Task
After learning about the risk and return topics, you are interested to perform some analysis concerning the risk and return trade-off of various asset classes. You also learn about the benefits of diversification and would like to examine whether there are diversification benefits from investing across asset classes. In particular, you are interested to examine two traditional stock and bond indices, namely S&P/ASX200 and S&P Aggregate Australian Bond Index. You are growingly concerned about issues associated with sustainability outlined by the United Nations.
Therefore, you are interested to examine two sustainable indices, namely the S&P/ASX 200 ESG Index and S&P Green Bond Index. All indices are listed as follows. You can click on the hyperlinks to find out more about these indices.
1) S&P/ASX200
2) S&P Aggregate Australian Bond Index
3) $&P/ASX 200 ESG Index
4) S&P Green Bond Index
The indices or prices for these asset classes are available from the Excel File named ‘FIN80005 Index levels for various asset classes’. They are real financial data downloaded from the S&P Global website.
Requirements:
1) Calculate the average return and standard deviation of these asset classes over the last five years from July 2016 to June 2021. Note that you are provided with index levels so you will have to calculate returns for these asset classes. Provide brief commentary on the historical performance.
2) Analyze the historical return relationships of these asset classes. Provide brief commentary on the correlations of these asset classes.
3) Form an equally-weighted portfolio by investing the same proportion in S&P/ASX200 and S&P Aggregate Australian Bond Index. Based on your portfolio, perform backtesting and calculate the average return and standard deviation if you had held the portfolio for the last five years. Is the portfolio superior in terms of its risk and return tradeoff compared to individual asset classes?
4) Repeat (3) above but now using all four asset classes. Form an equally-weighted portfolio with these four asset classes. Perform backtesting and calculate the average return and standard deviation if you had held the portfolio for the last five years. Based on your findings, do you think that it is possible to earn a similar rate of return and at the same time, consider the sustainability aspect?
5) Provide recommendations concerning diversification and sustainability investing based on your findings.
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