BAFI3180 Alternative Securities S1 2020 Project The current asset allocation for the endowment fund of the Fantasy University is as follows: Asset Classes Weight Cash 9% Bond 70% Equity 21% The endowment fund is a perpetual fund that provides scholarships, research grants and other research support to the university. The current asset allocation is problematic. You are the newly employed portfolio manager of this fund. Recently, the university has decided to review the asset allocation of the endowment fund to see if alternative investment opportunities can be explored and non-traditional assets can be included into the portfolio. Investment Objectives and Constraints of the Fund: 1. Return target: Return should not be lower than 7% per annum. 2. Risk target: Standard deviation of the returns should be as low as possible and not be higher than 14% per annum. The fund should not have large exposure to extreme losses 3. Liquidity target: At least 70% of the funds should be invested in liquid assets . The fund should hold at least 5% of cash. 4. Other constraints: At least 50% of the funds should be invested in traditional assets, i.e. bonds, equity and cash. Short-selling is not permitted but the fund can invest in investment vehicles that short sell, for example, hedge funds. The potential alternative investment asset classes that the fund can invest are listed below: a) Direct Property b) Listed Property c) Hedge Fund d) Commodity You are expected to construct a portfolio that contains at least two alternative investment asset classes in the list above while meeting all the investment objectives and constraints. You are required to prepare a report, which should contain the following information: 1) Justifiable asset class assumptions. Specifically, you need to: estimate expected return (p.a.) and standard deviation (p.a.) for each asset class, i.e. cash, equity, bond, direct property, listed property, hedge fund, and commodity, over short term (1 year) and medium-long term (5 years) respectively. estimate the correlation matrix of the seven asset classes, i.e. cash, equity, bond, direct property, listed property, hedge funds, and commodity, over short term (1 year) and medium-long term (5 years): include all the relevant analysis and/or other supporting evidence to support your assumptions. 2) Justifiable asset class selection. Specifically, you need to: propose the asset classes to be included in the fund; explain the reasons for proposed asset class selection - why these asset classes are selected and why the other asset classes are not selected; include all the relevant analysis and/or other supporting evidence to support your asset class selection; discuss and describe the due diligence required for the selected alternative investment asset classes. 3) Justifiable asset allocation. Specifically, you need to: propose an allocation of asset classes for the fund; explain the reasons for such an asset allocation; include all the relevant analysis and/or other supporting evidence to support your asset allocation Data: Quarterly data for each asset class is contained in the Excel file BAF13180 Project Data, you can find it under Canvas-Assignments-Assessment Task 2: Project. General Instructions The project is due by 10am on Wednesday 20 May, 2020. Students are required to work in a group of two students. Each group is required to submit a project report, including all the supporting analysis and materials by the due date. The report should be no longer than 3000 words (excluding reference, tables and appendices). Citation and referencing should be provided where necessary. Students should follow the Harvard referencing style. All report submissions must be made electronically to Turnitin, accompanied by a cover sheet. The report must be using 1.5 or 2.0 spacing and 12 point Times New Roman font. Unless extension is granted, severe penalties apply for late submission (please refer to the course outline for details). Allocation of Marks The assignment accounts for 30% of students' final grade for BAFI3180 Alternative Securities. Marks will be allocated as follows: 1. Investment objectives and constraints (5%) Marks will be awarded based on how well investment objectives and constraints are embedded in analysis, discussion, arguments and viewpoints. 2. Justifiable asset class assumptions (7%) Marks will be awarded based on whether the report provides all the required assumptions for each asset class and how well assumptions are justified by analysis of historical data and other relevant factors and/or other supporting evidence. 3. Justifiable asset class selection (7%) Marks will be awarded based on: first, whether the report provides a justifiable asset class selection; second, how well the asset class selection is justified by analysis of historical data and other relevant factors and/or other supporting evidence; third, how well the report discuss and describe the due diligence required for the selected alternative investment asset classes. 4. Justifiable asset allocation (7%) Marks will be awarded based on whether the report provides a justifiable asset allocation and how well the asset allocation is justified by analysis of historical data and other relevant factors and/or other supporting evidence. 5. Communication and writing (4%) Marks will be awarded based on how well the report communicates analysis, arguments and viewpoints and how well the report is written. Students are expected to provide accurate and complete citation and referencing where necessary.