FINM7403 Portfolio Management
Business School, University of Queensland
Project Task Document
Semester 2, 2023
Parts A & B due at: Fri, 20 Oct 2023, 11:59PM
Part C due at: Fri, 27 Oct 2023, 11:59PM
Submission: You should submit your report as a single
pdf file that includes a cover page, executive summary, responses to
Parts A and B, reference list and any appendices, if included.
This assignment has a total mark of 30.
It contributes 30% to your final grade.
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Project Task Document
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This is a group assignment to be completed in teams of at most five. The main project is split into two parts,
and you’re also required to complete a peer review of your team members after the submission of your report.
The task sees you assume the role of a portfolio management team in a fictional Australian asset management
firm, AlphaLink Strategies Group (AlphaLink), required to complete several of the practical steps involved in
establishing an investment portfolio of equities by drawing on the concepts taught in this class. You will be
taking a top-down approach to your investment decisions, with the end goal of forming an equity portfolio that
is diversified across industries but with a focus on certain industries and a tilt towards certain individual stocks
that your analysis determines to be more profitable. In Part A, you’ll undertake an asset allocation decision-
making process to select several industries to invest in and the weights of those industries in your overall
portfolio. In Part B, you’ll engage in security selection by analysing four individual stocks in greater detail and
selecting two stocks to increase the weight of and two to decrease the weight of in your portfolio. Your overall
mark for these sections may be increased or decreased during the peer review process.
Part A – 15 marks, 2000 words
Scenario
The date is 31 July 2023. You’ve been assigned by your immediate supervisor at AlphaLink onto a new
team that’s been brought together to develop AlphaLink’s Dynamic Cycle Navigator (DCN) fund. The
objective of the fund is to always be invested in a diverse set of the ASX’s industry sectors, but to rotate the
specific industries included in the portfolio along with the business cycle, remaining ahead of cyclical market
movements through ongoing detailed analysis of potential economic shocks. You’ve been instructed to follow
a top-down investment process in order to stay ahead of macroeconomic trends that may signal a profitable
time for sector rotation in your portfolio. As the fund is just being developed, your team has the responsibility
of establishing its initial holdings based on your analysis of the current outlook of the Australian economy
and presenting a report to your supervisor to explain your investment strategy.
Task Summary
You must select between four and six ASX industry sectors to add to your portfolio from amongst the sectors
represented by S&P/ASX 200 sector indices. The sectors you choose should be based on a macroeconomic
and industry analysis of the Australian economy that includes (i) an assessment of the current state of the
business cycle; (ii) an assessment of the market expectation of the state of the business cycle in the near
future; and (iii) a qualitative analysis of at least one potential economic shock and the consequences of that
shock(s) to the expected returns and variances of sector returns. You will also need to optimise your portfolio
weights according to Modern Portfolio Theory by first calculating sector expected returns, variances and
covariances from historical data, updating those calculations in a reasonable way based on your analysis of
the economy, and then finding the portfolio of those selected sectors that has the maximum Sharpe Ratio
based on your estimates. As a team, you’ll need to produce a written report that details every part of your
chosen investment strategy in at most 2000 words.
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Detailed Task Description
These are the ASX industry sectors that you may select from:
• Consumer
Discretionary
• Consumer Staples
• Communication
Services
• Energy
• Financials
• Health
• Industrials
• Information
Technology
• Materials
• Utilities
In assessing the current state of the business cycle in Australia you should visually analyse trends in
quantitative economic indicators discussed in class and qualitatively analyse recent economic shocks
that are relevant for industry performance.
In assessing the market’s expectation of future business cycle trends, you should discuss any recent trends
in economic indicators that signal changes in the business cycle and that would be clearly visible to market
participants, as well as undertake additional research, citing sources such as financial news articles or
opinion surveys that indicate the public’s perception of the direction of the economy.
Your analysis of a potential future economic shock should be justifiable, be a logically sound development of
ideas based in present facts and produce meaningful outcomes with respect to the impact on expected
industry returns and variances of industry returns.
You do not have to calculate the expected returns and variances of every sector and adjust them according
to your analysis before choosing the 4-6 sectors that will be including in your portfolio, but the outright
exclusion of sectors from your quantitative analysis should be in some way justified by your macroeconomic
and industry analysis. For the sectors that you do select to invest in, you should calculate the expected
return and variance of each using a reasonably-sized period of historical data. After calculating expected
return and variance for each sector, you should adjust each of these figures up or down by any amount that
is justified by your economic analysis. [Note: It would also make sense, and may make a meaningful
difference to your weights, to adjust estimated covariances based on your analysis. You are not being asked
to do this. Not only would it add much more busywork, but adjusting individual covariances by hand also
requires special care because the matrix of covariances is required to maintain a special property called
“positive semi-definiteness”, which, if that property is broken, would make it possible to build a portfolio out of
some combination of those assets so that the overall portfolio would have a negative variance].
You can obtain historical ASX 200 sector index value data from CapitalIQ. You are not assessed on any
decision you make about whether to use index data that is adjusted for dividends.
