Investment Risk and Return Objectives & Anne Marie Case Study – Accounting & Finance Assignment Help

Assignment Task


Assignment Brief
Anne Marie has received $500,000 in inheritance and would like to setup a charity (in perpetuity) to help the disadvantaged families by providing 3 scholarships each year for three deserving high school students. The charity is estimated to cost $6000 for each student each year of charity and will increase with inflation. Anne also wishes that the charity fund should grow in real terms at the rate of 2% per annum and does not expect any further contributions. She estimates that portfolio managers charge 0.5% per annum to manage such an investment scheme. Anne has been provided with two pieces of advice: (i) the charity requires a growth strategy and she should choose a 40:60 (Bonds:Equity) benchmark, and (ii) the charity should have a specific required return objective instead. 

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Anne has sought analysis of the two investment objectives from prospective portfolio management teams. She has requested that all analysis should be conducted on a rolling 8 quarter basis and that investment should have a minimum of 70% of US Bonds and Equities. Emerging markets and Developed markets outside the US should be restricted to equities in large-capitalised firms only. Further, Anne will not invest in any alternative investments, nor will allow the portfolio manager to use derivatives, short positions, or leverage. Cash will not be held by the fund unless it is a residual amount (from sale of assets or remaining yields from equities or bonds). Anne has invited proposals for her charity funds from reputable portfolio managers. Invited investment proposal should be submitted by the 23rd May, 2022 and must cover the following 5 sections:
1. Establish and Justify Investment Risk and Return Objectives
2. Characteristics and Discussion on Assets/Indexes
3. Create competing Strategic asset Allocations (SAA)
4. Test competing asset allocations against each other
5. Recommendation of the SAA.

Each section is further elaborated below. In the event of any clarifications, investment teams can also post question, and respond to other teams’ questions, in the thread “Assignment Q&A” on the discussion board.

Specific Requirements
Section A: Investment Risk and Return Objectives (up to 20% of the assignment mark – maximum 500 words): Anne’s charity fund must have a return and risk objective and the risk objective should be appropriate for the return objective. Further details are provided below:

1. Return objectives that will (i) ensure an annual Spend , pay portfolio management fee of 0.5%, and (iii) potentially provide real growth of the fund on a rolling 8-quarter.

2. Risk objectives should have maximum (in magnitude and ignoring the sign) levels of absolute and relative risk measures established, and the recommended SAA’s risk levels must be lower to achieve the investment return objective.
Proposed absolute risk measure of volatility will be calculated from an appropriate allocation to US Bond and US Equity suitable to achieve the investment objective. Once the appropriate allocation has been created, teams will use this allocation of bonds:equity to calculate a relative risk measure of tracking error against the 40:60 US Bond:US Equity benchmark to achieve the investment. In this section, teams will only use Barclay’s U.S. Aggregate bond index (defense) and the MSCI US Equity index (for growth) that are highlighted in the excel spreadsheet. CPI data is also provided to ensure that all data used is in real terms and NOT in nominal terms. Investment proposals will use the data from Q4, 1994 to Q2, 2021 to formulate the defense:growth allocation that will achieve the investment objectives of the charity fund. Portfolio management teams will report the two risk objectives.

Section B: Characteristics and Description of Assets/Indexes (up to 20% of the assignment mark – maximum 1000 words): Anne has set the assets/indexes that must be used in creating this portfolio are: US large (LC) and small (SC) caps, EM and EAFE large caps (LC), US Government and US Corporate investment grade bonds. Teams will first provide a summary description of each market segment (US LC and SC, EAFE, EM, US Government bonds and US Investment Grade Corporate bonds) using the MSCI factsheets (available from the MSCI website) for each asset/index. Each asset/index will be further examined by a discussion on the summary statistics of risk measures (downside and symmetric) and returns over the entire period of the data series. Teams will conclude the section by a discussion on returns and correlation against other assets/sub-assets over the same period.
Teams will provide ONE table for the assets/indexes used in the SAA and the role each asset/index plays in achieving the investment objectives. Teams should note that specifications of the tests, data choice and data manipulation (including regressions) must be placed in the Appendix and not in the main body of the proposal.

