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ANU Research School of Finance, Actuarial Studies and Statistics
FINM 3008/6016 Portfolio Construction
Assignment
General Instructions and Information
1. The assignment involves producing a report that offers portfolio construction advice
for a client based on specified circumstances and objectives. The assignment is to be
undertaken in groups of 4 to 6 students. All students must sign up for an assignment
group on Canvas by week 5. If you have to do the assignment as an individual task,
you need the lecturer’s approval to do so.
2. Assignment Summary
Due Date Wednesday October 15th, 2025, before 11:59 pm
Weighting (%) 30% of course grade
Objectives • Build and submit quantitative/qualitative analysis models that are
appropriate for the client’s circumstances
• The models should be built based on client’s objectives and
constraints and be able to produce a matrix of portfolio measures
for further analysis
• Conduct analysis of asset allocation problem based on client’s
objectives and constraints
• Research potential aspects that the client is concerned about
• Write-up the portfolio construction advice and your analysis in a
report format
Marking Marking criteria are attached at the end.
Required Sub- missions
File 1: Final report in either Word or PDF format
File 2: Quantitative/qualitative analysis model(s) in Excel format
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Submission Re- quirements
1. Online submission at Canvas. No hard copy or email submission is
accepted. Only one submission from each group is required.
2. Upload your files in Excel, Word or PDF format. Double check your
files when submitting them, make sure they can be opened in a
Windows-based operating system. When you submit Excel file,
if possible, submit a Windows based Excel file instead of a Mac
version.
3. You must click “submit” to finalize the submission. No changes can
be made after submission. The submission link can only be re- opened by the lecturer manually if you’d like to make changes
to your submitted files.
4. The usual assignment cover is not required for online submissions.
5. To correctly record your assignment marks, make sure you have
correctly signed up for an assignment group at Canvas, even if you
are working by yourself.
6. All files submitted to be named as follows:
FINM(course code) Group (Number) - (description)
Example 1: FINM3008 Group 1 - Model.xlsx
FINM3008 Group 1 - Report.docx
The maximum size of each file is 50MB.
Penalties and Extensions:
Late submissions of assignments are not accepted. Students will receive a mark of zero for the
assignment if it is submitted after the due date without the lecturer’s approval.
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Guidelines
1. The assignment should be written as a ‘business report’ by a consultant for their client.
It should be easily readable with most important messages upfront. The articles written
by industry practitioners and journalists provided in this course can be good guides to
writing in the portfolio construction context, for instance, their writing style, word
choice, “story-telling” and the way of using jargons that are easily understood by
readers with common-sense knowledge of the economy and financial market, etc.
2. The word limit for report is 3,000 words, which refers to the text contained in the body
and appendix (if there’s important analysis to support your recommendation in the
appendix). It excludes title or contents page, tables, and any notes to tables that
describe the analysis or assumptions, figures, references. This word limit is “soft” in
nature. You won’t get penalty if you get over the limit with a small margin (i.e., within
10%). The message is that the word limit imposed should be sufficient for the
assignment. “Trimming” and “cutting” are part of the exercise that you have to do to
deliver your insights to your client within a page limit in business writing. In practice,
your clients are busy. It is always best if you can deliver your main messages within a
short period of time. If your report exceeds the limit by more than 10%, you might lose
marks in the presentation and formatting category.
3. Ideally the report should be ‘standalone’ for your client to understand the analysis and
the reasoning behind your recommendation. You should aim for the examiner not to
need to look at the Excel file to understand your report. Note: this doesn’t mean that
your examiner does not look at your Excel file. If the examiner needs to dig into the
models to understand your analysis, it will mean that the analysis is either poorly set
out, inadequately explained, or looks like it may be wrong.
4. Marks for ‘effectiveness of communication’ will reflect not only the appearance of the
report, but also the general ease with which the report can be read and the analysis
and messages can be understood. Try to use generous font sizes, ample paragraph
spacing and borders. Make sure that tables and charts are formatted and labelled well.
Make sure your sentences are coherent, and arguments are sound. If the examiner is
left wondering about your main messages or what you have done, you will lose marks.
