Advanced Investment Management Assignment

Running head: ADVANCED INVESTMENT MANAGEMENT
Advanced Investment Management
Student Name:
Student Number:
Authors Note:

ADVANCED INVESTMENT MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Using the covariance matrix providing discussion regarding the rationale for choosing the 5
specific companies:....................................................................................................................2
Creating 5 different portfolios:...................................................................................................3
Recommending one portfolio to the client and explaining rational for the choice:...................4
Conducting an empirical test of the CAPM by describing the setup of CAPM and justify its
merits:.........................................................................................................................................5
Including a brief report summarizing the recent research regarding active or passive
management of investments:......................................................................................................5
Conclusion:................................................................................................................................6
References and Bibliography:....................................................................................................8
Appendix:...................................................................................................................................9

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Introduction:
The overall assessment directly aims in evaluating five different portfolios and
detecting the most adequate investment option that can be used by the investors to generate
high level of returns in the process. The adequate analysis of the covariance matrix is
conducted to identify the rationale behind choosing the five specific companies for
investment. This would eventually help in creating five different portfolios that would have
significant alterations towards its risk and return attributes. This could eventually help in
adequately recommending one of the portfolios to the client that would be suitable for
appropriate investments. For the evaluation is conducted on the Capital Asset Pricing Model
relevant calculations are conducted for each of the companies to detect and justify its merits.
Lastly, a summarization of the overall results of the recent research is conducted to identify
whether active and passive management of investment it is better for investors.
Discussion:
Using the covariance matrix providing discussion regarding the rationale for choosing
the 5 specific companies:
In the below appendix information regarding the covariance matrix for the five
selected companies is adequate represented this information is conducted to identify the
rationale behind the selection of such organization. The analysis has been conducted on the
basis of covariance values which tend to reach from 0.005601132 to 0.00509459. The
covariance matrix is mainly used for identifying the overall portfolio variance, which is
considered as an appropriate measure to derive the portfolio values and determine the risk
attributes of the investment. The analysis of the covariance value is relatively conducted for
detecting the overall standard deviation and the various condition of a particular stock, which

ADVANCED INVESTMENT MANAGEMENT
is relatively low in comparison to other investment options. The low level of risk factors
involved in the overall investment is relative detected from the covariance table, which can
allow the investors to identify the investment opportunity by diversifying the portfolio to
obtained high returns, and low risk attributes (Albulescu 2015).
One of the additional rationales for selecting National Australia Bank Ltd, ANZ
Banking Group, BHP Group Ltd, CSL Ltd, and Commonwealth Bank Australia is their
presence in the capital market, which is considered to be higher in comparison to its other
industry peers. The company selected for investment has a high level of market cap and
history of higher performance that could provide investors with adequate information
regarding their current trajectory and performance. The investors that have an exposure in the
above companies would eventually detect all the relevant options for securing their
investments and reduce the level of risk exposure to the portfolios. The companies are
considered to be giants in their sector, which could allow them to harness the ever changing
development of the sector.
Creating 5 different portfolios:
Minimum
variance
Lowest
return
Highest
return
Equally
weighted Optimal
E1 E2 E3 E4 E5
CBA.AX 25.15% 0.00% 0.00% 20.00% 27.55%
CSL.AX 35.65% 0.00% 99.83% 20.00% 47.64%
BHP.AX 21.32% 0.00% 0.17% 20.00% 20.05%
ANZ.AX 2.51% 100.00% 0.00% 20.00% 2.94%
NAB.AX 15.37% 0.00% 0.00% 20.00% 1.82%
Portfolio Risk 4.12% 6.36% 5.97% 4.34% 4.23%
Portfolio Return 0.78% 0.08% 1.64% 0.50% 1.00%
The 5 portfolios that has been created for investment is relatively considered on the
basis of the risk and return attributes. Therefore detecting the highest level of returns and the
lowest level of risk is mainly appropriate for identifying the investment opportunity that

