FINC6001: Finance – Theory to Applications
Weighting: 20% (report) + 10% (oral presentation)
Being a scarce resource (for most), money needs to be properly managed. The second half of this Unit of Study has been devoted to concepts and theories associated with investment management that aim to assist us in understanding portfolio performance evaluation and
In the first part of the Major Assignment (written report), we will be exploring different ways to assess the work of asset managers; whilst, in the second part (oral presentation),
we will learn how to build portfolios.
Part A (WRITTEN REPORT)
Performance evaluation is an integral part of financial markets. Efficient allocation of resources depends on the ability of investors to direct their capital to those identified as the best managers. This raises the following question: how can portfolio performance be measured?
To address the question above, we will analyse a sample of exchange-traded funds (ETFs) available in Australia. ETFs are similar to mutual funds; however, they allow investors to more easily buy and sell the corresponding portfolios on an exchange (just like they would with individual stocks). These have grown considerably in popularity since their inception in 1993. By 2020, about $7.7 trillion was invested in more than 1,800 ETFs in the US, which is the world’s largest market in terms of assets under management.
Although ETFs were originally created as passive portfolios aimed at tracking specific indexes, there also exists actively managed ETFs with other investment objectives. For instance, focusing on attributes such as value, growth, dividend yield, liquidity, and volatility, to cite a few. To assess the performance of ETFs, therefore, we need to first understand their goals and the benchmark against which to compare the performance observed.
- You will be assigned a random list of five ETFs to analyse for this Major Assignment. Please follow the instructions on Canvas carefully on how to generate this list. Describe the key characteristics of each ETF. Explain their investment objectives and goals clearly.
- Select (an) appropriate benchmark(s) to compare the performance of your five ETFs. In your report, you should justify your choice of the(se) benchmark(s).
- Calculate and compare the monthly returns for the five ETFs and the Russell 3000 market index, as a proxy of the market portfolio, over the period from January 2018 until December 2020.
- Select an appropriate proxy for a risk-free asset. Justify your data choices.
- Calculate the following risk-adjusted performance metrics:
- Sharpe ratio
- Treynor measure
- Jensen’s alpha (using the Fama-French 3-factor model to calculate the expected return) Information ratio
- Morningstar risk-adjusted rating (using 2 as the coefficient of risk aversion)
- Discuss how each ETF has performed based on these different risk-adjusted performance metrics. Explain the conceptual differences across the metrics being utilised for evaluation. Determine whether there is any evidence of market timing ability by the portfolio managers of these five ETFs.
- Determine the exposure of these five ETFs to style portfolios based on book-to-market ratio, earnings-to-price ratio, and dividend yield. Describe the particular style(s) that is driving the performance of your ETFs. Compare and discuss any differences between the five ETFs.
- Provide a final recommendation as to which ETF(s) you would advise an investor to purchase. You will need to provide an explanation as to how you reached your recommendation and any potential pitfalls of your recommendation.
- Conforming with instructions (e.g. word length, font, other instructions)
- Presentation, communication & style (written)
- Clarity of expression (incl. accuracy, spelling, grammar, punctuation)
- Use of literature/knowledge of theory
- Data/information gathering/processing
- Problem solving
Formatting and Presentation:
- The report should be a maximum of 10 pages in length with 1.5 line spacing and size 12 Arial or Calibri Font. It should have normal-sized (2.54cm) margins on all sides. Please number the pages of your report. Marks will be reduced by 10% for each page you exceed the page limit. Hence, your mark will be reduced to zero if the report exceeds 20 pages. You will be penalised for inappropriate formatting.
- You will need to undertake research on industry and/or academic sources to justify your choices and conclusions. Your references do not need to be all academic journal articles.
- Ensure you use proper academic referencing in supporting the ideas and discussion within your report. All reports must include a list of references in academic form using the APA 7th Further information on the APA referencing style can be found here:
https://libguides.library.usyd.edu.au/citation/apa7. You will be penalised if you forget to reference your sources or use inappropriate referencing.
- Pay particular attention to presentation. A component of your mark will be based on presentation. Avoid overdoing formatting and ensure that the report is very clear, logical, and professional. Pay attention to grammar. Clear and logical presentation is a major challenge in report preparation.
- Preparing a concise report poses a major challenge. Brevity and conciseness are key ingredients of a highly successful report. Every part of the report should somehow add to the end result; otherwise, it is superfluous and distracting.
- Use headings in the report to separate key ideas. Using paragraphs will also assist with structuring ideas.
- The report must be submitted as a PDF You must submit the report electronically via the Turnitin link on Canvas. Excel spreadsheets with all your calculations must be submitted as a .xlsx workbook. You must submit two files electronically via the link on Canvas.
The page limit for the report is 10 pages.
What is included in the 10 page limit?
- Report body
What is excluded from the 10 page limit?
- Title page
- Table of contents
- Executive summary
- Reference list
- Appendices (Appendices should be used sparingly and only used to provide information to the reader, where appropriate)
ETF description /4 marks
Data selection and return calculations /12 marks
Risk-adjusted performance metrics /7 marks
Market timing /3 marks
Style exposures /6 marks
Final recommendation /4 marks
Presentation and style of report /4 marks
Inappropriate use of literature up to -4 marks Incorrect referencing up to -4 marks
Failure to comply with formatting requirements up to -4 marks
Failure to submit Excel file with calculations -20 marks
Each page over the 10 page limit -4 marks per page
TOTAL MARKS /40 marks