5. All sources should be acknowledged with proper references. Consistent Harvard
referencing style is required. The standard for proper referencing is that a third person
can replicate your analysis, if needed. You should not use any artificial intelligence
tools (e.g., ChatGPT) to write the report.
6. In the second task of this assignment, each member of the group is expected to take
the lead in providing an expected return forecast for at least one asset class. Make
sure you clearly indicate which member is responsible for an asset class. If an asset’s
expected return is forecasted by all team members, then label it as Team. A table like
the following should be included in the report:
Asset class Expected return Forecast provided by Australian equities x% above cash rate John Doe (Uni. ID) World equities y% above cash rate Jane Doe (Uni. ID) Australian cash z% Team … … … Page 4
THE ASSIGNMENT
Happicity Pension Plan Investment Board (HPPIB) is a defined contribution superannuation
fund for Happicity public sector employees with an AUM of $3 billion. HPPIB investment team is
headed by the CIO (Chief Investment Officer), Sarah Connor, who is in charge of the day-to-day
operations of the fund. Every five years, Sarah submits a Strategic Investment Plan (SIP) to the
board of trustees of HPPIB for approval. The most important purpose of the plan is to decide the
asset allocation of HPPIB for the next five years. This year, Sarah needs to prepare a new SIP
for the next five-year period. She has asked you, a team of asset allocation experts, to prepare
a report to help her draft the plan.
HPPIB has reached a mature stage with each year’s contributions to the plan approximately the
same as its outflows. The investors of HPPIB are Happicity public sector employees, who have
relatively stable income. For performance evaluation purposes, the board of HPPIB has elected
a benchmark portfolio, which is the average portfolio of similar pension funds. The board
assumes that the benchmark portfolio invests in each asset class passively, except for asset
classes without any passive investment option.
HPPIB currently invests in Australian Equities, World Equities, Fixed Income, Real Estate and
Cash. Details about the current asset allocation have been provided to you. Sarah also provides
you the schedule of asset management fees that HPPIB would pay for each type of investment
(the same fee schedule applies to the benchmark).
Through the initial meeting with the CIO, you come to understand that in the report, you need to
address the following issues:
• Provide an independent assessment of HPPIB’s investment performance over the period of
June 2020 to June 2025. Sarah also asks you to evaluate the performance of the fund over
longer horizons, such as over the past 10, 15, or 20 years, to determine whether the fund’s
performance is improving over time. The asset allocation over the past 20 years has
remained the same. In this exercise, assume that the fund’s portfolio is rebalanced monthly
and rebalancing does not incur transaction costs.
• Determine a new strategic asset allocation for the next five-year period with a more efficient
risk-return trade-off so that the fund is better positioned to achieve its mission and
performance objectives. Sarah would like you to provide an overview of the characteristics
of each recommended asset class and explain how they might contribute to the portfolio
return and risk considering the specified objectives and constraints. She also asks you to
provide a detailed forecast of the expected return of each asset class in the next five years
and document the reasons behind your forecast. In constructing the portfolio, practical
issues should be adequately addressed, for example, the availability of some investments,
liquidity considerations, and asset management fees.
• Consider a 25-year-old public sector employee who is a member of HPPIB and expects to
work for another 40 years before retirement. Her pre-tax salary is $100,000 per year and
post-tax salary is $80,000 per year (assume the employee pays a constant 20% income tax
rate and her salary grows with inflation). Her employer contributes additional amounts of
money as a fraction of her pre-tax salary to her superannuation account at HPPIB. What
fraction of this employee’s pre-tax salary should be contributed to her superannuation
account such that the pay-out from her superannuation account after she retires is expected
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to be at least 60% of her (after-tax) income before retirement (so that this employee can
maintain a reasonable standard of living after retirement). What is the standard deviation of
her payout at retirement? What is the probability that the pay-out of her superannuation
account is less than 40% of her income? To answer these questions, you can assume:
• There is a 15% tax on the contribution to superannuation accounts, e.g., if the
employer contributes $10,000, only $8,500 goes towards the employee’s account.
• The pay-out rate at retirement is 5%, e.g. if the superannuation account has
$1,000,000 in assets at retirement, the employee receives $50,000 per year after
retirement
• There is no capital gains tax in the superannuation account.
