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

Topic: Analysis of an Investment Portfolio and Recommendations for the Future.

At the end of 2009, on the advice of a friend, your uncle invested $600,000 in a portfolio of 3 shares -

$200,000 in BHP, $200,000 in CSL (Commonwealth Serum Laboratories) and $200,000 in WBC (Westpac). The share prices than, and at the end of each year since, are shown below.

S & P ASX 200 End-of-year Values, 2009-2019

Following are the values of the S & P ASX 200 Share market Index at the close of business on the last business day of each year from 2009 to 2019.

End of year                                         Index Value at Close of Business

2009                                                                           4,870.6

2010                                                                           4,745.2

2011                                                                           4,056.6

2012                                                                           4,648.9

2013                                                                           5,352.2

2014                                                                           5,411.0

2015                                                                           5,295.9

2016                                                                           5,665.8

2017                                                                           6,065.3

2018                                                                           5,646.4

2019                                                                           6,684.1    

NOTES: 1. The ASX 200 reached and then exceeded 7,000 early in 2020.

              2. At close of business today (12 May, 2020), the ASX 200 value was 5,403.0. 

SOURCE:  “My ASX Dashboard, “End of Month Values, 2002 – April, 2020”, ASX (website).

              Accessed, 12 May, 2020. 

Each year since 2009, your uncle received and spent the dividends received from these shares, and did not alter the portfolio over this period. In fact, he has little knowledge of shares and investments generally.

Now your uncle seeks your advice as to whether he should retain his existing shares, or sell some or all of his portfolio and buy shares in another company or companies, or switch to another asset class. Youruncle is a widower with no children. He expects to live another 10 years, and you are his only beneficiary under his will.

You are required to track the annual performance of the value of the individual share investments, and of the overall portfolio, each year at 31 December, from 31 December, 2010 to 31 December, 3019.

Your brief requires you to submit a 2 parts report – first, to report on the annual and overall performance of each share investment, and of the portfolio, against the bench mark market index (as a benchmark, you may choose either the All Ordinaries Index or the ASX200 Index); and secondly, to make recommendations, supported by reasons, for any change in strategy going forward.

Task Details:

Part 1. You are required to prepare a schedule showing the value of each shareholding, and of your uncle’s overall investment portfolio at 31 December each year, from 2009 to 2019 inclusive. Include two extra columns in the schedule, one is showing ASX200 and the second showing the calculated value of your uncle’ portfolio if instead he had invested the $600,000 in this Index.at 31 December, 2009.

Part 2. From the foregoing schedule, calculate the annual percentage returns (correct to 2 decimal places) of each share, the portfolio and the selected market Index for each year over the decade from 2010 to 2019 inclusive, and present in appropriate tables.

Further, calculate and present in tables, for the decade, the following:

a. The arithmetic annual return and the geometric annual return for each share, the portfolio and the selected market Index.

b. The standard deviation and the co-efficient of variation of each share, the portfolio and the market Index.

c. The covariance of the average annual returns on each share with that of each of the other shares in the portfolio, i.e., the covariance of BHP with CSL, of BHP with WBC, and of CSL with WBC.

d. The correlation coefficients of the average annual returns on each share with each of the other shares in the portfolio, i.e., the correlation coefficient of BHP with CSL, of BHP with WBC, & of CSL with WBC.

e. The covariances and correlation coefficients of the average annual returns of the portfolio with those of the selected market Index.

f. The Sharpe Index or ratio for each share, the portfolio and the market Index. Assume a risk- free rate of 4% p.a. operated over the decade.

Part 3. Prepare a detailed report on the performance of your uncle’s portfolio, noting any over- or under- performance in relation to each share individual, and of the portfolio overall, all compared with the performance of the selected market Index (the benchmark) and note the reasons for these variations.

Your report should then extend to include (with reasons) recommendations as to whether, going forward for the next 10 years, you would make any changes to the portfolio now. (May, 2020). These recommendations would include which holdings you would increase, decrease, retain or replace, along with the identification of – and reasons for selecting – the recommended replacement investments. In making your recommendations, you may relax the requirement that 100% of the portfolio be invested fully and equally in 3 shares, and include other asset classes in your recommended investment mix (even zero amounts in shares, if desired).