asset class long-term
return and risk assumptions) in Appendix 1.
Table 2: SAA for different investor profiles
SAA Portfolio
Volatility
Global Equity Global Bond Alternative Cash
Hedged* Investments
Portfolio 1 – Conservative
14% 43% 8% 35% 3.27%
Portfolio 2 – Moderate
29% 38% 15% 18% 4.98%
Portfolio 3 – Balanced
41% 36% 17% 6% 6.38%
Portfolio 4 – Growth
65% 12% 20% 3% 9.10%
Portfolio 5 – High growth
78% 2% 18% 2% 10.57%
*Hedged means hedged in Australian dollars.
a) Based on your allocated risk tolerance from Table 1, choose the fund manager’s
portfolio that fits your assigned risk profile. To calculate the maximum drawdown of a
portfolio, use this rule of thumb: Maximum drawdown = 3xVolatility. The volatility of
the portfolios is provided in Table 2. Please mention your risk tolerance level when you
answer this question. Explain why you selected this portfolio (i.e. how the chosen
portfolio is consistent with your risk profile and others are not). (2 points)
b) Use these CMAs in Appendix 1 and Carver’s method to create your own SAA.
Prepare a table like Table 3 with asset classes on the columns and the cash weight of
each asset class in rows to show your final constructed portfolio.
Follow these rules while creating your portfolio.
i) Keep the cash allocation as it is in the portfolio suggested by your fund manager.
ii) Keep the total allocation to Equity, Alternatives and Fixed Income as they are in
the portfolio suggested by your fund manager. For example, if you selected the
conservative portfolio, your allocation to Equity, Alternatives, and Fixed Income
should be kept at 14%, 8% and 43%, respectively.
iii) Use Carver’s method to allocate within Equity, Alternatives and Fixed Income.
For example, if you selected the Conservative portfolio in part (a) then 14% of
your portfolio should be allocated between AU Equity, DM ex-AU equity and EM
equity using Carver’s method. And will do the same for Alternatives and Fixed
Income assets.
iv) There are several ways to break down your portfolio within Equity and Fixed
income using Carver’s top-down approach. For example, you can allocate within
equity using a one-step breakdown or a two-step breakdown.
v) If you are using the 'one-step breakdown', you need to allocate your equity
portfolio between AU Equity, DM ex-AU Equity and EM Equity in one step. You
allocate among the five asset classes (AU Govt Bonds, AU Corp Bonds and AU
Inflation Linked Bonds, Global ex-AU Govt Bonds and Global ex-AU Corp
Bonds) within Fixed Income in one step. Similarly, for alternative investments,
you allocate between private equity, property, and infrastructure in one step.
If you are using the ‘two-step breakdown', you need first to allocate the Equity
part of your portfolio between DM Equity and EM Equity. Then, in the next step,
allocate the DM Equity between AU Equity and DM ex-AU Equity. Similarly, for
Fixed Income, in the first step, you first allocate between AU Fixed Income and
Global ex-AU Fixed Income. Then, in the second step, allocate within AU-Fixed
Income (AU Govt Bonds, AU Corp Bonds and AU Inflation Linked Bonds) and
within Global ex-AU Fixed Income (Global ex-AU Govt Bonds and Global ex-
AU Corp Bonds). For alternative investments, since there is no more than one
breakdown, you can use the ‘one-step breakdown’ results here.
Please show the SAA using either the one-step breakdown or the two-step
breakdown. Explain why you prefer the method you used. (2 points)
You need to show the details of the steps, formulas and how you work out the
allocations of your SAA. You need to submit Excel files. Please ensure that numbers
are linked with each other by formula, not just entering the final calculation outputs in
Excel. If you cannot submit Excel, please state the steps and formulas you used to work
out the weights clearly in the Word or PDF document you submit. (10 points)
Table 3: SAA
Final Cash
Cash Weight
Weight
AU Equity
Developed Market (DM)
Global Equity ex-AU Equity
Emerging Market (EM)
Asset class Equity
Private Equity
Alternatives Property
Infrastructure
AU Govt Bonds
AU Inflation-linked Bonds
AU Corp Bonds
Global Bond
Hedged Global ex-AU Govt Bonds
(Hedged)
Global ex-AU Corp Bonds
(Hedged)
Cash AU Cash
c) Carver’s top-down approach used only the volatility information in constructing the
SAA. However, expected returns are also important for building a portfolio.
1) From the CMAs in Appendix 1, estimate the risk-adjusted return (Sharpe Ratio) of
each asset class in your SAA. (3 points)
2) 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 SAA, and you decide to
increase the weight to 10%, that will be an example of overweighting that asset class).