In calculating the Sharpe Ratio of your portfolio, you need to decide what value you’ll use as the risk-free
rate. You’re welcome to determine this yourself as a team in some justifiable way, or you can use the
Australian Government 2-Year Bond yield as at the end of July 2023, which is 4.09%.
The task scenario places you in the role of a portfolio manager writing a report to your supervisor, and this
should guide your language use and structure for the most part, but you must ensure that your report covers
all parts of your analysis, even if some explanations may feel unnatural to give in the context of the report. In
particular, you must show that you optimised your weights correctly under Modern Portfolio Theory, rather
than by guess-and-check, by including figures (images) in your report showing the steps you took in Excel
(or any more sophisticated software that you choose) to get your portfolio weights.
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Part B – 10 marks, 1500 words
Scenario
After establishing the core industries that the Dynamic Cycle Navigator (DCN) fund will invest in, your
supervisor has tasked you with performing a more detailed analysis of individual stocks from your chosen
industries. The objective of this stage of the top-down investment approach is to enable you to make fine-
tuning adjustments to the makeup of the portfolio with the goal of profiting from identified stock mispricing.
Task Summary
You must select two stocks from your portfolio to increase the weighting of and two stocks to decrease the
weighting of. Your decision should be based on various valuation techniques simultaneously. For each stock
you should undertake (i) a financial statement analysis that includes a comparison of relevant key financial
ratios over time and/or across similar firms; (ii) a discounted cash flow valuation; and (iii) a valuation by the
method of multiples. As a team, you’ll need to produce a written report that details every part of your security
selection analysis in at most 1500 words.
Detailed Task Description
The stocks you analyse should all operate in the industries that you decided to invest in in Part A of this task.
One way to find candidate stocks within the right industries is to check the index constituents on Capital IQ
for each chosen industry index.
In undertaking your financial statement analysis for each stock, you should source the actual financial
statements of each firm from their annual reports. Your current stance on the firm should be based on the
financial statements that were released most recently prior to 31 July 2023, but you can look at prior years’
statements to comment on trends over time. Your financial statement analysis should culminate in a basic
qualitative assessment of the prospects of the firm.
In undertaking a discounted cash flows analysis, you can choose to do either a dividend discount model
(DDM) analysis or a discounted free cash flows model (DFCFM) analysis, but you should justify your choice
of cash flows either way. To complete a discounted cash flows analysis you’ll need to estimate (a) the
appropriate discount rate for the type of capital being valued; and (b) future cash flow amounts, including a
terminal growth rate beginning after some specified duration.
a) You should estimate the cost of equity capital using the CAPM. You can obtain the beta of
your stocks from Capital IQ, and you should use the same value for the risk-free return that you
did in Part A. You can calculate the expected return on the market index in any reasonable way,
including simply taking an average of recent returns provided by the ASX 200 index over a
reasonable time period.
If you need to estimate the cost of debt, you can do so in any reasonable way. One option is to
calculate the average cost of debt for the firm in the most recent financial year by dividing total
interest expenses by the total of long-term debt on that firms’ most recent statements. You will
also need a value to use for the tax rate of the firm. It is fine for the purpose of this assessment
to use either (i) the Australian corporate tax rate of 30%; or (ii) total taxes paid divided by total
pre-tax income on the firms’ most recent statements, which more closely estimates the firm’s
effective tax rate after all other considerations are made.
b) You can choose any number of growth stages, though the choice must be justified and
reasonable given the stage of the firm’s industry within the industry lifecycle. You should use
the average growth of Australian GDP as your long-term growth rate, which you can
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estimate in any reasonable way. As long as you provide a basic justification for your choice of
short-term cash flow growth amounts, you can structure these in any way.
If you’re undertaking a DFCFM analysis, you should consider and comment on the growth of the
components of free cash flows (e.g., sales, operating expenses, depreciation, etc...), and
estimates of free cash flows should be calculated from these, rather than estimating growth of
free cash flows directly.
No matter which cash flows you choose to analyse, you can estimate the growth of the relevant
data by taking an average of historical growth rates, or by making reasonable assumptions
about the ROE and DPR of the firm based on that firm’s financial statements and using the
equation = ⋅ (1 − ), or by any other reasonable means so long as the method is
sufficiently justified.
You can select any sensible valuation multiples in valuing the stocks by the method of multiples, but each
stock should be priced by at least 2 different multiples. It’s fine to use the same 2 multiples for each stock, or
to change the multiples across stocks.
Your DCF and multiples valuations should produce a price target (an estimate of intrinsic value) for each
stock. It is very likely for each method to produce different estimates of intrinsic value. You can treat these
results as a range of likely price targets in making your decision whether to increase of decrease the weight
of the stock. You should highlight in your report any large disparity between the outcomes of the different
valuation methods and give an explanation for what might cause such a disparity.
