You run a small, boutique investment advisory and financial planning business providing

financial services to retail investors. The company receives advisory and investment return

commission fees for providing investment advice and designing investment strategies and

portfolio for individual clients. You have recently been approached by a new client who is

looking to invest $1,000,000 outside of their employment-based superannuation account to

provide an additional nest-egg and funding source as they transition towards retirement. The

client has provided the following brief and guidelines associated with their investment


They have a reasonable level of risk tolerance, and are willing for their funds to be invested
in equity securities, listed investment companies (LICs) or exchange-traded funds (ETFs),

equity market option securities or futures contracts, and cash. They are looking for the

development of an investment portfolio with a capital growth perspective, and are less

concerned about ongoing income or the tax-effectiveness of the portfolio.

Given the current sharemarket uncertainty following the referendum decision in the UK to
leave the European Union (EU), they would only like physical share investments in the

highest-quality securities represented by the 100 largest listed companies on the Australian

Securities Exchange (outlined in the provided spreadsheet file). At least 40% of the total

investment funds are to be invested in physical equity securities and, to ensure a prudent

level of diversification, no more than 10% of the total funds are to be invested in any one

company. They would also like a minimum of 50% of the Australian direct share

investment component (excluding LIC and ETP investments) to be hedged using market

futures or option securities to provide some protection again adverse market movements.

They are comfortable with diversified investment in other segments of the Australian
sharemarket or in international markets through holdings in LICs or ETFs (list of preferred

LICs and ETFs is provided in the attached spreadsheet file).

They have indicated that short-selling of securities is also permissible, although sufficient
reserves are required to be held in a cash management account to meet re-purchasing


They have also approved the use of equity index futures contracts and option securities for
speculating or hedging purposes. Current information about these securities is as follows:

o The closing price of the December 2016 SPI 200 Futures Contract was 5,336 on

13/07/16 (Contract value represents A$25 × SPI 200 value). Each contract will

require creation of a $10,000 settlement account to meet margin movements.

o The preferred equity market call option is the SPI 200 (A$25 × SPI 200 value)

expiring in December 2016 with an exercise price of 4,950. The closing price of

this call option was $492.00 on 13/07/16.

o The preferred equity market put option is the SPI 200 (A$25 × SPI 200 value)

expiring in December 2016 with an exercise price of 4,950. The closing price of

this call option was $106.00 on 13/07/16

They have indicated that a maximum of 20% of the total funds can be maintained in a cash
management trust as a liquid and secure investment. The preferred cash investment is the

ANZ Cash Advantage Fund which is currently providing a return of 2.15% per annum.

The performance of the recommended investment portfolio proposed will be evaluated relative

to the performance of the S&P/ASX 200 index, which had a closing value of 5,388.50 on



This case study requires the completion of the following tasks:

An explanation of an underlying investment philosophy and strategy for the
development of the portfolio, which is consistent with the indicated requirements of

the client. Explanation and justification for this strategy, individually or relative to

alternatives, should be provided.

A description, in table or similar format, of the recommended portfolio components,
indicating the selected assets / securities and the magnitudes of investment in each.

A brief explanation of how each of the recommended investment components aligns
with the overall investment strategy.

Assume this portfolio construction is being done on July 13th 2016.

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