BAFI1045 Equity Portfolio Management Assignment Questions | RMIT

Assessment Task 3: Equity Portfolio Management Report

Marks/Weighting: accounting for 40% of the total grade for this course

Assignment Due Date: Sunday of Week 14, 20th April 2025, 5 pm, Singapore time

Word Limit: Maximum 3,500 words (excluding Toc, Appendix and References)

Submission: The assignment will be submitted via Canvas, Turnitin

Rubric/Marking criteria: A marking rubric is provided on Canvas.

The assessment is submitted as an individual assignment.

You will be given funds to invest in the share market. You are required to construct two $1,000,000 equity investment portfolios:

• A passive portfolio replicating the return of the Straits Times Index (STI)
• An active portfolio to achieve your investment objective of outperforming the index

You will then prepare a report in which you can explain your investment strategy for constructing a passive and an active portfolio, and then evaluate the investment performance of each in terms of absolute and relative return, risk and attribution effects to explain the differences in performance of each portfolio. You will be given ten companies selected from the STI index that tracks the performance of the top 30 companies listed on the Singapore Stock Exchange to create an active portfolio.

This assessment replicates the tasks that would be undertaken by portfolio managers in a real-world investment company. For the passive portfolio, your task will be to replicate, as closely as possible, the risk and return characteristics of the Straits Times Index (STI) benchmark index. For your active portfolio, your task will be to select stocks and sectors from ten stocks selected from companies in the STI Index, which will result in your portfolio achieving a higher return than the index.

Your task is not necessarily to produce a positive return. If the markets fall in value, then your passive portfolio should fall in value by a similar degree. Your active portfolio should aim to outperform the return on the index: if the index falls, your portfolio should fall by a lesser amount; if the index rises, then your portfolio should rise by a higher amount.

The final submission should fulfil the following minimum requirements

For the Passive portfolio

• Calculate the number of shares required for your passive portfolio to replicate the composition of the STI index.

For the Active portfolio

• Assess all ten companies and sectors from the stocks shared with you.
• Analyse the outlook for each company’s industry.
• Analyse the macroeconomic environment at the global and domestic level.
• Identify the firms and sectors that you consider will outperform relative to the index and build your active portfolio to reflect your predictions.
• Analyse and comment on three financial ratios of each company over the previous five years. Examples of ratios that can be used:
• Return on Equity
• PEG Ratio
• Net Profit Margin
• Earnings Growth
• Debt to Equity
• Evaluate your findings and select six companies for your active portfolio.
• After assessing the ten companies, select six to be included in your active portfolio.
• Describe the reasons for your selections (around 5 bullet points for each stock).
• Also, describe the reasons why you have not chosen the other four firms (around 5 bullet points for each stock).
• Assign portfolio weights for each of your companies and discuss why you have chosen the weights in comparison to the weight of each stock in the index.
• Calculate the number of shares required for each company to create a portfolio with the initial weights you have selected for your active portfolio.
• Why are some companies overweight in your portfolio, and why are others underweight as compared to the index?
• What do these active weights mean for your portfolio’s potential performance relative to the index?

Build your portfolios

• Create these two portfolios in LSEG Workspace, ensuring that all dates and numbers of shares are correct.

Portfolio Creation Dates

• Passive and Active
• Start Date: Monday, March 17th, 2025
• Portfolio Names in Workspace:
• Passive: Student number Replication (Ex, s3254663 Replication)
• Active: Student number Active (Ex, s3254663 Active)

Benchmark Portfolio

• Straits Times Index (STI)

Portfolio Analysis period for both portfolios

• Start Date: Monday, March 17th, 2025
• End Date: Friday, April 11th, 2025

Observe your portfolios’ performances over the analysis period:

• As the share prices change over the evaluation period, you will be able to watch how the returns on the index, your active portfolio and your passive portfolio react.

For each portfolio

• Explain the reasoning for your stock selection and weighting relative to the index.
• Attach screenshots of your portfolios created in Workspace.
• Report your results for each portfolio.
• Provide comments on the total return/risk and active return/risk of your portfolios.
• Discuss the sectors and securities’ active weights in your portfolio.
• Analyse the active return of your portfolios concerning the allocation and selection effects.
• What was the overall performance of the active portfolio, your passive portfolio and the benchmark index?
• Describe any major market events that contributed to the return performance of the benchmark or your portfolios.
• Have you achieved (or not achieved) the goal for your passive/active portfolio?
• Finally, which of the two portfolios will you recommend and why?

Data for your report from Workspace

• Workspace calculates the portfolio statistics you will require for your report. The information you will need can be found as listed below:

Information Workspace Location

• Total and Active Return: Balanced Summary – Contribution
• Contribution to Return: Equity Summary – Performance/Contribution
• Contribution to Portfolio Weight: Equity Summary – Allocation
• Allocation and Selection Effects: Brinson Single Currency
• Contribution to Total Risk: Ex-ante Multi-factor Risk – Portfolio Summary
• Contribution to Active Risk: Ex-ante Multi-factor Risk – Active Summary
• Performance Ratios (Sharpe, Treynor): Return Statistics

You will need to select six stocks for your active portfolio from the following ten stocks that are constituents of the STI Index:

References and Citations

Use proper citations and references, and include a list of references you use in your report. Failure to do so will result in a lower grade. RMIT provides a website that explains the use of the Harvard reference system.

Please consult it here: Harvard Reference System