The amount by which you increase or decrease the weight of each stock is not important. All you’re tasked to
do in this part of the project is determine two stocks that should have their weights increased and two that
should have their weights decreased. In any real scenario where a portfolio manager is performing security
selection analysis they would analyse a large number of stocks, and so would have many stocks to select
from to increase or decrease weights. This assessment recognises that if students were required to find two
overpriced stocks and two underpriced stocks, some teams may, by random chance, be left with a much
larger workload if they happen to choose stocks that they analyse as being all overpriced or all underpriced.
For that reason, it’s sufficient for you to justify your choices for which stocks would increase or
decrease in weights by showing that those stocks are priced more or less favourably than the other
stocks that you analysed. For example, if you find that of the four stocks you analysed, one is overpriced
by 40-50%, one is overpriced by 30-45%, one is overpriced by 10-20% and one is underpriced by 5-10%,
you will satisfy the task requirements by select the best two of those stocks (in this case, the latter two) to
have their weights increased, even though one of those stocks still appears overpriced. This is an unrealistic
simplification applied solely for the sake of consistency in the assessment requirements between teams.
You can do any other analysis not mentioned here if you feel it would add to your rationale for which stocks
to increase or decrease the weights of, but you are not required to do so, and you must remain within the
word limit of 1500 words for your response to this part of the task.
As in Part A, you must ensure that your report covers all parts of your analysis, even if some explanations
may feel unnatural to give in the context of the report as set out in the task description.
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Communication & Formatting – 5 marks
In addition to the marks you receive for Parts A and B, marks are also allotted for the quality of your
communication and your adherence to formatting requirements.
Writing Style
The report should be written in a professional tone and with language appropriate for a portfolio
management team submitting a written report to their supervisor. The language should be clear, concise,
and free of spelling or grammatical errors. However, you should balance this professional tone with language
suitable for a university assessment. For example, you should avoid unnecessary jargon that isn’t in
common use throughout the course and provide definitions for any terms drawn from external sources. You
should also provide detailed documentation of the steps of any numerical analyses you undertake even
where this might be able to be taken for granted in an actual industry report. You are not required to explain
basic concepts that have been taught in FINM7403.
Structure
You should also include an executive summary in no more than 200 words at the start of your report that
summarises the key ideas in your analysis as well as your final investment decisions. The entire report
should be structured logically, with both Part A and Part B each having a clear introduction outlining the
objective and approach, a detailed main body discussing the analyses, and a concise conclusion
summarising the recommended investment strategy for that part. For clarity, you should write two
introductions and two conclusions. You are not required to write an introduction or conclusion for the
report as a whole.
Visuals
It is appropriate to include any figures, tables, and graphs you find useful to illustrate features of your
analysis if they meaningfully aid the reader in understanding the report. Any visuals used should be clearly
labelled and appropriately scaled. Any part of your analysis completed using Excel or another chosen
software should be clearly documented. This includes providing figures that show the results of your analysis
in the software, but also figures (e.g., screenshots) that document the entire process well enough that it’s
clear to the reader what steps you’ve taken along the way and could recreate your work given sufficient time.
Failure to document your numerical analysis will result not only in a loss of communication marks, but also
will prevent accurate marking of the analysis itself.
Referencing
All external sources, such as financial news articles, opinion surveys, annual reports, or journal articles,
should be correctly cited using the UQ Harvard referencing style. A guide to this style can be found at:
https://guides.library.uq.edu.au/referencing/uqharvard. Completing this task accurately requires additional
research, and you're expected to include appropriate references. Failure to do so will impact directly on your
marks for each of Parts A and B. You do not need to provide a source for ideas taught in FINM7403 and
need not include class materials or the class textbook on your reference list. You should not overuse direct
quotations in your report and any quotations that you do find necessary to include should be appropriately
cited also.
Formatting
Do not exceed the individual word limits set on either of Part A or Part B. These limits don’t include your
reference list, figures, or tables. It is not necessary to include an appendix, and anything placed within an
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appendix will not be directly marked, but you are permitted to include appendices if they would aid the reader
in understanding your report.
Your report should be double-spaced, use a standard, easily readable font in size 12, use normal margins
on all sides, use justified text (i.e., aligned to both the left and right margins), and include a page number in
the bottom right-hand corner of every page. You should add a cover page that lists the full names of
everyone in your group, with family names written after given names, alongside your student numbers. You
should also include the course code, your tutorial code (e.g., T01) and day of the week and start time
(e.g., Wednesday 10am Tutorial), your group number within that tutorial, and the word count for each of
Part A and Part B on the cover page. Finally, you should include your tutorial code and group number as a
header on every page.
Deliverables
You must submit a single pdf file containing your entire report. This should include your cover page,
executive summary, responses to Parts A and B, reference list and any appendices, if included. You are not
required to submit any Excel file or other software file and should instead document your software usage
within your report as instructed. One representative from your team should upload the report using the
submission link on the Learn.UQ (Blackboard) site in addition to the Turnitin submission link. It’s important to
submit your report to both links as the Learn.UQ submission is the one that gets graded, which allows the
grade to be applied across all group members, while the Turnitin submission is necessary for similarity
checking and for checking your work for the use of generative AI.