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FIN201 Portfolio Management and Analysis Assessment 2 Answer


Assessment 2

Assessment Type: Case Study – individual assessment. 2,500 +/- 10% words.

Purpose: To allow students to demonstrate an understanding of the various portfolio investment analysis techniques applicable to real world situations, enabling them to construct an investment portfolio, analyse the expected and actual performance of the selected securities and the overall portfolio against a market benchmark. Students will also be expected to review the performance of the portfolio after a period of substantial market volatility, and communicate their findings. Including any new recommendations, in a written report. The assessment will reflect the advice that would be expected from students, if, after graduation, they are working in a modern accounting practice. This assessment relates to learning outcomes a, b, c and d.

Topic: Portfolio Construction and Review: The Economic and Investment Outlook at the End of 2019, Construction of a Diversified Investment Portfolio at that date, and a Review in September, 2020 of its performance.

Task Details: Imagine that you graduated a year ago, and joined a firm of accountants and investment advisers.

On 31 December, 2019, a client, Miss Jean Brown, a single lady born on 30 December, 1954 and who has just retired, seeks your investment advice. She tells you that she owns her own apartment in Balmain, worth $1,000,000, in which she intends to live for the rest of her life. She has used her life’s savings to pay off the mortgage on her apartment and now has no debts. She also has no income, no superannuation, no other savings and has no dependants. However, she has just inherited $2,000,000, which she wishes to invest in a diversified investment portfolio, and seeks your advice on its construction.

She wishes the portfolio to provide an income of $70,000 a year, which will enable her to live comfortably in retirement, including paying for an annual overseas holiday. She says she is in good health and expects to live at least for another 20 years.

After questioning, you assess that she has a moderately conservative risk profile, and wishes to spread her funds across the four main asset classes of Australian securities, namely, Australian company shares, Australian listed property trusts (or REITs – real estate investment trusts), Australian fixed interest securities (Commonwealth and State Government bonds) and Australian cash or equivalents

(e.g., cash at bank, Treasury notes, and bank bills). She is willing to invest up to 50% of her inheritance in risky assets (company shares and listed property trusts) and the balance in fixed interest and cash. To provide a measure of diversification, she wishes to invest in three different securities in each asset class.

Because of exchange rate and other risks, she does not wish to include any foreign or overseas assets or alternative investment assets in her portfolio. On her death, she wishes to have, if possible, more than $2,000,000 (plus her apartment) in her estate, which she plans to leave in equal proportions (50% each) under her will to a niece and to the Red Cross (an international charity).

You are required to prepare a three-part report; each part of which Miss Brown accepts and implements.

Part A of the report, following the Introduction, is a literature survey or review of selected reference books, articles, web-sites and other sources used in the preparation of the report.

Part B of the report is the preparation of a Statement of Investment Advice to Miss Brown, specifying:

  • her personal details, her broad investment objectives and goals, and her risk profile;
  • the then (at end of 2019) domestic economic (with a focus on economic growth, inflation and interest rates) and investment outlook (expected returns and risks) for each of the above four Australian asset classes;
  • your recommended investment portfolio, including asset allocation and selected securities, withe reasons for their selection and how they align with her assessed risk profile (or her ability to comfortably handle risk);
  • the expected annual returns from your selected assets and overall recommended portfolio, along with the prospects for growth in the value of the portfolio, having regard to her desire in the provisions of her will;
  • the risks relating to your recommended portfolio; and
  • a foreshadowing of ongoing monitoring and an annual (or more frequent, if required) review of her portfolio.

Part C of your report will embrace a review and evaluation of your recommended portfolio in September, 2020. It is likely that some at least of your recommendations have been adversely affected (and possibly some enhanced) by the coronavirus (Covid-19) pandemic and the impacts of government policy seeking to limit the spread of the virus and the resultant economic and investment outcomes.

This part of your report should include a summary of these effects, a current valuation of the original recommended portfolio, a review of the income provided by the selected assets, and a discussion of their suitability for the investor, going forward. Also include reasons for any recommendations for switching investments (selling some of the original assets and replacing them with new ones, together with a revised estimate of future annual income and estate size.

NOTE: In your calculations and report, ignore taxes, brokerage and any investment advice regulations.

Presentation: 2,500 +/- 10% words, in short Report format. The word count excludes the coversheet, contents page, references, appendices, and illustrations (e.g., diagrams, graphs and tables).

Students need to stay within the assigned word limits, and indicate the word count on the cover page of the Assignment. Marks will be reduced for Assignments shorter than or greater than the minimum word count.