When Sarah submits the SIP to the board for approval, HPPIB board members, consisting of
business executives of large companies and top-level public officers, always ask tough
questions to challenge the proposal. Therefore, Sarah asks that you support your
recommendations with numerical analysis detailing what outcomes they might expect from the
new portfolio and supplement numerical analysis with qualitative discussions or robustness
checks to add confidence to your recommendations. She also requires that you provide
additional explanations for any significant change in asset allocation relative to the current
allocation or the benchmark.
Sarah has specified the objectives and constraints of the fund as follows and asks you to
demonstrate that your recommendations meet these objectives and constraints as much as
possible:
(a) Five-year outcome: she wants the fund to generate the highest Sharpe ratio possible in five
years subject to return and risk constraints. She considers the fund’s investment horizon as
long-term and that focusing on the end-result would most benefit its members.
(b) Absolute return target: she requires that the portfolio generates an annualized return at
least 3% above the expected inflation. The RBA has a long-term inflation target band
between 2 to 3%. You need to make your own assumptions about the inflation rate over the
next five years.
(c) Not losing money: she wants to limit the chance of the portfolio declining in value over 5
years (i.e., generating negative compound returns) to no more than 20%.
(d) Relative performance: she asks that the annualized tracking error of the fund versus the
benchmark to be no greater than 2%.
(e) Portfolio constraints: she asks that the allocation to equities, including all types of public
equities, should be within 15% range of the benchmark allocation. In order to maintain
flexibility, she asks that no more than 20% of the portfolio be invested in illiquid assets, and
that at least 2% of the portfolio remains invested in cash. No borrowing or short sales are
permitted.
Sarah has provided information to assist you in the Excel file: “Assignment Data S2 2025”. This
file includes: the current portfolio weights of the fund; portfolio weights of the benchmark;
historical levels of indexes for different asset classes of potential interest; and indicative
management fees for the fund. If you choose to include additional asset classes that are not
covered by the data file, you should find the most reliable data to support your recommendation.
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Following is the HPPIB Fact Sheet
Happicity Pension Plan Investment Board Fact Sheet
Mission Help members accumulate wealth during their work life
Performance
Objective
To achieve returns at least 3% above inflation (CPI) per annum over long
term (after investment-related expenses).
Investment
Strategy
To invest in a diversified portfolio of mainly growth assets, such as Australian
shares, international shares, properties, and some fixed income, alternative
assets, and cash.
Investment
Horizon
Long term, more than 10 years
Current Asset
Allocation
Asset Class
Performance
Benchmarks
Australian Shares: ASX All Ordinaries;
International Shares: MSCI World Index; MSCI EM
Fixed Income and Cash: Bloomberg Ausbond Composite; ASX Bank Bill
Property: S&P Global REIT; Australia Residential Property Prices
Commodities: S&P GSCI
Hedge fund and private equities: Proprietary
Historical
Performance
The performance of each asset class tracks their passive benchmark closely
over long term before fees (Therefore, the returns of the benchmarks can be
used as proxies to calculate the fund returns before fees).
Australian
shares, 40% International
shares, 20% Fixed income &
cash, 30% Property, 10% ASSET ALLOCATION AS OF LATEST MONTH END Page 7
Guidance
Workshops
• Assignment workshops will be held throughout the semester.
• Please email me your questions regarding the assignment if you have any. I will collect
the questions and answer them at workshops. In this way, I can avoid answering the
same question redundantly.
• Please note you are expected to have reviewed all lecture, tutorial, and workshop
materials and listened to all recordings before you come to consultations.
