MAF 707 Investments And Portfolio Management

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MAF 707 Investments And Portfolio Management

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MAF 707 Investments And Portfolio Management

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Course Code: MAF707
University: Deakin Business School

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Country: Australia

Question:
The purpose of this summary is to inform the management as part of aiding decision making with respect to portfolio management activities of JF Asset Management Ltd covering detailed information relating to the above companies as well as the overall market for portfolio decisions.Part II of the Assessment requires you to conduct estimation and evaluation of various portfolios using continuously compounded return various trading strategies.a) Using these 10 stocks, you are required to form an equally weighted portfolio and comment on the performance using traditional performance measure such as Sharpe and Treynor ratios. Equally weighted portfolio requires equal distribution of the available fund (AUD 500 million) on 13 April 2012 and generate risk-return measures using thisnaive strategy. 
b) Assuming no short-sale is permitted, you are required to construct an efficient frontier using the continuously compounded return data from 13 April 2012 to 13 April 2017 for different target return. You are required to use target returns of 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, 13%, 14%, 15%, 16%, 17%, 18%, 20% and 25% usingthe 10 stocks identified above. Please note that there may not be convergence at certain target returns and you are required to report evidence of convergence or convergence failure at these target returns in an appendix. If there is no convergence achieved at a given target return clearly identify the target returns that fail to achieve convergence in atable for those respective target returns. Provide details (weights, and annualized return and standard deviations) of the efficient portfolios forming the frontier for those target returns that achieve convergence and you are advised to present these estimation output in an appendix (please maintain neatness and readability of the estimation output with respect to individual target returns). Having completed these estimation procedures, you are required to comment on the performance of these portfolios using different performance measures ( such as return, risk, portfolio 
 
c) Generate the global minimum variance portfolio that sits at the point of the efficient frontier and comment on the performance of this portfolio. 
Answer:

The Asset management wing of JP operates nearly with AUD 500 million which needs to be invested across the pool of 10 stocks which are listed below. The purpose of this summary is to inform the management as part of aiding decision making with respect to portfolio management activities of JF Asset Management Ltd covering detailed information relating to the above companies as well as the overall market for portfolio decisions. The ten companies under consideration are:
Market for portfolio decisions. The ten companies under consideration are:

Commonwealth Bank of Australia

BHP Billiton Ltd.

CSL Ltd.

Wesfarmers Ltd

Telstra Corp Ltd

Woolworths Ltd

Woodside Petroleum Ltd

Transurban Group

Westfield Corp

Agl Energy Ltd

Fortescue Metals Group Ltd

We need to understand the performance of the company vis-à-vis the market index (S&P/ASX 200). We also need to look at correlation coefficient of each of these stocks with market index ASX 200.
Commonwealth Bank of Australia: It is one of the largest multinational bank in Australia. It has business span across Fiji, New Zealand and Australia. The company is a provider of all kind of banking services in the regions which it operates and one of the financial powerhouse in the region. The history of the bank goes down more than 100 years when bank started operation in 2011.
BHP Billiton:  The Company is one of the largest mining company of Australia. It is headquartered in Melbourne and as per market values it is the world’s largest mining company. BHP Billiton found that it needed an internal platform to manage all the platforms of its supply chain. An internal digital business platform enables enterprise employees and things to share and enhance digital processes and capabilities or to extend them for mutual benefit. This framework allows for combinations of business models, leadership, talent, delivery and IT infrastructure platforms that power digital business ecosystems. It also enables enterprises to integrate with other digital platforms.
CSL Limited: CSL limited is one of the famous companies of Australia which specializes business in the field of biotechnology. The company specializes in research, manufacturing and marketing many drugs in the field of biotechnology. Some of the main areas where company has product line includes blood plasma, vaccines and antivenom. The company was founded in the year 1916.
Wesfarmers: Wesfarmers, an insurance provider and retailer in Australia, built a new process-based solution on a CE-BPM in a private cloud to support both direct online sales and online sales of white-labeled products by its retail partners.  The company has a very strong retail network across the regions of Australia and one of the strongest retailer in the region.
Telstra: Telstra is a major network service provider in Asia/Pacific. Its capabilities were strengthened through its acquisition of Pacnet, which had a unique joint venture in China and an innovative SDN/NFV network called the Pacnet Enabled Network (PEN). Telstra offers managed SD-WAN using Cisco IWAN and is considering a second SD-WAN vendor. Telstra is also planning a vCPE appliance for multivendor virtual network functions (VNFs). Telstra’s multi-domain orchestration platform, Symphony, will initially cover the vCPE platform and evolve to cover both PEN and the vCPE platform. Telstra interconnects its PEN and MPLS networks to four cloud providers in 10 cities worldwide. Telstra uses network-to-network interface (NNI) agreements to extend its coverage, and has uniquely added instrumentation within its partners’ networks to ensure consistent performance of these connections. Telstra should be considered by organizations requiring strong network coverage in the Asia/Pacific region, but with less extensive requirements in other regions.
Woolworths Limited: Woolworths Limited is one of the major Australian company which has revenue in the range of AUD$59 billion in 2016. The company has extensive retail services across the region of Australia and New Zealand. It is the largest take away liquor provider in Australia, the largest poker machine slot provider in the region and as per 2015 it is the 18th largest retailer in the world.
Woodside Petroleum: This Company is an Australian entity which has business interests in the field of exploration and production of oil. It is the largest operator in the region in the space of oil & Gas. This is a public company which is headquarter at Perth. The company started operation in 1954 and has reported revenues of AUD$ 4.49 billion in 2015 and profit of AUD$26 million. The owner of the company is Royal Dutch Shell which is one of the largest business maker in the field.
Transurban Group: It is one of the largest group which operates in the field of toll roads and road networks in Australia. The company has very strong business interest in the region of United States. As per market cap it falls under the top 20 companies of Australia. The company has been in business since the year 1996.
Westfield Group: The Company is one of the largest retailer in Australia and is also owner of many large shopping centers in the region. The company has now splited into two separate entities. Many large, international corporations immediately think of the California Silicon Valley area as a first choice location for an innovation center. This is where the greatest pool of tech talent, supporting services and intense culture is to be found. Examples of innovation centers in Silicon Valley established by nontechnology companies include Australia’s Westfield shopping mall group. However, there is a downside to going with the crowd, which is that it can be tough to attract and retain key talent in a highly competitive geography.
AGL Energy: It is a publically listed company which provides energy products and services to the economy of Australia. The company generates electricity and operates various thermal power stations. The company started operation as early as 1837 and now provides energy solution to more than 3.8 million residents in Australia.
Fortescue Metals Group: This Company managed to deliver near-real-time analytics from diggers and trucks to mining supervisors in the field on a standard mobile device, leveraging mobile and Internet of Things technology. Before this, changes couldn’t be made during mining supervisors’ eight- to 12-hour shifts. This new, digitalized way of working enabled FMG to: (1) Reduce the number of trucks needed to move in a specific volume from 120 to 80; and (2) move the unused trucks to a new mine, resulting in a capital expenditure savings of $200 million. In addition, the finance department made conservative estimates that 20 cents per ton was subtracted from costs, resulting in a savings of up to $30 million a year.
Performance Table