Every page should be clearly numbered. The Assignment, when lodged, should include the following, in order:

  1. A KOI Cover Sheet for an Individual Assignment
  2. A title page, which indicates Subject title, Subject code, trimester number, Assignment title, your full name and KOI student number, word count and Tutor’s name.
  3. Executive Summary.
  4. Table of Contents.
  5. Body (main contents).
    • Introduction – a brief introduction as to what the report is about, the methodology and key finding.
    • Part A - Research – this should consist of a review of the literature you have discovered on the topic (see research requirements above) – each identified and described item in your

literature review should be source referenced with “(Author(s), date of publication and page number(s)”.

  • Part B - Analysis – this will be the major part of your Assignment and may require a number of sub-sections and the inclusion of Appendices – see under (f) below.
  • Part C - Recommendations
  • Conclusion.
  1. Appendices (if any) – you may prefer to include the tables required in Parts B and / or C above as Appendices, so that your report flows more freely, making appropriate reference/s in your report to each Appendix as required .
  2. References (using Harvard – Anglia style)
  3. A TURNITIN validation page, including the Similarity score for your Assignment.
  4. A copy of the Marking Rubric (see page 10 below)



The report provides a brief understanding of portfolio management and analysis. Under this report, a brief discussion is provided on different investment options available to Miss Brown based on her investment objectives, goals, and risk profile. The investment is based on the economic and investment outlook at the end of 2019 such as economic growth, inflation, and interest rates of four Australian asset classes. The report also provides recommendations on investment options in September 2020 as the market is adversely affected by the Coronavirus pandemic and the impacts on the government policy.

Part A: Research:

Definition of portfolio construction:

The portfolio construction is an investment process in which the investor selects different securities for minimizing the risk and increase the return on investments. The portfolio consists of different securities such as bonds, shares, debentures, government securities, fixed deposits, bank balance, and other money market instruments.

For creating a portfolio, an in-depth knowledge of the market is required which provided by the investor advisor. The investor has to assess the risk which he can face in the market and the required rate of return on the investment made by him. The investor must have a risk-return profile that is decided on the extent of risk and volatility an investor can face while generating a return on investment. The investor is required to set a benchmark for investment purposes and for monitoring the portfolio.

The book taken for reference is Portfolio Construction and Analytics by Dessislava A. Pachamanova and Frank J. Fabozzi that is written for portfolio managers, institutional investors, and students of finance. This book is divided into six parts to provide a brief analysis of portfolio management that are statistical models of risk and uncertainty, simulation and optimization modeling, portfolio theory, fixed income portfolio, equity portfolio management, and derivatives. 

Steps of portfolio construction and planning:

Portfolio management depends on the strategy of portfolio planning. Planning of every investment is necessary for minimizing risk and earning expected returns. For constructing the investment portfolio that provides precise return with minimum risk the planning involves five essential steps:

Current Situation assessment:

For making any planning related to future requirements there is a need to understand the current situation of investor and future expected returns want by the investor. The current situation can be assessed with the help of current assets, obligations, cash flows, and investments along with the goals of the investor. The objective of investment and expected returns are identifiable before making any investment strategy.

Setting the objective of investment:

For identification of the risk-return profile of investor setting of investment objectives is necessary. In this step risk and volatility that an investor can face is determined based on the goals of investors. In any portfolio strategy, the expected returns are calculated with an acceptable level of risk. After setting the risk-return profile of the investor, a benchmark can be established for monitoring the portfolio's performance (Dixon, McNamara, & Newell, 2018).

Asset allocation in the portfolio:

A portfolio is the combination of different securities and assets that provide certain returns and having a certain level of risk. Based on the risk-return profile of the investor, an asset allocation strategy is used. In this strategy, the investor selects various asset classes and investment options in which he can invest by diversification of risk to achieve the expected returns.

Selection of investment option:

The investor based on the asset allocation strategy selects the different investment options as per preference for active or passive management. In the active management, the investor directly involves in the investment of stocks, bonds, securities for achieving optimum diversification. In the case of passive management, the investors invest funds in the index such as mutual funds and investment funds.

Monitoring, Measuring, and rebalancing of the portfolio:

After creating the portfolio as per the requirement of the investor, there is a need to regularly monitor the portfolio and measure the impact of the market on the portfolio's expected returns and risk level. Investment completely depends on market news related to economic, political, banking, and environmental, etc. The portfolio performance is reviewed at regular intervals such as monthly, quarterly, half-yearly, or annually. If there is a requirement to change in portfolio and assets allocation then there is the rebalancing of the portfolio is required based on the risk-reward profile of investors (Murdoch, 2014).