ADVANCED INVESTMENT MANAGEMENT
would be generated from the particular investment. The portfolio that has been created also
consists of minimum variance portfolio, optimal portfolio, lowest return portfolio, highest
return portfolio and equally weighted portfolio. Brandstetter and Lehner (2015) stated that
with the help of different types of portfolios, investors are able to select the best suitable
options that would support their investment criteria and make relevant investment decisions.
Recommending one portfolio to the client and explaining rational for the choice:
Optimal
E5
CBA.AX 27.55%
CSL.AX 47.64%
BHP.AX 20.05%
ANZ.AX 2.94%
NAB.AX 1.82%
Portfolio Risk 4.23%
Portfolio Return 1.00%
After evaluating the overall portfolio that is created for investment in the above table,
the adequate investment opportunity for the client can be identified. The client can adequately
improve their performance by utilizing the Optimal Portfolio, as it would allow them to
generate high level of returns while reducing the risk factor involved in investment. The
utilization of optimal portfolio would eventually help the client to generate mediocre returns
while having the second lowest return that is attributed from their investment. The other
investment options such as minimum variance lowest return highest return and equally
weighted portfolio would eventually increase or decrease the return generation capability on
the basis of risk (Jordan, Miller and Dolvin 2015). The minimum variance portfolio with only
provide the lowest level of risk involved in investment while the returns would not be
appropriate. Moreover, the equally weighted portfolio has the second lowest level of returns

ADVANCED INVESTMENT MANAGEMENT
from an investment. The utilization of the optimal portfolio would relatively increase the
exposure of CSL limited, while using the overall exposure to ANZ and NAB.
Conducting an empirical test of the CAPM by describing the setup of CAPM and justify
its merits:
The analysis of the appendix has a relatively provided adequate information regarding
the capital asset pricing model that has been used for calculating the returns of each stock.
The graph also presents the overall security market line on which all the returns of the
investment are aligned. This mainly indicates that the values derived from the capital asset
pricing model are relatively adequate where the returns that is provided and expected from
the stocks are in lieu with the market trend. The beta coefficients for all the five companies
are relatively conducted by utilizing the Excel function. The returns of the market and the
other stocks are utilized for detecting the conditions of the investments. The beta levels are
relatively conducted to identify the risk levels of an organization and determine how much
fluctuations the share price would face when the capital market is volatile (Lahr and Mina
2016). Thus, with the help of beta values investors are able to understand and comprehend
the investment options that would help in reducing the level of risk and increasing return
generation capability of their portfolio.
Including a brief report summarizing the recent research regarding active or passive
management of investments:
The research that has been conducted for the investors relatively indicates that active
management of investments is better for an investor perspective in comparison to passive
management. The investors with the help of active management are able to identify all the
relevant changes to the investment portfolio and stabilize the level of risk that is affecting
their investment. The use of passive management would relatively increase the risk exposure

ADVANCED INVESTMENT MANAGEMENT
of the investors and force them to incur losses in the long run due to the inactive management
of the portfolios. Baker and Ricciardi (2014) stated that passive management in portfolios
does not allow the investors to accommodate the changes that has been made due to the
fluctuations in the market.
During the current era the overall fluctuations in the capital market is subject to the
alterations in the perspective of investors and other announcements made by government and
organizations. The continuous delivery of information to the investors regarding different
attributes of the investment is relatively altering the overall perspective of investors regarding
the investment scope. The continuous changes have relatively increased the concern for the
investors to actively manage their investments for reducing the level of risk that is faced
while conducting investments in the capital market. Investors that are following the passive
management system are relatively not able to comprehend the changes and make adequate
returns from their investments due to the change in the pricing conditions of the investments
(Bebchuk, Cohen and Hirst 2017). Investors are currently reliant on the mispricing that is
present within the capital market due to the continuous flow of information from organization
to the investors. Thus, investors utilizing the active management scheme would eventually
benefit from the mispricing and generate adequate returns in the process.
Conclusion:
The assessment has adequately provided the adequate investment opportunity to the
investors in the form of the optimal portfolio that could help in reducing the level of risk and
simultaneously generate adequate returns in the process. Therefore, relevant discussion has
been conducted on the choice of the five stocks that is used for creating the optimal portfolio.
The low level of covariance that is involved in the returns of the five stocks is the main
reason behind the selection of the organizations as investments. The recommendation for the

ADVANCED INVESTMENT MANAGEMENT
client is the optimal portfolio, as it comprises of adequate returns with the second lowest risk
involved in investment. The adequate derivation of the CAPM formula has directly indicated
that ANZ Bank requires the highest return, as the beta levels of the organization is highest
among the five selected stocks. Lastly, it is understood that investors need to engage in active
management of their investments, as the overall investment scope changes with the flow of
information into the capital market.