Some Helpful Hints
• Tutorials provide the foundation to conduct quantitative portfolio analysis in Excel. It’s
essential that you understand the concepts behind the numerical analysis of the first four
tutorials to start working on your assignment. Some specific issues discussed/analyzed
in tutorials are:
o Tutorial #2 – bootstrapping of future returns for a given portfolio - data-based is
performed, but parametric is shown (latter is mean-variance, iid); estimation of
various risk measures
o Tutorial #3 – M-V optimisation; solver; imposing expected returns on historical
data by adjusting the geometric mean (more relevant for generating target
returns over multiple periods)
o Tutorial #4 – choosing what data to use - measurement interval and time period
o Tutorial #5 – estimating the impact of asset allocation shifts on portfolio
measures; imposing expected returns on historical data by adjusting the
arithmetic mean using implied views (CAPM); parametric portfolio analysis
(mean-variance, single period)
o Tutorial #6 – estimating the impact of tilting strategy on portfolio measures;
calculation of 1-year and 3-year (rolling) returns using shorter interval data
• This assignment requires a fairly good understanding of the topics we discuss over the
semester and synthesizing the learnt theories and applications in solving a real-world
problem. The assessment focuses on how well you customize the portfolio to serve
specific objectives and constraints of investors, which demonstrates the depth of your
understanding of the concepts covered in the course. The assignment is not assessed
based on how close your recommendation is to a “correct” set of asset allocation or how
well your recommended portfolio can hit the performance “target”. The detailed
requirements are set out in the Marking Guidelines at the end of the file.
• Fund objectives may be taken as targets, not hard constraints. Working towards the
intent of the stated objectives matters more than precisely meeting any stated rules.
That is, do not panic if you cannot hit the objectives exactly under your assumptions –
just do the best that you can for your client.
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• You should consider using multiple methods to construct optimal portfolios, because
every method has its limitation and adopt multiple methods can improve the robustness
of your result. Methods that we have discussed include, but not limited to, imposing
weighting constraints, imposing tracking error constraints, Black and Litterman
approach, in-sample and out-of-sample analysis, fundamental risk approach, two stage
approach. You may choose any methods that are appropriate for the client’s
circumstances. In any event, you are required to perform some data-based work to
demonstrate the extent to which the recommended asset allocation meets client
objectives. This analysis will follow on from the tutorial exercises.
• One of the themes of this course relates to problems that can arise when analyzing data.
You are expected to show appreciation for these issues in the way you perform your
analysis and present your recommendations. This means trying to highlight the
shortcomings of any analysis and address them where possible. Non-data-based
approaches may assist in this respect.
• You may recommend adding any additional asset classes – whatever you believe would
work best for your clients. If you use additional data other than the data provided, you
need to make sure you retrieve the data from a reliable and verifiable source and
relevant information is provided in an appropriate manner.
• You should always try to do your own research and look for the data you require for your
analysis. Yahoo Finance is a good data source to look for historical returns of various
indexes. You may find all Australian statistics at https://www.abs.gov.au/ or financial
market data at https://www.rba.gov.au/. Australian Prudential Regulation Authority
(APRA) is the government body to regulate superannuation industry. Other good
sources of country or international data can be found at Federal Reserve of the US
(https://fred.stlouisfed.org/), OECD, IMF and World Bank, mostly free access. Make sure
you reference your data source properly such that it can be independently verified.
• The report should be read as an integrated piece, not a collection of disparate individual
work. Hence, it will help to have one person in charge of the project management, and
all members should meet regularly, and conduct an overall review of the report at the
end – allowing ample time to sort out any issues.
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Assignment Marking Sheet
Group Number:
Marking Criteria
50-59 pass, 60-69 credit, 70-79 distinction, 80 and above HD
Grade
Weight Mark
1. Assessment of fund performance:
- Effectively assess, summarize, and explain fund performance
- Identify areas of strength and areas that need improvement
- Comment on the long-term performance of the fund
10%
2. Asset allocation recommendations:
- Display a good understanding of each asset class
- Clearly state how expected returns are forecasted
- Consider the client’s objectives and constraints
- Apply various methods learned from the course
- Highlight the limitations of the methods used and find appropriate
solutions
- Convincingly demonstrate that the report’s recommendation is the
best option for the client
40%
3. An analysis of an employee retirement plan
- Have sensible estimates of the required rate of contribution to
achieve the retirement target
- Analyze the risk of not meeting the target and the volatility of future
outcomes
- Recommend potential ways to mitigate the downside risks
20%
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4. Effectiveness of communication:
- Summarize the main recommendations and findings in the execu- tive summary
- Report is logically structured and easy to read with clear sub-titles
- Good overall presentation, adequate font sizes, page numbers, ef- fective use of tables and charts, correct spelling, and grammar,
etc.
- Complete reference list with sources acknowledged in the text
- Satisfy submission requirements
30%
Total Mark
Marker’s comments:
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