BFC5935: Portfolio Management and Theory

Task details

Your task is to identify the Andrews’ investment objectives and suggest a new asset allocation for their investment portfolio. To achieve this, you need to study and analyse their cash flows, historical returns on various assets classes, the performance of their existing superannuation portfolio and the performance of the investment portfolio that you propose to them.

1. Investment policy statement Create an investment policy statement (IPS) for the Andrews. The IPS should at least include

(a) Return objectives;

Note: You need to calculate annual cash flows for Andrews for the next 30 years. Of this period, first 10 years can be considered as the consolidation period and the remaining 20 years is the spending/gifting period. Use the long-term discount rate for discounting cash flows, if necessary. It is also important to consider their tax rate in arriving at the return requirement.

(b) Risk objectives;

(c) Investment constraints – investment time horizons, liquidity needs, special needs, tax concerns and investment guideline/strategy;

(d) Standards for evaluating portfolio performance.

2. Portfolio construction and performance

(a) Generate annualised return for each asset class from July 2000 to June 2019 and using the data provided, analyse their performance and examine the relationships among them. Discuss the role that each asset class plays in an investment portfolio. Note: This should be based on annualised return calculated for each month from July 2000 to June 2019. You need to use the following formula to annualise the return of a particular month: