BAFI 6010 Advanced Investment Management
The Complete Exam Bible · S2 2026BAFI 6010 Overview
- University of Adelaide
- S2 2026
- 10 chapters
- Finance
BAFI 6010 Advanced Investment Management is a postgraduate funds-management course that walks you through the full investment management process the way a professional manager runs it — specifying an investor's return and risk objectives, optimising a strategic asset allocation with Modern Portfolio Theory and risk budgeting, understanding traditional assets across the economic cycle, choosing between active and passive strategies, and judging managers with performance attribution and mutual-fund analysis.
- Assessed by Mid-Semester Test 30% · Group Assignment 30% · Final Examination 40%
- Key terms Strategic Asset Allocation (SAA), Efficient frontier, CAPM and the Security Market Line (SML), Beta
- How to prepare Treat the course as one continuous funds-management workflow rather than ten isolated topics: start every revision session by placing the concept in…
- Most asked Is there a final exam?
How BAFI 6010 is assessed
| Component | Weight | Format |
|---|---|---|
| Mid-Semester Test | 30% | In-person supervised, closed-book, 1.5 hrs; 5 short-answer questions each with sub-parts (calculation + theoretical); covers Topics 1-5; no formula sheet |
| Group Assignment | 30% | Groups of max 4; Belleview University endowment / Centrium Asset Management case; Excel (4 tabs) + report over 6 sections (SAA creation, out-of-sample testing, fund/manager selection, active bond fund) using LSEG + Morningstar |
| Final Examination | 40% | In-person; 7 questions; 150 minutes; 20% calculations / 80% applied concepts & discussion; all topics except Topic 6 |
What BAFI 6010 covers
The ten chapters trace one funds-management workflow end to end — from setting an investor's return and risk objectives, to building and risk-budgeting a strategic asset allocation, to picking active-versus-passive managers, and finally judging them with performance attribution, mutual-fund due diligence and the rules that govern investment companies.
Investment Return and Risk Objectives
Return objectives · Risk objectives · Constraints · BenchmarksThis is the foundation of BAFI 6010 — the stage of the Investment Management Process that turns an investor's situation into explicit, defensible objectives before any asset allocation happens.
- Investment Management Process — the four-stage arc; Topic 1 builds stage 1 (objectives, constraints, spending policy, benchmark)
- Functions of asset management — selection, objective-driven diversification, liquidity, cost reduction, acting for investors
- Return objective is two-dimensional — adding a risk objective turns return-seeking into mean-variance optimisation
- Absolute vs relative objectives — stand-alone target (CPI + x%) vs match/beat a benchmark (passive vs active)
- Endowment return objective — spending rate s = NCF / W0; required real return = spending + real growth + fees − donations
- Risk objectives & tolerance — absolute (std dev, VaR, drawdown) vs relative (beta, tracking error); ability × willingness; path dependence; LLTTU constraints
Modern Portfolio Theory & CAPM
Markowitz MPT · Efficient frontier · CAPM/SML · Performance ratios · Black-LittermanThis is the theoretical engine room of BAFI 6010. Modern Portfolio Theory (Markowitz 1952) turns expected returns and a covariance matrix into an efficient frontier of best risk-return trade-offs, and a risk-free asset unlocks the Capital Market Line through the market portfolio.
- Diversification — how the correlation ρ between assets sets the size of the risk reduction
- MPT (Markowitz 1952) — E(rp) = Σ wi E(ri) and σp² = Σ wi²σi² + ΣΣ wiwj Covij
- Efficient frontier & GMV — the upper arm dominates; below the minimum-variance tip is inferior
- Capital Market Line — rf tangent to the frontier at the market portfolio; slope = Sharpe ratio
- Systematic vs unsystematic risk — only undiversifiable market risk is rewarded
- CAPM & the SML — E(ri) = rf + βi(E(rm) − rf), βi = Cov(i,m)/Var(m)
Risk Budgeting and Risk Allocation
Marginal contribution to risk · Risk parity · Risk budget · Tracking errorThis topic makes the jump from allocating dollars to allocating risk.
