Asx Portfolio Assignment Essay Example
Asx Portfolio Assignment Essay Example

Asx Portfolio Assignment Essay Example

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Executive Summary

The report aims to evaluate two portfolios: an index tracking portfolio and a speculative capital growth portfolio. Both portfolios were active from April 21, 2008, to May 20, 2008. The index tracking portfolio seeks to replicate the returns of the ASX/S&P 500 New All Ordinaries price index, while the speculative capital growth portfolio aims to surpass the market and optimize capital gains. For the tracker portfolio, a total of 11 stocks have been selected.

The portfolios are determined using two criteria: capitalization-based sampling and stratified sampling. The capital growth portfolio consists of 8 stocks from the five major Australian industry sectors. The Appendix provides an overview of the selected companies. Both portfolios are evaluated using three performance measures: Sharpe’s Index, Treynor’s Index, and Jensen’s Alpha. During the observation period, both portfolios have moderately replicated the AOI, with the capital gr


owth portfolio performing relatively better than the Index portfolio.

Comparison of Growth Rate of Portfolios and Market

Index Tracking Portfolio Overview

The objective of the Index Tracking Portfolio is to select a manageable number of shares that can match or outperform the overall market performance. The composition of the portfolio is determined based on three main factors: market capitalization ratio, historical share price performance of the company, and industry performance.

This report analyzes and compares the performance of a portfolio containing eleven shares from ASX50 with the performance of the ASX All Ordinaries Index. The composition of the portfolio is discussed in the next section. The portfolio was created by gathering market capitalization rate and industry information for each company in ASX50, analyzing their financial data, and grouping them based on market capitalization rate into separate industry groups. The dail

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compound rate of return for all ASX50 stocks between April 2, 2007, and May 18, 2008, was calculated along with the annual average return for each company and the market as a whole. Based on this data, eleven shares were chosen for the Index Tracking Portfolio. The BCOVARIANCE portfolio function was used to construct the covariance matrix for these shares while determining their weighting in the portfolio using the BWSSN portfolio function. Alongside this analysis, a Capital Growth Portfolio Overview is provided to maximize total capital over a one-month period by examining shorter periods of historical data to achieve more sensitivity in results. The Capital Growth Portfolio disregards industry grouping information and market capitalization rates but instead focuses on selecting shares with high annual average returns. Several steps are involved in constructing this Capital Growth Portfolio process.
The text provides a detailed analysis and construction of a portfolio using ASX50 stocks. The process begins by calculating the daily compound rate of return for all ASX50 stocks within a specific time period. Next, the annual average return is determined for each individual stock as well as for the overall market. Based on this information, ten stocks with the highest annual average returns are chosen to form the portfolio. To create a covariance matrix for these selected shares, the BCOVARIANCE portfolio function is utilized. Finally, using the BWSSN portfolio function, the weighting of each stock in the portfolio is determined. The given table presents a summary of both the daily value of the portfolio and growth in dollar value for each portfolio. Additionally, graphs can be generated to visually illustrate performance differences between these two portfolios.

The two graphs

below demonstrate that the Capital Growth portfolio has a higher daily growth in dollar value compared to the index portfolio. This is evident in terms of the total daily value of the portfolio and the daily growth in dollar value. The graph above visually represents that the continuously compounding daily return growth of the capital growth portfolio surpasses that of the index portfolio, but it is slightly more volatile, particularly on May 1, 2008.

Additionally, the mean and standard deviation of the returns for both portfolios are compared to those of the all ordinaries index over our investment horizon. Firstly, we can observe this comparison through the table below which showcases the performance of the all ordinaries index over this horizon.

Furthermore, summarized in a table below are provided with mean and standard deviation values for both portfolios as well as for All Ordinary Index. Finally, depicted in another graph below is a comparison between mean/standard deviation values for both portfolios and All Ordinary Index.

The performance of each portfolio is assessed against its stated objectives and an appropriate performance measure. Performance measurement is conducted using a risk-adjusted approach, with a standard index data serving as the benchmark for comparison. To determine the diversification of the portfolio during the evaluation period, a table is generated to compute the beta, intercept, systematic, and unsystematic risks for both the portfolio and benchmark index. The Capital Growth Portfolio has specific constraints which include being comprised solely of ASX listed ordinary shares with a minimum of five different shares but no more than 20 shares. It also has an initial value of $10 million and assumes that short selling is not possible.

The Sharpe index, which takes into account both systematic and unsystematic risks, is commonly used for undiversified portfolios or investments. The calculation incorporates an average 10-year Treasury bond rate of 5.25%.

The Capital Growth Portfolio outperformed the Index Portfolio according to the Sharp index, which measures the reward-to-variability ratio for evaluating non-diversified portfolios. Since our portfolio lacks diversification, it is appropriate to use the Sharp index to assess its performance. This index considers all risks and penalizes insufficiently diversified funds.

Treynor’s Index

The Treynor Index compares returns on systematic risk and does not consider unsystematic risk in its evaluation. Assuming a well-diversified portfolio, it demonstrates that the Capital Growth Portfolio outperformed the Index Portfolio. However, in this case of an unproven diversification level, using the Treynor index for performance measurement would be inappropriate.

Fundamental Analysis

The Australian economy has experienced consistent growth over the past fourteen years, boasting one of the highest average growth rates among OECD nations during this period. In June 2006, Australia's net worth was valued at $5,336 billion in current prices, representing a $448 billion increase (9%).

Jensen's Alpha, also referred to as Jensen's Index, assesses investment performance by comparing the return on investment with what would be expected based on the Capital Asset Pricing Model (CAPM). This metric reveals that the Capital Growth Portfolio outperforms Index Perform. However, it is important to note that Jensen's Alpha solely pertains to reasonably diversified portfolios.

From June 30, 2005, there has been a 2% increase in total assets resulting from transactions worth $58 billion. In general, the total assets have increased by 10.7%, reaching $6,671 billion. Furthermore, liabilities have grown by 17.5% and are currently valued at $1,335 billion.

The Treasury

department forecasts that Australia's GDP will rise by 3.75% in the year 2007-08, which is a notable improvement compared to the previous year's growth rate of 2.5%. The increase in real net national disposable income (4.4%) has surpassed GDP growth, primarily due to the strong expansion in the Terms of trade (10.8%).

The inflation rate in Australia is currently at a low of 2.4%. At the same time, the listed share market experienced a significant increase of $165.3b, bringing the total to $1,407.

In December 2007, the assets amounted to $33.5 billion, showing a growth of $131.5 billion over seven years and doubling wealth during that period. Australians hold direct shares accounting for 8.4% of total holdings.

However, despite this favorable progress, the Australian economy faces potential challenges such as the risk of a US economic recession and abnormal inflation in global resource prices, which may hinder its growth from 2007-2008.

Hence, in summary, the uncertain global economic condition will hinder Australia's growth.

Sector analysis

The Treasury papers acknowledge that there is an adjustment happening in the economy due to the increased demand for Australia's mineral and energy resources globally. It predicts positive growth in these sectors for 2007-08 after a $55 billion investment in production over the past five years. The mining industry has consistently contributed around 4-5% to Australia's GDP in the last decade. Additionally, the trend estimate of turnover for the Australian retail sector showed a moderate growth of 0.6% in April 2007, maintaining this trend for 17 months.

Food retailing has experienced strong trend growth for five months, while clothing and soft goods retailing as well as hospitality and services have had moderate trend growth for four months.

However, department stores and recreational goods retailing declined in 2007.

The energy sector in Australia comprises various resources including oil, natural gas, steaming coal, coking coal, coal seam methane gas, and uranium. This industry plays a crucial role in generating wealth by employing millions of Australians, supporting government revenue collections, and generating valuable export revenue for the Australian economy. Currently, the energy industry is undergoing significant changes due to climate change issues.


  1. Company profile URL:

au/af/finhome? xtm-licensee=finanalysis, (June 1, 2008)

  • Daily statistical release URL: http://www. rba. gov. au/statistics/indicative. html (May 10, 2008)
  • Gaynor, P.
  • The book "Introduction to time-series modeling and forecasting in business and economics" by E. and Kirkpatrick, R. C. (1994) was published by McGraw-Hill in New York. This information is taken from the Investment Management (25721) Lecture Notes written by BF.

    In January of an unspecified year, Hunt accessed several finance-related sources. These sources included Yahoo!Australia and NZ Finance at the URL, as well as Reserve Bank of Australia from 2001 to 2007 at Bloomberg from 2007 was also consulted. The dates of access for these sources are mentioned as May 30th, another unspecified date in May, and April 16th respectively.

    bloomberg. com

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