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FINC6001 – Finance: Theory to Applications

Semester 1, 2023

Video Presentation – 20% of overall grade

Due date: 28 May 2023 at 23:59

Brief

Suppose that the Codrington Hedge Fund was commissioned by the University of Sydney to invest $A500,000. The fund began operations as of 1 July 2022.  The mandate of the fund was to, with respect to equities; invest only in the largest 200 companies listed on the Australian Securities Exchange. As a not-for-profit institution, The University of Sydney does not pay tax and may access imputation tax credits. Consideration was to be given to the dividend payout ratios of companies, and whether those dividends are franked or unfranked. As the funds are endowment funds, the objective is to beat the market but without taking higher risk.

A percentage of the asset allocation was to be placed in 10-year Australian Government bonds, and the return on the 10-year Australian Government bond rate is deemed the benchmark or required return on that part of the portfolio.

The benchmark portfolio to assess the performance of this fund comprised an 86.2 percent investment in Australian equities in the ASX200 index and a 13.8 percent investment in 10-year Australian Government bonds.

A complete portfolio was constructed, comprising 90 percent investment in equities and 10 percent in 10-year Australian Government bonds. The investment in equities was constructed as shown in the following table. Stocks were purchased at closing prices on 30 June 2022 overnight to start operating the next day.

Task 1

Provide a report on the Fund Management Committee on the performance of this fund as of 30 April 2023.

What is the performance of selected securities compared to the performance of the market index?

Use the Sharpe Ratio, the M2 measure, Treynor’s measure and Jensen’s alpha to assess the performance of the equity component of the fund.

Task 2

The University of Sydney will continue to invest and run the fund for 2023-2024. Suppose that the fund is to begin a new portfolio as of 1 July 2023.

You need to propose an investment portfolio which has a mix of bonds and equities. The asset allocations of bonds and equites can change from the existing 10% bond and 90% equities portfolio. The percentage of the asset allocation that you place in cash, or 10-year Australian government bonds will be managed by an investment bank and the return on this investment will be deemed the benchmark or required return on that part of the portfolio.

You need to determine the asset allocation decision and the securities selection decision using equities in the ASX200 universe While the costs of trading will be met by an investment bank by way of in-kind donation to the University, you need to determine how many stocks to hold by keeping in mind the benefits of additional diversification by holding more stocks against the monitoring and record keeping costs of holding additional stocks.

The report to the Fund Management Committee should include the following information:

1. Justification for and reasoning behind the overall asset allocation decision on stocks and bonds. Your group can determine the optimal weights for bonds and equities. You can use financial databases or the RBA/ABS/ASX website for historical data on bonds and equities.

2. Justification for and reasoning behind the inclusion of stocks in the equity portfolio. Discuss the total number of stocks and why they are included.

3. Justification for and weighting of each of these stocks in the equity portfolio. Provide an optimal weighting for the stocks included in the portfolio.

4. Recommendation as to the optimal method to evaluate the performance of the complete portfolio. Discuss how the objective of the portfolio should be considered.

Deliverable

The following structure is suggested to be followed for the presentation:

The video presentation (including the slides) should be submitted by 11:59pm (Sydney time) on Sunday 28^th May 2023

Tips

- Do not read from the slides and do not read from a script since both compromise the flow of the presentation.

- Use animations and introduce picture/statements sequentially as you explain them.

- Aim for a presentation that is simple and objective rather than one overly complex and with too many details.

- Think of three messages that you want the audience to remember after the presentation and concentrate on them.

Video Submissions

Submission links will be provided on Canvas for your video file and Powerpoint presentation slides (as a .pptx file). Only one member (the group’s designated member) should submit the relevant files on behalf of the whole group. Consistent with Business School practice, a late submission penalty will be applied if your submission is not received by the announced due date/time.

Marking Guide

The marking guide is as follows:

Evaluation of existing portfolio 6 marks

Justification of asset allocation 2 marks

Justification of equity selection 3 marks

Justification of equity weights 5 marks

Conclusion and recommendation 2 marks

Presentation and style 2 marks

TOTAL MARKS 20 marks