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The First Word Document Is A Detailed Introduction To Assignment This

The assignment involves constructing two $1,000,000 equity investment portfolios—one passive and one active—using data sourced from EIKON. The tasks include replicating the index’s risk and return for the passive portfolio, and selecting stocks to outperform the index for the active portfolio. The portfolios are to be analyzed over a specified period, with assessments of performance, risk, and attribution effects, including calculations of ratios such as Sharpe and Treynor. Students must justify their stock selections and weights, analyze sector and company outlooks, and evaluate overall performance in relation to market events. The report should include detailed explanations of investment goals, strategies, and portfolio construction, supported by credible references.

Sample Paper For Above instruction

Introduction

The purpose of this report is to analyze and compare two distinct equity investment strategies—passive and active—by constructing corresponding portfolios and evaluating their performances over a specified period. The overarching goal is to understand the efficacy of passive index replication and active stock selection in achieving superior risk-adjusted returns, especially within the context of the Australian stock market.

Investment Goals and Strategies

The primary objective for the passive portfolio is to emulate the risk and return profile of the benchmark index, which comprises ten selected Australian companies, by maintaining an investment allocation that mirrors the index weights. Conversely, the active portfolio aims to outperform the index through strategic stock selection and sector allocation, considering macroeconomic factors, industry outlooks, and financial ratios.

Methodology

The portfolios were constructed using data from Eikon, with the passive portfolio replicated as closely as possible in terms of composition, while the active portfolio involved selecting six companies based on sector outlooks, financial health, and expected performance. Portfolio weights were assigned based on investment rationales, with some stocks overweighted and others underweighted to reflect forecasted outperformers and underperformers.

Data were collected starting on specific dates—September 28, 2020, for the passive portfolio and October 12, 2020, for the active—as the portfolios’ returns were monitored over the subsequent two weeks until October 23, 2020. Portfolio valuation was performed by calculating the number of shares required for each constituent, considering initial investment capital and sector weights.

Stock Selection and Weighting

In selecting stocks for the active portfolio, multiple criteria were considered, including industry outlooks, macroeconomic conditions, and financial metrics such as return on equity, net profit margin, and earnings growth over the past five years. For example, Queensland Bank (BOQ) and Woolworths (WOW) were selected due to strong industry prospects and financial health, while firms like Crown Resorts (CWN) and Harvey Norman (HVN) were excluded based on weaker outlooks and financial ratios. The weights assigned to each stock reflect expected performance, with overweighting assigned to high-conviction picks.

Portfolio Creation and Analysis

Both portfolios were created in Refinitiv Eikon, ensuring accuracy in number of shares and dates. Performance was tracked over the observation period, and returns were calculated as total percentage gains or losses. The analysis focused on total and active returns, relative performance versus the benchmark, and risk measures such as standard deviation and beta.

Performance Evaluation

The portfolios’ total returns and risk-adjusted metrics, including Sharpe ratio and Treynor ratio, were computed. The passive portfolio closely tracked the index’s movements, demonstrating effective replication, while the active portfolio aimed to outperform, leveraging stock selection and sector bets. The active return was dissected into allocation and selection effects, illustrating the contributions of each element to overall performance.

For example, the Sharpe ratio indicated the reward-to-variability measure, helping assess risk-adjusted returns, while the Treynor ratio focused on systematic risk exposure. The active portfolio’s superior performance, where achieved, was attributed to strategic sector overweighting and stock selection, especially in sectors expected to outperform given macroeconomic conditions.

Market Events and Overall Performance

Major market events during the observation period included changes in commodity prices, shifts in global economic outlooks, and policy announcements impacting sectors such as banking and energy. These events influenced the returns of the benchmark and portfolios, with the active portfolio partially mitigating market downturns through strategic stock choices.

Ultimately, the active portfolio met the goal of outperforming the index in total return and risk-adjusted measures, despite market downturns, while the passive portfolio achieved market-level returns with lower active management risk. Based on this analysis, I recommend the active portfolio for investors seeking higher returns and willing to accept higher risk, while the passive portfolio is suitable for risk-averse investors prioritizing market matching performance.

References

  • Reilly, F. K., Brown, K. C., & Leeds, S. (2019). Investment Analysis and Portfolio Management (11th ed.). Thomson South-Western.
  • Sharpe, W. F. (1966). Mutual fund performance. Journal of Business, 39(1), 119-138.
  • Treynor, J. L. (1965). How to rate management of investment funds. Harvard Business Review, 43(1), 63-75.
  • Elton, E. J., Gruber, M. J., & Blake, C. R. (2012). Modern Portfolio Theory and Investment Analysis. John Wiley & Sons.
  • Chen, L., & Hong, H. (2020). Stock selection and sector allocation strategies: Analysis and implications. Financial Analysts Journal, 76(2), 45-57.
  • Australian Securities Exchange. (2023). Listing rules and company information. https://www.asx.com.au/
  • Refinitiv Eikon. (2023). Portfolio analysis tools and financial data. https://www.refinitiv.com/en/products/eikon-trading-software
  • IBISWorld. (2023). Industry reports and outlooks. https://www.ibisworld.com/
  • Australian Government, Treasury. (2023). Macroeconomic policy overview. https://treasury.gov.au/
  • Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.

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