Section C: Create 3 Asset Allocation(s) (up to 30% – maximum 1500 words): Anne would like to evaluate three different SAA, using any of the three portfolio construction techniques detailed below. Each asset allocations will be constructed using (i) quarterly real returns, and (ii) data from Q4 1994 to Q2 2021. Allocations must be whole numbers (for example a 9.5% allocation to US small cap growth should be changed to either 9% or 10%), and allocation to each asset must be in multiples of 5% (for example a 4% allocation to emerging market equities must be changed to 5%). Allocations adjustments may be programmed OR can be adjusted manually.

1. An optimised Mean-Variance SAA: MV Optimised SAA will be created using Excel Solver (or any optimisation program).
Solver objective will be to either minimise an appropriate risk measure (not used in the constraint) or maximise an appropriate performance ratio.
Solver constraints will include:

  • No leverage or short selling
  • Minimum allocation of 5% to each asset/index.
  • Required return based on the return objective established in Section A above.
  • Ensure a defense:growth bias as established in Section A above (note this is not the 40:60 BM).
  • Constrain one risk measure appropriate for this investment objective.

Investment proposals have freedom to add additional constraints as deemed appropriate based on the asset/index characteristics and discussion in section B above and demonstrate that the investment objectives will be met.  Teams will explain the process of creating this SAA (for example any additional constraints used).

2. A Risk-Allocated Portfolio: A risk-allocated SAA will be created using Excel Solver (or any optimisation program). Investment proposals have freedom to allocate risk (marginal contribution) as deemed appropriate based on the asset/index discussion in section B above and demonstrate that the investment objectives will be met. Constraints for this methodology may not be the same as for the mean variance optimisation. However, 5% allocation to each asset/index will be maintained. Teams will explain the process of creating this SAA (for example the MCR proportions used).

3. A Core-Satellite Portfolio: A Core-Satellite SAA will use the 40:60 benchmark to form the core of the SAA and the remaining assets will form satellites. The allocation to the core and satellite may be Quantitatively optimised on the $ or risk allocation, or Subjective based on the description and characteristics of each asset. A 5% allocation to each asset/Index will be maintained. Teams will explain the process of creating this SAA (for example any constraint, MCR proportion or subjective core/satellite allocation used). Teams will compare the three SAAs qualitatively and quantitatively against the 40:60 benchmark in a single table. Quantitative comparison will compare average and active return, volatility tracking error and 90% VaR (parametric or non-parametric) of the three SAAs. Qualitative comparison will explain the relative performance and riskiness of the SAAs based on (the discussion on assets/sub-assets) in section B above. Teams should note that specifications of data choice and data manipulation (including regressions, outputs from Excel, etc.) must be placed in the Appendix and not in the main body of the proposal.

Section D: Asset Allocation Testing (up to 20% of the assignment mark – maximum 1000 words): Teams will demonstrate the viability of the proposed SAA by conducting Back Testing (including analysis on significant market events). The proposal will conduct these tests with real (not nominal) returns on the three SAAs and by using quarterly rebalancing. Test will use a starting value of $500K and each test will compare the three SAAs (both qualitative and quantitative) and by making the spend in Q4 of each year (spend will be limited to the erosion of fund value on a rolling 8 quarters). Invited proposals will demonstrate comparison between SAAs using well-labelled graphs and tables.
A Back Test of the three SAAs over the period [from Q4 1994 to Q2 2021]. Teams will discuss how each asset allocation performed in general AND during (i) troughs and (ii) peaks, using business cycle information from NBER. The discussion on the SAA performance will use the characteristics of each asset/index and their allocations in each SAA. Teams should note that specifications of the tests, data choice and data manipulation (including regressions) must be placed in the Appendix and not in the main body of the proposal.

Section E: Recommendation (Up to 10% – maximum 1000 words): Teams will provide recommendations of the SAA to Anne. The recommendations will focus on achieving Anne’s charity fund investment objectives in the future.

1. Proposals will decide on, and justify, the SAA. Testing of competing SAAs in Section D provides insight into assets/sub-assets chosen and their allocations.

2. Performance of the fund during negative market conditions and the speed of recovery of fund’s real value.

1. The main report must be a single document (in pdf, doc or docx format) and will be submitted through Turnitin.
2. Excel spreadsheet (in xls or xlsx format) with all the work associated with the report will be submitted through Turnitin as well.

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