Show your tilted weights in Table 4. (2 points)
3) Explain why you have tilted (or have not tilted) the weights from your SAA. (2 points)
Table 4. SAA with adjustments
Risk- Titled
Final Cash
Cash Weight adjusted Cash
Weight
Return Weight
AU Equity
Developed Market
Global Equity (DM) ex-AU Equity
Emerging Market
(EM) Equity
Private Equity
Asset
class Alternatives Property
Infrastructure
AU Govt Bonds
Global Bond AU Inflation-linked
Hedged Bonds
AU Corp Bonds
Global ex-AU Govt
Bonds (Hedged)
Global ex-AU Corp
Bonds (Hedged)
Cash AU Cash
d) Which specific asset classes in your portfolio are most likely to benefit from a high
inflation environment, and why? How would you adjust your allocation to protect real
returns if inflation remains persistently above target levels? (2 points)
e) How would your SAA change if interest rates were expected to drop sharply over the
next 12 months? Which asset classes might you reduce exposure to, and which might
you favour? Explain your reasoning. (2 points)
f) Behavioural research suggests that investors often chase past performance. How might
this behaviour impact the effectiveness of your long-term SAA? What strategies could
you implement to counteract this bias? (2 points)
g) Imagine you experienced unexpected financial events (e.g., inheritance, major
expense). How would you incorporate this change into your asset allocation? (2 points)
h) Suppose within your equity portfolio, the price of AU Equity increased by 50% and
that of DM Equity fell by 50% and the price of EM Equity remained unchanged. How
will you rebalance your Global Equity portfolio? (2 points)
i) If a prolonged bear market causes a sustained decline in portfolio value, how might loss
aversion bias influence your actions? What rational strategies should an investor with
your risk profile follow in such a scenario? (2 points)
j) How would your asset allocation strategy change if you were five years away from
retirement instead of your current age? (2 points)
Question 2 (10 points)
You are provided a set of quarterly values of several indices between their inception dates
and the latest quarter data available (attached). The Indices are
• SPDAUDP Index: S&P 500 Dividend Aristocrats Price Index
• SPDAUDT Index: S&P 500 Dividend Aristocrats Total Return Index
• SPX Index: S&P 500 Index
• SPXT Index: S&P 500 Total Return Index
Further information about the indices is available here:
https://www.spglobal.com/spdji/en/indices/dividends-factors/sp-500-dividend-
aristocrats/#overview
https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview
a) Please calculate the annualised return of these indices over (4 points):
i. their full data period
ii. the last 20 years
iii. the last 10 years, and
iv. the last 5 years
b) Based on the results in (a), please comment on the performance of the dividend
investment strategy using the S&P 500 Dividend Aristocrats Index versus the overall
S&P500 Index (3 points)
c) What could explain the difference in performance that you observe? (3 points)
Question 3 (15 points)
Students will assume the role of a financial advisor and recommend investment options to a
client assigned to you. 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 on is based on a client's
maximum acceptable loss and the expected maximum drawdown from growth assets. You use
these figures to estimate the maximum percentage of the portfolio that should be allocated to
growth assets. Your client has a balance of $50,000. The expected maximum drawdown of
the growth assets is assumed to be 40%.
The maximum acceptable loss of your client is based on the following table:
Maximum acceptable loss ($) Students whose last name begins with the
following letters
9,000 A, B, C, D, E, F
11,000 G, H, I, J
13,000 K, L
15,000 M, N, O, P, Q, R
17,000 S, T, U, V, W
19,000 X, Y, Z
Read the Member Guide from Hostplus and Unisuper How We Invest Your Money and
Unisuper Fees and Costs (also attached) to answer the following questions.
a) Which of the Core options would you recommend from Hostplus? Why? (3 points)
b) Which of the Pre-Mixed options would you recommend from UniSuper? Why? (3
points)
c) You want to evaluate the options you recommended for your client from a) and b).
Which of the super funds would you choose solely based on costs and fees? Show the
calculation of the costs and fees. (3 points)
d) What, in your opinion, can explain the difference in fees and costs charged by these
two super funds? (2 points)
e) Based on the past performance of Hostplus and Unisuper, which one of these two
options would you recommend for your client? Explain your recommendation. (4
points)
Appendix 1: Asset class long-term return and risk assumptions
Nominal Returns Nominal Volatility
Asset Classes
(AUD) (AUD)
Equity
Global Equity 8.4% 13.37%
Developed Markets (DM) Equity 7.65% 12.51%
AU Equity 6.09% 14.43%
Developed Markets (DM) ex-AU
7.30% 12.04%
Equity
Emerging Markets (EM) Equity 10.45% 15.71%
Alternatives
Alternatives 10.10% 17.35%
Infrastructure 10.30% 17.16%
Private Equity 10.20% 19.55%
Property 8.50% 13.82%
Fixed
Global Bonds Hedged 4.95% 7.10%
Income
AU Fixed Income 4.55% 5.60%
AU Govt Bonds 4.52% 4.96%
AU Inflation-Linked Bonds 4.70% 3.36%
AU Corp Bonds 4.65% 8.10%
Global ex AU Fixed Income
5.10% 8.50%
(Hedged)
Global ex-AU Govt Bonds
4.20% 3.97%
(Hedged)
Global ex-AU Corp Bonds
6.50% 9.08%
(Hedged)
Cash
AU Cash 3.40% 1.72%
