The assignment uses the total return performance of direct property, shares, A-REITs, bonds and cash over 1985-2019.
Step 1: Download the excel file “Assessment 2 Total Return Index Data”.
Step 2: Perform analysis using the data based on the questions below.
Step 3: Export analysis results (in tabulated form) into Microsoft Word and write comments for relevant questions. Please make sure tables are properly formatted. Calculation working is not required.
Overview
The aim of this assessment is to conduct the empirical property performance analysis to understand the significance and role of property in a mixed-asset portfolio over various investment horizons.
Details
You are required to assess the investment attributes of the Australian property market and other major asset classes by using the total return index of direct property (and its sub-sectors), shares, A-REITs, bonds and 90-day bills (cash). The total returns data will be available on the unit vUWS site.
Note: All numeric answers must have at least 2 decimal points and 2 significant figures
Total return performance 1985-2019
By using the total return index:
1) Graph the performance trends of direct property, shares, A-REITs and bonds over 1985-2019; comment on relevant trends.
2) Graph the performance trends of office, retail and industrial property sub-sectors over 1985-2019; comment on relevant trends.
3) Calculate the various annual returns for 1985-2019.
4) Calculate the average annual returns for each investment for the following time periods:
- 2015-2019 (5 years)
- 2013-2019 (7 years)
- Pre-GFC: 1985-2006
- Post-GFC: 2010-2019; based on the average annual return calculation, comment on their post-GFC performance in comparison to the performance observed in the pre-GFC period.
5) Calculate the average annual return and risk for each of these assets for the full period: 1985-2019; comment and compare the return and risk of these assets.
6) Calculate the correlation coefficient and construct the inter-asset correlation matrix for these assets over 1985-2019.
Note: For 4 and 5 above, use the geometric mean, not the arithmetic mean in calculating the average annual return.
7) Based on the analysis in Question 6, explain in-detail on the inter-asset correlations concerning portfolio diversification for the following scenarios:
- do A-REITs provide an effective property investment exposure for investors?
- are there any diversification benefits between the three direct property sub-sectors: office, retail and industrial?
- if an investor has a traditional portfolio of shares and bonds, would the inclusion of direct property enhance diversification benefits?
8) Based on the analysis in Question 6, discuss the inflation-hedging characteristics of direct property, A-REITs, shares and bonds.
9) Based on the analysis in Question 5:
- Construct the risk-return diagram for these investments.
- Calculate the risk-to-return ratio and return-to-risk ratio for these investments.
- Calculate the Sharpe ratio for these investments.
- Comment on their risk-adjusted performance.
Note: For Question 10 onward, use the post-GFC annual returns: 2010-2019
10) By using the post-GFC annual returns: 2010-2019 calculate the portfolio return and portfolio risk for the following property-sector only investment portfolios:
- 55% office / 45% retail
- 40% office / 25% retail / 35% industrial
11) By using the post-GFC annual returns: 2010-2019 calculate the portfolio return and portfolio risk for the following mixed-asset investment portfolios:
- 60% bonds / 40% shares
- 40% bonds / 30% shares / 20% direct property / 10% A-REITs
- Based on the analysis above, how does the inclusion of direct property and A-REITs impact the portfolio return and risk?
12) By using the post-GFC annual returns: 2010-2019, calculate the beta value and Treynor ratio for each of office, retail and industrial property; use direct property as the market benchmark. Discuss the results for these three property sectors in the context of return sensitivity, relative risk and risk-adjusted performance.
13) By using the post-GFC annual returns: 2010-2019, calculate the beta value and Treynor ratio for A-REITs; use shares as the market benchmark; Discuss the result in the context of return sensitivity, relative risk and risk-adjusted performance.
14) By using the post-GFC annual returns: 2010-2019, calculate the tracking error and information ratio for each of office, retail and industrial property; use direct property as the market benchmark; discuss the results for these three property sectors in the context of performance replication and efficiency.
15) By using the post-GFC annual returns: 2010-2019, calculate the tracking error and information ratio for A-REITs; use shares as the market benchmark; discuss the result in the context of performance replication and efficiency.
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