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References and Bibliography:
Albulescu, C.T., 2015. Do Foreign Direct and Portfolio Investments Affect Long-term
Economic Growth in Central and Eastern Europe?. Procedia economics and finance, 23,
pp.507-512.
Au.finance.yahoo.com. 2019. Yahoo is now a part of Oath. [online] Available at:
https://au.finance.yahoo.com/ [Accessed 31 Aug. 2019].
Baker, H.K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Bebchuk, L.A., Cohen, A. and Hirst, S., 2017. The agency problems of institutional
investors. Journal of Economic Perspectives, 31(3), pp.89-102.
Brandstetter, L. and Lehner, O.M., 2015. Opening the market for impact investments: The
need for adapted portfolio tools. Entrepreneurship Research Journal, 5(2), pp.87-107.
Investing.com. 2019. Australia 10-Year Bond Historical Data - Investing.com. [online]
Available at: https://www.investing.com/rates-bonds/australia-10-year-bond-yield-historical-
data [Accessed 31 Aug. 2019].
Jordan, B.D., Miller, T.W. and Dolvin, S.D., 2015. Fundamentals of investments: valuation
and management. McGraw-Hill Education.
Lahr, H. and Mina, A., 2016. Venture capital investments and the technological performance
of portfolio firms. Research Policy, 45(1), pp.303-318.
Reserve Bank of Australia. 2019. Cash Rate. [online] Available at:
https://www.rba.gov.au/statistics/cash-rate/ [Accessed 31 Aug. 2019].

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Us.spindices.com. 2019. S&P/ASX 300 (AUD) - S&P Dow Jones Indices. [online] Available
at: https://us.spindices.com/indices/equity/sp-asx-300 [Accessed 31 Aug. 2019].
Appendix:
1) Identify your portfolios and shares (with names and ASX identification codes).
Present all the key performance and risk measures in one table.
ASX
Code Name Key performance
CBA.AX Commonwealth Bank Australia One of the leaders in financials sector
CSL.AX CSL Ltd One of the leaders in health care sector
BHP.AX BHP Group Ltd One of the leaders in materials sector
ANZ.AX ANZ Banking Group One of the leaders in financials sector
NAB.AX National Australia Bank Ltd One of the leaders in financials sector
2) Include the covariance matrix. Do not present the raw share prices, index or the
returns data.
Covariance
Matrix CBA.AX CSL.AX BHP.AX ANZ.AX NAB.AX
CBA.AX
0.00325171
1
0.00075858
4
0.00087877
9 0.00249071 0.00232816
CSL.AX
0.00075858
4
0.00357071
5
0.00056011
3
0.00073754
6
0.00061217
4
BHP.AX
0.00087877
9
0.00056011
3 0.00509459
0.00094336
1
0.00107689
7
ANZ.AX 0.00249071
0.00073754
6
0.00094336
1
0.00404186
1
0.00327897
5
NAB.AX 0.00232816
0.00061217
4
0.00107689
7
0.00327897
5
0.00377543
6
3) Present a mean-standard deviation chart, which identifies all the portfolios and
shares in the one chart. Clearly label each portfolio and share. This chart must be
prepared using Excel.

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0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
Efficient Frontier and Capital Allocation Line Series2 Series4
Portfolio risk
Portfolio return
4) Present the estimated the beta coefficients for all of your chosen 5 companies in one
table.
Particulars
Bet
a CAPM
CBA.AX 1.05 0.23%
CSL.AX 0.96 0.23%
BHP.AX 1.18 0.24%
ANZ.AX 1.34 0.25%
NAB.AX 1.24 0.24%
Rf - 0.19%
Rm 1.00 0.23%

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- 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
SML
Rf
Linear (Rf)
CBA.AX
CSL.AX
BHP.AX
ANZ.AX
NAB.AX