AFF5270ASSIGNMENTMONASHUNIVERSITY

iExecutiveSummaryThisreportconsistsoftwosections:strategicassetallocationthataimstoconstructalong-terminvestmentportfolioforthefoundationbasedonthehistoricalreturnofthebenchmarksandtestthefeasibilityofmomentuminvestingstrategybyassessinggoodperformedstocksandpoorperformedstocks.Inthefirstsection,aproperInvestmentPolicyStatement(IPS)isformulatedforthefoundationinreferencetoitsobjectivesandconstraints.Then,theperformanceandthecorrelationofeachassetclassareassessedwiththegivendataofthebenchmarks’historicalreturn.Furthermore,inordertoconstructlong-terminvestmentportfoliothatmeetstherequirementsspecifiedbythefoundation,Excelsolverfunctionisappliedtodeterminetheweightofeachassetclassinaccordancewiththevolatilityandtheexpectedreturn.Inthesecondsection,wetestthefeasibilityofmomentuminvestingstrategybyassessingtheperformancesoffiveportfolios(equalweightedandvalueweightedapproach)intermsofcomparinggoodstocksandpoorstocks.Basedonourempiricalanalysis,themomentuminvestingstrategycouldbeappliedinreality,wherethestocksperformedwellinthepastcontinuetoperformwellinthefuture.Butallportfoliosareunderperformedorclosetomarketportfolio,whichraisesthequestionwhetheractiveinvestingstrategyissuperiortopassiveinvestingstrategy.Relativelylowerreturnswithsignificantlyhigherriskandvolatility;additionalexpensesfromtransactioncost,taxesandmanagementfees;irrationalfinancialbehaviourcausedhighernon-systematicriskcomparedwithpassivestrategyarethemainpotentialproblemsformomentuminvestingstrategyappliedinpractice.iiTableofContent1.Introduction............................................................................................................12.InvestmentPolicyStatement(IPS)........................................................................12.1.Objectives..........................................................................................................12.2.Constraints.........................................................................................................23.AnalysisofAssetClassPerformance....................................................................23.1.CumulativeReturn.............................................................................................23.2.CorrelationofEachAssetClass........................................................................33.3.EconomicCycleandAssetClassPerformance.................................................43.4.Determinationofexpectedreturn......................................................................54.StrategicAssetAllocation(SAA)..........................................................................74.1.RoleofEachAssetClass...................................................................................74.2.AssetAllocationDecision..................................................................................84.3.HowtheInvestmentPortfolioMeettheIPSRequirements...............................94.4.PerformanceofProposedPortfolio....................................................................94.5.ScenarioTesting...............................................................................................115.MomentumInvestingStrategy.............................................................................135.1.MomentumInvestingStrategyandCoreConcept...........................................135.2.PoorStocksandGoodStocks..........................................................................145.3.PerformancesofEqualweightedPortfolio......................................................155.4.PerformancesofEqualweightedPortfolio......................................................195.5.RecommendationonMomentumInvesting.....................................................236.Conclusion...........................................................................................................24TableofFigureFigure1:Summaryofthefoundation’sobjectives........................................................1Figure2:Yearlycumulativereturnfrom1999to2011.................................................2Figure3:Correlationofassetclass................................................................................4Figure4:Economiccycle..............................................................................................4Figure5:Summaryofassetclassperformance.............................................................5Figure6:Expectedreturnofeachassetclassbasedonhistoricalreturn.......................5Figure7:ExpectedreturnbasedonMonteCarlosimulationtechnique........................6Figure8:Summaryoftherequirements........................................................................8Figure9:Averagemeanandstandarddeviationofyearlyreturn..................................8Figure10:Assetallocation............................................................................................9Figure11:Portfolioreturnvs.expectedreturn(Yearly)...............................................9Figure12:YearlySharperatio.................................