Part B: Analysis:

Details of Investor:

In the case given in the assessment, the name of the investor is Miss Jean Brown born as on 30 December 1954 who has retired from her job as on 31 December 2019. The details of the wealth of Miss Brown are as follows: 

  • Apartment in Balmain worth $ 1,000,000
  • No debts on the apartment owned by Miss Brown
  • Miss Brown has no income, no superannuation, no other savings, and no dependents
  • Miss Brown received an inherited amount of $ 2,000,000 which she wants to invest in different investment portfolios.

Miss Brown has certain investment objectives & goals related to investments so she can live a comfortable life after retirement such as:

  • Miss Brown wants to earn an income of $ 70000 in a year on a portfolio.
  • She has good health and the expected life is at least 20 years.
  • She wants to invest in four Australian assets such as Australian company shares, Australian listed property trusts, Australian fixed interest securities, and Australian cash or equivalents.
  • She wants to invest 50 % of the inherited amount in risky assets and 50 % in non-risky assets.

Miss Brown has provided detail that she does not want to involve more in risky assets as on the death she wants to have complete capital including an apartment which she wants to leave 50% for her will be the niece and 50 % for the red cross. As per the requirement of Miss Brown, the risk profile is to minimize the risk by having at least a return of $ 70000 per year on the investment (Newell, Haw, & Acheampong, 2012).

Domestic economic and investment outlook of Australian asset classes:

For investment purpose the Australian investment market is diversified in four categories that are:

Australian Securities:

Australian Securities refers to listed companies' shares, bonds, and credits, etc. The expected returns and risk related to securities are based on industries in which companies' deals, government policies, natural disaster. The expected returns are the combination of future business growth, dividends paid by companies, and change in valuation of securities. In the current scenario, the expected returns of Australia's stock market is 4.6% for the coming years. The returns in the form of economic growth in local current prices: 1.46%, dividend yield: 1.89%, and valuation returns 1.27%. The market risk premium on securities is 7% as there is a risk of a decrease in the value of the investment is 25% (MacCowan, & Orr, 2018).

Australian listed property funds:

Australian listed property funds are investment funds which invest the amount of investor in real estate. In the current scenario, the most beneficial listed property fund is REIT (Real estate investment trust fund). These funds are completely dependent on the real estate market that may volatile based on the market available for real estate. The real estate market is highly risky therefore the return rate on these investments is also high. The expected return in the form of economic growth is 4.25% and the risk rate is 20%.

Australian fixed interest securities:

Australian fixed interest securities refer to government bonds and securities issued by the government. Due to government securities, there is a very low risk of investment in fixed interest securities (Reddy, Higgins, & Wakefield, 2014). As the government bonds are issued at a fixed rate that is called coupon rate therefore the investors can get a fixed amount of return yearly. As per information of government bonds of Australia, the coupon rate on different bonds are as follows:

NameCoupon RatePriceYield
Australia Bond 2 Year Yield
3.75110.130.23 %
Australia Bond 5 Year Yield
3.25113.020.39 %
Australia Bond 10 Year Yield
2.50114.100.97 %
Australia Bond 15 Year Yield
2.75119.461.28 %

Due to government bonds, the investment is risk-free as the investors can get fixed interest income without any risk factor (Newell, & Wen Peng, 2018).

Australian cash or equivalents:

Australian cash or equivalents refer to cash at a bank in the form of fixed deposits, treasury notes issued by the central bank, and bank bills. The investment in cash or equivalent is completely risk-free and highly liquid assets as it can be converting in liquid at any time. The return on this investment is very low and completely depends on government policy that is based on inflation, change in bank rates, and change in interest rates by the Reserve Bank of Australia. Reserve bank of Australia issued a Treasury bond that has a fixed coupon rate that is earned by the investor (Parker, 2014).Some examples of Treasury bonds are as follows:


Treasury Bond 1460.17521-Nov-20201.75%
Treasury Bond 1240.24015-May-20212.75%
Treasury Bond 1510.24021-Dec-20212.00%
Treasury Bond 1280.25015-Jul-20222.75%

The Treasury Bonds are secured by the Reserve bank of Australia therefore the bonds provide a risk-free return.

Recommended Investment Portfolio:

As per the current scenario that is the expected rate of return on different Australian assets and risks related to investment. The assets selected for the portfolio are as follows:

In the case of Australian listed companies, shares investment should be made through index funds that covered the complete market and diversify the risk related to investment. The index units are combinations of different companies and cover the overall market risk. The expected return may volatile due to the risk factor involved in securities. Miss Jean Brown should invest a low amount in such securities due to the high risk involved in the investment. Miss Brown should invest 30 % of the total inherited amount in index units (Hutcheson, & Newell, 2018).