 

Daily average Return

Annualised Return

CBA

0.000755161

19.0

BHP

-0.000226154

-5.7

CSL

0.001227442

30.9

TLS

0.000811873

20.5

WOW

0.000262989

6.6

WPL

0.000126246

3.2

TCL

0.000614276

15.5

WFD

0.000666028

16.8

AGL

-4.33295E-05

-1.1

FMG

-0.001088105

-27.4

ASX 200

0.000316972

8.0

 As we can see from the above table it is CSL, TLS which are the best performers over the period under consideration while FMG has been the biggest loser.

Name

Original Value

Final Value

Integer

$ Amount

Daily return

Weighted return

Weight CBA

0.1

0.055986033

Contin

27993016.33

0.000755

4.23E-05

Weight BHP

0.1

0.063739285

Contin

31869642.61

-0.00023

-1.4E-05

Weight CSL

0.1

0

Contin

0

0.001227

0

Weight TLS

0.1

0.125829268

Contin

62914634.2

0.000812

0.000102

Weight WOW

0.1

0.149509775

Contin

74754887.29

0.000263

3.93E-05

Weight WPL

0.1

0.047153915

Contin

23576957.35

0.000126

5.95E-06

Weight TCL

0.1

0.23224979

Contin

116124895.1

0.000614

0.000143

Weight WFD

0.1

0.10482929

Contin

52414645.04

0.000666

6.98E-05

Weight AGL

0.1

0.220702644

Contin

110351322.1

-4.3E-05

-9.6E-06

Weight FMG

0.1

0

Contin

0

-0.00109

0

Average Excess Returns in comparison to ASX 200

Average Excess Return

 

CBA  Excess ret

-0.00234951

BHP  Excess ret

-0.00442573

CSL  Excess ret

-0.00343069

TLS  Excess ret

0.002159898

WOW  Excess ret

0.00090251

WPL  Excess ret

-0.0163679

TCL  Excess ret

0.008227388

WFD  Excess ret

0.002686079

AGL  Excess ret

0.000710925

FMG  Excess ret

-0.01080668

Correlation Table

Correlation table with ASX 200

CBA

75%

BHP

75%

CSL

42%

TLS

52%

WOW

57%

WPL

62%

TCL

39%

WFD

41%

AGL

43%

FMG

50%

The correlation table is indicative of the fact that CBA and BHP moves in very high correlation to the market while the lowest correlation to ASX 200 is provided by TCL, WFD, AGL, and CSL. It means that TCL, WFD, AGL and CSL will provide the strongest diversification to the whole portfolio. These are the set of companies which we needed to evaluate to get understanding of the market dynamics. It is very important to understand that these companies are very large multinational companies based out of Australia. The market dynamics of the region are very competitive and hence performance assessment and risk mitigation strategy need to be in place for proper optimization of returns for the portfolio. It is very important to understand that business dynamics are a function of how the industry is doing and hence a perspective on industry performance is very important too. It is also very important to fundamentally assess all the companies discussed above to get a fair idea of the performance of the whole constructed portfolio.
References:

Faff, R., Gharghori, P., & Nguyen, A. (2014). Non-nested tests of a GDP-augmented Fama–French model versus a conditional Fama–French model in the Australian stock market.International Review of Economics & Finance, 29, 627-638
Dou, P. Y., Gallagher, D. R., & Schneider, D. H. (2013). Dissecting anomalies in the Australian stock market.Australian Journal of Management, 38(2), 353-373
Di Iorio, A., & Faff, R. W. (2015). The effect of intervaling on the foreign exchange exposure of Australian stock returns
Loh, L. (2013). Co-movement of Asia-Pacific with European and US stock market returns: A cross-time-frequency analysis.Research in International Business and Finance, 29, 1-13.

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