ACTL2111 2020 Term 1 Excel Assignment

Deadline: Friday 17 April 2020 at 5pm sharp

Jackson is a fresh actuarial graduate who just started his first full time job in a reputable insurance company in Sydney on 1 January 2020. Upon the start of his job, Jackson also decided to make an investment to accumulate a deposit to purchase his first home in 10 years time. As a junior actuary who passed Part I and Part II exams, Jackson has a personal preference of passive investment strategies, that is, investments consisting of fund tracking well-diversified portfolios and government bonds only.

To make such important investment decision, he consulted a bank regarding his investment strategy.

You, a junior analyst in the bank, have received the case from your supervisor, with the following information.

a. Salary:

(i) Jackson's annual starting salary is $60,000 (after income tax) and it will increase by 5% every year at the beginning of each year.

(ii) There are three actuarial exams Jackson will take. His salary will increase by 20% (i.e. 15% extra compared to the regular increase described in paer (i) above) at the beginning of the year after he passes an exam. Since he is working full time, he will take only one exam every year and his chance of passing each exam is 30%, independent of his performance in previous exams (if there is any).

(iii) He receives his salary monthly on the last day of each month (i.e. the first payment will be on 31 January 2020).

b. Savings: Jackson is very keen on saving as much as possible for his deposit, so he has decided that each month when he receives his salary, he will put 30% of it to his investment portfolio.

c. Investment options: After a meeting with Jackson, your supervisor has shortlisted the following two investments for Jackson:

Option 1: 70% Vanguard Australian Shares Index Fund; 30% government (zero-coupon) bonds maturing on 31 December 2029,

Option 2: 50% Vanguard Australian Shares Index Fund; 50% government (zero-coupon) bonds maturing on 31 December 2029.

For example, in Option 2, Jackson will invest 15% of his salary to in government bonds and 15% of his salary in the index fund every month. The index fund does not pay dividends.

d. Bond return: Your colleague in the interest rate modelling team has given you the current spot yield curve using the dynamic Nelson-Siegel model, where the (annual effective) τ -year spot yield at time t is it,τ% with it,τ given by

it,τ = β1,t + β2,t

(1− e−λτ

λτ

)

+ β3,t

(1− e−λτ

λτ

− e−λτ

)

, (1)

where λ = 0.7173 is a parameter. Here both t and τ are measured in years, where t is the amount of time from 1 January 2020 and τ is the remaining time (counting from time t) until maturity. (Note that it,τ will not be known before time t, and therefore from time 0's perspective it is modelled as a random variable.) The starting values of the β's are given by

β1,0 = 3.5,

β2,0 = − 1.5,

β3,0 = − 2,

1 and then for subsequent values of t = 1/12, 2/12, ..., 10 they satisfy the recursive relationship

β1,t = 0.35 + 0.9 β1,t−1/12 + ε1,t.

β2,t = − 0.28 + 0.8 β2,t−1/12 − ε1,t,

β3,t = − 0.81 + 0.7 β3,t−1/12 + ε2,t,

with

ε1,t ∼ N(0, 0.11),

ε2,t ∼ N(0, 0.21).

Here all εj,t's are assumed to be independent (j = 1, 2 and t = 1/12, 2/12, ..., 10).

f. Costs and fees and others: At this stage, your supervisor is going to present the two products (described in c.) in preliminary form to Jackson so you do not need to consider the details such as costs, fees, taxes on investment and reinvestment of the bond coupons.

You need to perform the following analyses for your supervisor to present to Jackson:

1. Project Jackson's salary over the next 10 years (from the first payment on 31 January 2020 to the payment on 31 December 2029), under the following scenarios:

(i) He passes the three exams in 2022, 2024 and 2026 (average scenario);

(ii) He passes the three exams in 2020, 2021 and 2022 (best scenario);

(iii) He passes the three exams in 2024, 2028 and does not pass the last exam before 2030 (bad scenario).

Also calculate the probability of each of the scenarios (i)-(iii).

2. Interpret the β terms in (1). Via simulation, plot the spot yield curves at 1 January 2025 and 1 January 2029 respectively, for 0 ≤ τ ≤ 10. (Hint: You only need to simulate one trajectory when plotting the two yield curves, and the yield curves are dependent.) Explain the shape of the curves. Also interpret the formula (2).

3. For each of the options in the average scenario, run 100 simulations on the terminal value of Jackson's investments and calculate relevant summary statistics including the mean, standard deviation, minimum, maximum, median. Plot the histograms for the terminal values of the two options in the same graph.

*Hint: You may want to create a new worksheet and use VBA to copy your answer in each simulation to the new worksheet.

The log return of the fund over the period [t1, t2] is defined to be log

F (t2)

F (t1)

, where F (t) is the fund value at time t.

4. Provide a brief recommendation to Jackson based on your analysis (max. 250 words). This should be placed in a separate sheet within the same EXCEL file.

Assignment submission procedure

Your assignment must be uploaded as a unique EXCEL document. As long as the due date is still future, you can resubmit your work; the previous version of your assignment will be replaced by the new version.

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Please note that the School of Risk and Actuarial Studies will apply the following policy on late assignments. A penalty of 25% of the mark the student would otherwise have obtained, for each full (or part) day of lateness (e.g., 0 day 1 minute = 25% penalty, 2 days 21 hours = 75% penalty).

Students who are late must submit their assessment item to the LIC via e-mail. The LIC will then upload documents to the relevant submission boxes. The date and time of reception of the e-mail

determines the submission time for the purposes of calculating the penalty.

You need to check your document once it is submitted (check it on-screen). We will not mark assignments that cannot be read on screen.

Students are reminded of the risk that technical issues may delay or even prevent their submission (such as internet connection and/or computer breakdowns). Students should then consider either submitting their assignment from the university computer rooms or allow enough time (at least 24 hours is recommended) between their submission and the due time. The Turnitin module will not let you submit a late report. No paper copy will be either accepted or graded.

In case of a technical problem, the full document must be submitted to the LIC before the due time by e-mail, with explanations about why the student was not able to submit on time. In principle, this assignment will not be marked. It is only in exceptional circumstances where the assignment was submitted before the due time by e-mail that it may be markedand this only if a valid reason is established (and the LIC has the discretion in deciding whether a given reason is valid).

Plagiarism awareness

Students are reminded that the work they submit must be their own. While we have no problem with students discussing assignment problems if they wish, the material students submit for assessment must be their own. In particular, this means that any code you present are from your own computer, which you yourself developed, without any reference to any other student's work.

While some small elements of code are likely to be similar, big patches of identical code (even with different variable names, layout, or commentsTurnitin picks this up) will be considered as plagiarism.

The best strategy to avoid any problem is not to share bits and pieces of code with other student outside your group.

Note however that you are allowed to use any EXCEL files that were made available during the course (either from the lectures or developed in the lab tutorials). You don't need to reference them formally, and this will not be considered as plagiarism.

Students should make sure they understand what plagiarism iscases of plagiarism have a very high probability of being discovered. For issues of collective work, having different persons marking the assignment does not decrease this probability. For more information on plagiarism, see [click].