Reference no: EM132628244

25728 Fixed Income Analysis - University of Technology Sydney

Australian Bond Portfolio Project

The Australian Bond Portfolio Project accounts for 20% of your overall assessment. In order to complete the assignment, you are required to construct a $10m, bond portfolio fund by choosing a portfolio of Australian Treasury bonds (ATBs) and to track the daily performance of your fund over a period of a few weeks. Here, the yields evolve in a daily real time fashion. Your bond investment universe is a group of more than 20 Australian Treasury bonds with maturities ranging from one to 30 years

Your group needs to complete the following tasks:

1. devise a portfolio strategy, taking account of anticipated movements in interest rates, which you believe will outperform other groups and the benchmark, of an equally weighted portfolio,
2. chart the progress of your fund over the 4-week period of investment on a daily basis,
3. at the end of the investment, analyse the performance of your fund in terms of daily return and risk. And of course
4. present a well written, well-illustrated report. Here is the schedule that you need to abide by:

Project Details
Length
The project should be about 1500 words and no more than 5 pages including graphs and tables

Portfolio Constraints
You must choose your portfolio from the 20 or so Treasury bonds (ranging from TB 124 to TB 156). You can engage, if you wish to, in limited short selling. Five bonds only can have a negative weight of up to -10%. You can exclude individual bonds from your portfolio by specifying a zero weighting. However, you are required more than least a 10% weight allocated to 4 individual bonds. Naturally, the sum of all of your weights must equal 100%.

You must also comply with a risk constraint. Your portfolio DV01 (BPV) must be greater than $3,000 but must not exceed $12,000 per basis point (See cell I28).

Devising a Bond Portfolio Strategy
As with the simulation exercise, you need to anticipate changes in the term structure of interest rates in order to optimise your portfolio performance over the investment period. Naturally, it is up to you what strategy/bond weightings you choose. However, you will need to justify your choice of weights in your final report.

Rebalancing Your Portfolio
With such a short investment period, I don't expect that you will need to rebalance your bond weights during the period. However, if feel that rebalancing is necessary, email me your new weight set. The new weight set will be applied from the date of your email. Frequent rebalancing will not improve your grade.

Daily Data Collection
You require daily data on the yields of Australian Treasury bonds in order to calculate daily return for your fund. This data can be found both contemporaneously and historically

Portfolio Administration Workbook
You will use the PortfolioAdministration workbook to manage your portfolio and to calculate daily return. Note that the PortfolioAdministration.xlsm requires the installation of FIA.dll file. (1) Download PortfolioAdministration workbook and (2) the FIA.dll file from Canvas. (3) Make sure these two files reside in the same folder. (4) Open the workbook. (5) Click on the Activate FIA dll button. If the installation is successful cell C2 should display a number. If this doesn't work, download the Installing the FIA dll document from Canvas
The input in cell N3 is an index of the daily data. An entry of 0 in N3 returns the starting yields. An entry of 1 in N3 provides day 1 yields and portfolio value etc.

Data clipped from RBA F16 is pasted into the data section range beginning top, left T3 (date in U7, yield data in columns V to AR). Note that the workbook currently contains some prior data in the range U5:AR27. This data will need to be replaced by data taken from the F16 workbook and posted on Canvas.

A Benchmark Portfolio
You will need to construct a bond benchmark portfolio with which to compare your chosen fund. For the purpose of this project your benchmark will consist of an equally weighted portfolio (this is the default portfolio in the workbook).

Project Elements
As stated above the project consists of three sections. Each of these sections should be approximately equal length (a page or so)

Choosing Your Portfolio
You must devise a clear strategy for choosing your particular portfolio. This strategy must be based on your assessment of how the yield curve will change over the next month. This assessment will based on knowledge of where the yield curve is at present and your, and other experts, view of the forces of change acting on the level and shape of the term structure of interest rates.

Please note the YieldCurveDrawing worksheet in the PortfolioProjectAdministration
workbook to assist with strategizing and writing up your report.

This first section of your report should include a comparison of the properties of your chosen portfolio compared to the properties of the bench portfolio. Deviations in the characteristics of your portfolio away from the benchmark should be consistent with your overall strategy.

Note that while you are not required to explicitly set out the rationale for your portfolio choice at the time of the commencement of the investment period, you will need to provide a detailed rational for your portfolio choice in your final report so make you choice wisely with the consideration of all group members.

Tracking the Fund over the Investment Period
Your report will include a section showing how daily fund value and fund return tracked over the month long investment period. Cell R3 shows running return from the beginning of the investment period. Cell R23 shows the value of the fund at any given date. You can calculate daily return from changes in portfolio value from day to day.
This section should include charts showing relevant changes in value and return for both your fund and the benchmark fund.

Evaluating Fund Performance over the Investment Period
Average daily return is an important metric of fund performance. However, risk must also be a consideration in judging the performance of your fund. You should annualise the average daily return figure by multiplying the daily average by 250 (there are approx. 250 working days in a financial year). The standard deviation of daily return can
be annualised by multiplying by .

In this section you should provide a rational for your fund's success or failure, both absolutely and relative to the equally weighted benchmark.

Getting Started
You need to meet with your group as soon as possible to discuss a process of deciding on an interest rate strategy and ultimately choosing a portfolio to submit. You should start researching contemporary opinion on future short-term interest rate movement. Your group needs to meet several times, prior to finalising on a set of weights and e- mailing me the weights by the deadline specified above

Attachment:- Portfolio Project Instructons.rar