You are holding a traditional 60-40 portfolio in stocks and bonds for the last five years. Specifically,  you have been holding the ASX200 index portfolio and the aggregate Australian bond portfolio. The  index levels to these two asset classes are tabulated in Spreadsheet named 'FIN30020 Index or Price  for various asset classes'. After learning that alternative investments could potentially enhance the  risk-return trade-off of your portfolio, you have decided to consider the following international equities and alternative asset classes to be added to your current 60-40 portfolio:
1) S&P 500 
2) S&P/ASX A-REIT 100 
3) Bitcoin (relative to USD) 
4) Gold 
5) Foreign exchange - AUD/USD 
The indices or prices for these asset classes are available from the same Excel File. They are 
downloaded from publicly available websites such as Yahoo Finance and S&P Global. You are investing 
for yourself so consider your own return objectives, risk appetite, and unique circumstances when 
formulating the asset allocation. 

Requirements: 
1) Calculate the average return and standard deviation of your 60-40 portfolio over the last five  years from the start of 2016 to the end of 2020. Note that you are provided with index levels or prices so you will have to calculate returns for these asset classes. Provide brief  commentary on the historical performance.  
2) Calculate the average return and standard deviations of the above five  international/alternative investments over the same period. Estimate the correlations of the  above five international/alternative investments with your portfolio. Briefly explain what your findings are.
3) Based on your return, standard deviation, and correlation analysis and considering your own  return & risk preferences and unique circumstances, how would you adjust your 60-40 portfolio and incorporate these alternative investments into your portfolio? Propose a new
asset allocation with specific weights to the asset classes you want to invest in.
4) Based on your adjusted portfolio now with the inclusion of one or more alternative  investments above, perform backtesting and calculate the average return and standard deviation if you had held the adjusted portfolio for the last five years. Is the adjusted portfolio
superior in terms of its risk and return tradeoff?
5) Justify and explain whether the historical return and standard deviation of your adjusted portfolio are likely to repeat in the future, considering qualitative and quantitative information.

 

Average daily return Daily standard deviation Annualised return Annualised standard deviation Correlations S&P ASX200 S&P Aus Aggregate Bond S&P 500 S&P ASX A-REIT 100 BTC-USD Gold AUD-USD S&P ASX200 S&P Aus Aggregate Bond S&P 500 S&P ASX A-REIT 100 BTC-USD Gold AUD-USD 0.02% 0.31% 0.05% 0.01% 0.02% 0.02% 0.06% 1.06% 0.21% 1.21% 1.45% 5.03% 112.60% 12.39% 5.90% 4.42% 3.92% 0.93% 0.61% 1.59% 23.07% 74.90% 0.79% 9.76% 16.36% 16.88% 3.35% 19.23% 100.00% -6.49% -9.24% 66.73% -1.50% -0.66% -3.40% 100.00% -0.38% 100.00% -3.41% -2.49% 6.95% 1.87% -0.17% -3.75% -3.35% 1.34% 100.00% -0.62% 100.00% -6.29% -1.14% 100.00% -0.02% 0.67% 2.32% 100.00%