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PART A ( 3 5 points ) Question 1 ( 3 0 points ) Table 1 : Investor profile: Age Age in years The student

PART A (35 points) Question 1(30 points)
Table 1: Investor profile: Age
Age in years The student whose first name begins with the following letters
80 A, B, C, D, E, F, G
60 H, I, J, K
40 L, M, N, O, P, Q, R
30 S, T, U, V, W
20 X, Y, Z
Students are required to create their strategic asset allocation using this investor profile and the capital market assumptions given in Appendix 1.
1. Use 40 years old as an example. You have been assigned an investor profile based on your age. Based on this profile, you must answer the following questions (1(a) to 1(e)). To determine your investor profile, follow this rule: Your maximum allocation to Equity must not exceed (100- your age)%.
a) Suppose you have an asset manager who proposes the following Strategic Asset Allocation (SAA) for portfolios suitable for investors in different age groups._ Which portfolio would you choose? Why? (3 points)
____________________________________
Table 2: SAA for different investor profiles
Portfolios (SAA)
Asset class Conservative Moderate Balanced Growth High Growth
AU Equity 6%11%16%24%30%
Developed Market (DM) ex-AU Equity 5%11%22%32%39%
Emerging Market (EM) Equity 3%5%7%8%9%
Infrastructure 1%3%3%4%5%
Private Equity 2%3%5%6%6%
Private Debt 10%9%8%5%2%
AU Govt Bonds 13%10%7%4%3%
AU Inflation Linked Bonds 15%12%10%6%4%
AU Corp Bonds 8%7%5%4%0%
Global ex-AU Govt Bonds (Hedged)11%10%5%0
%0%
Global ex-AU Corp Bonds (Hedged)3%3%
4%4%0%
AU Cash 23%16%8%3%2%
_____________________________
Appendix 1: Capital Market Assumptions (10-year Annualised)
Asset Classes Nominal Returns (AUD) Nominal Volatility (AUD)
Equity Global Equity 7.10%12.15%
Developed Markets (DM) Equity 5.94%12.47%
AU Equity 8.88%13.44%
Developed Markets (DM) ex-AU Equity 6.49%11.64%
Emerging Markets (EM) Equity 10.85%14.38%
Alternatives
Infrastructure 7.80%23.90%
Private Equity 6.20%17.80%
Private Debt 5.00%15.00%
Fixed
Income Global Composite Bonds 3.04%10.33%
AU Fixed Income 4.74%3.16%
AU Govt Bonds 4.49%4.13%
AU Inflation Linked Bonds 4.45%7.21%
AU Corp Bonds 4.91%5.03%
Global ex AU Fixed Income (Hedged)2.90%12.35%
Global ex-AU Govt Bonds (Hedged)2.20%10.50%
Global ex-AU Corp Bonds (Hedged)4.20%13.30%
Cash AU Cash 4.33%7.21%
_______________________
b) You asked your investment manager to send you the Capital Market Assumptions (CMAs) they had used for these allocations. These are given in Appendix 1. Use these CMAs and Carvers top-down approach to create your own SAA. Follow these rules while creating your portfolio. (14 points)
i) Keep the cash allocation as it is.
ii) Keep the allocation to Equity, Alternatives and Fixed Income as they are in the portfolio suggested by your manager. For example, if you selected the conservative portfolio, your allocation to Equity, Alternatives, and Fixed Income should be kept at 14%,13% and 50%, respectively.
iii) Use Carvers method to allocate for allocation within Equity, Alternatives and Fixed Income. For example, if you selected the Conservative portfolio in part 1(a) then 14% of your portfolio should be allocated between AU Equity, Developed Market (DM) ex-AU Equity and Emerging
Market (EM) Equity using Carvers method. And will do the same for Alternatives and Fixed Income assets.
There are several ways to distribute your portfolio within Equity and Fixed income. For example, you can allocate within equity in two steps or in one step. Please show the SAA using both the one- step and two-step processes.
c) Which one of the two SAAs you created in 1(b) following the one-step and two-step Carvers Topdown approaches will you choose? Explain. (3 points)
d) Compare the expected rate of returns of the portfolios suggested by your investment manager and the one you created. Which one would you prefer? Why? (4 points)
e) From the table below, estimate the Sharpe Ratio of the portfolio created by the Carver method and your investment manager. Which portfolio would you choose? Explain your selection. For portfolio returns in columns (2),(4) and (6) of Table 3, use your estimates from the previous question. (4 points)
_
Table 3: Performance ofthe portfolos
Portfolios Returns
(Manager) Volatility (Manager) Returns (Carver one-step method) Volatility
(Carver onestep method) Returns (Carver two-step method) Volatility (Carver two-step method)
(1)(2)(3)(4)(5)(6)(7)
Conservative 5.81%5.60%5.58%
Moderate 6.
_
f) Will you change your allocation if you have twice the amount of wealth you have now? (2 points)

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