Miss Jean Brown should invest 20 % of the total inherited amount in REIT as the investment is highly risky. However, the company may have chances of growth in the next following years. The real estate industry has a good opportunity in the following years due to the government policy of investment in the real estate sector for the uplift of the living of people.

Miss Jean Brown should invest 25% of the total inherited amount in Govt Australian Bond having 15 years period as the rate of return is fixed at 2.75 % and due to government securities, the amount is fully secured from future uncertainty. 25 % of the total inherited amount should invest in treasury bonds having the name Treasury Bond 147 having expected return 3.25% without any risk. Miss Brown should invest a low amount in treasury bonds due to a change in government policy related to rates of bonds. The remaining 5 % of the total inherited amount should be kept as cash at the bank (Baker, 2018).

Expected annual returns on the portfolio:

As per the above-mentioned portfolio details, the expected annual returns in the hand of Miss Brown are as follows:

InvestmentInvestment AmountThe expected return for the next 20 yearsAnnual expected return
Australian listed index6000004.60%27600
Govt Australian Bond 5000002.75%13750
Treasury Bond 147 4000003.25%13000

As per the objective of Miss Brown, she can earn an annual return of more than $ 70000 from the portfolio. However, there is a risk involved in this portfolio, which can be minimized with regular review and rebalance of the portfolio. The expected returns are taken for 20 years which may change due to many factors of the market (Brzica, 2012).

Risk related to the portfolio:

Every investment may have certain risks involved. There is always a correlate relation in risk and return means the higher the risk, the higher the return. The investor creates a portfolio by considering the risk factor at the required rate of return. The risk factor involved in the portfolio of Miss Brown is as follows:

Details of risk involved in investment

InvestmentInvestment AmountWeight of investmentExpected risk
Australian listed index6000000.300.25
Govt Australian Bond 5000000.250.06
Treasury Bond 147 4000000.200.06

As per the above information, the risk involved in the portfolio is 8.975 % that is the minimum risk faced by Miss Brown in the investment portfolio. The Govt Australian Bond and Treasury Bond 147 are a risk-free investment. However, there is always certain systematic risk involved in the investment which cannot be removed.

Ongoing monitoring:

Miss Jean Brown is required to review the portfolio frequently due to investment approx 50% of the total inherited amount is invested in highly risky assets. Miss Jean Brown has to review the portfolio monthly and rebalance the portfolio to minimize the risk along with a certain income on the portfolio (Jiamchoatpatanakul, & Thisadrondilok, K. (2015).

Part C: Recommendations:

Recommended portfolio:

Due to the Coronavirus pandemic, the market is adversely affected in September 2020; Miss Jean Brown has to rebalance her portfolio due to the adverse impact on the market. Coronavirus has impacted all industries and government policy adversely due to this rate of return on government securities decrease. The expected returns on the company's shares also get reduced which may affect the overall value of the portfolio. In the current situation, the investment portfolio should be revised by Miss Brown as follows (Fung, & Hsieh, 2017).

Miss Brown should diversify the investment in companies’ shares by investing the funds in the medical industry. The medical industry has good growth due to various tests and vaccines of Covid-19. Miss Brown should invest 25% in medical industry shares, 20% in Australian listed index securities, 5% in real estate investment trust, 15% in government bonds, 30% in treasury bonds, and 5% in cash at bank (Glassman, & Riddick, 2016).

Due to Covid-19, there is a highly adverse impact on the market of real estate as the income of people gets reduced due to unemployment and due to this investment in real estate also gets reduced. The government also reduced the rate of return on bonds and treasury bills that also reduce the income of Miss Brown. The revised portfolio after rebalancing is as follows:

InvestmentInvestment AmountThe expected return for the next 20 yearsAnnual expected return
Medical Industry shares5000005.80%29000
Australian listed index4000003.60%14400
Govt Australian Bond 3000002.25%6750
Treasury Bond 147 6000003.00%18000

The risk associated with the above portfolio is 10.25 %. The current condition is temporary as the government has made regular policies for minimizing the adverse impact on different industries due to Covid-19. Miss Brown has to review and monitor the portfolio as in the current scenario she can earn a high return by investing in different industries in a long time (Baker, Litov, Wachter, & Wurgler, 2014).


From the above information, we can conclude that the portfolio is the combination of different assets. The investment has a certain amount of risk along with the return on investment. The investor wants to protect the capital investment and for this purpose, investment is done in different securities. Miss Brown has invested inherited amounts in both risky and risk-free assets that provide the required return on an annual basis.

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