- Why go beyond mean-variance — MV needs fragile return and correlation forecasts and ignores skew and fat tails; risk-based allocation works from the covariance structure alone
- Marginal contribution to risk (MCR) — MC_i = w_i × β_i × σ_p, with β_i = Cov(i,P)/Var(P) measured against the whole portfolio, not stand-alone volatility
- Percentage risk contributions — divide each MC by total risk to get shares that must sum to 100%; the built-in checksum
- The 6-step recipe — build a hypothetical portfolio, form the covariance matrix, screen for positive Cov(i,P), compute betas, then marginal contributions and target weights
- Risk parity — equalise marginal risk so higher-volatility assets get smaller dollar weights and calmer assets get larger ones (the opposite of cap-weighting)
- Risk-parity weights from betas — inverse-beta weighting (w_i proportional to 1/β_i) for a simple long-only sleeve
Characteristics of Traditional Assets
Yield curve · Duration & quality · Bullet/barbell · Equity styles & sectorsCharacteristics of Traditional Assets is Topic 4 of BAFI 6010 — the building blocks the strategic asset allocation is actually implemented with, once the objectives, MPT allocation and risk budget are set.
- Yield curve & shapes — normal (up), flat, inverted (down); inversion as a recession signal
- What sets rates — central bank anchors the short end; trading & issuance set the long end
- Macaulay duration — PV-weighted average time to cash flows, D = Σ t·PV(Cₜ) / Price
- Modified duration — D_mod = D / (1 + y/m); price change ΔP/P ≈ −D_mod × Δy
- Duration properties — inverse to coupon & YTM; rises with maturity at a decreasing rate; zero-coupon D = maturity
- Convexity — the curvature correction; more convexity is desirable for a given duration
Passive and Active Investment Strategies
Active vs passive · 5-step IM process · SRY model · Berk (2004) · Sharpe (1991)This topic is the active-versus-passive debate that BAFI 6010 grounds in two named papers you must argue in the exam: Sharpe (1991) — before costs the average active dollar earns the market, so after costs it must underperform a cheap index — and Berk (2004) — capital flows compete away the investor's alpha, so skill accrues to the manager as fees and AUM, not to the investor as persistent outperformance.
- Active vs passive & the EMH paradox — active adds no value if markets are perfectly efficient, yet markets need active investors for price discovery; active bets = stock selection + market timing
- Manager signatures — benchmark (TE 0, alpha 0), passive (minimise tracking error, ~0 alpha), active (deliberate tracking error targeting positive alpha, higher fee and volatility)
- Sharpe (1991) arithmetic — before costs the average active dollar = the market; after costs it must fall below it; a negative-sum game net of fees
- Berk (2004) capital flows — flows to skill, then AUM growth, then diseconomies of scale drive net investor alpha back toward the benchmark; skill is captured as AUM not persistent alpha
- Edelen-Evans-Kadlec (2007) mechanism — trading costs exceed the expense ratio, are negatively correlated with performance and hit larger funds harder, producing closet indexing as funds grow
- The 5-step process — philosophy, signal creation, capturing the signal, implementation, feedback/review, with the value-added-versus-capacity trade-off
Testing Portfolios
Backtesting · Out-of-sample testing · Business & market cycle stress-testsTopic 6 is the stress-test-before-you-implement stage of the investment management process.
- Why test — MCR gives only an average risk contribution; testing reveals event- and regime-specific behaviour
- Sensitivity analysis — flex ONE input (a capital-market assumption or correlation), hold the rest fixed
- Back-testing — run the strategy on historical data vs a benchmark; read tracking error, downside risk and attribution
- In-sample vs out-of-sample — build/optimise on one window, validate on withheld data to catch over-fitting
- Scenario analysis — probability-weighted economic states give the portfolio's expected return and scenario risk
- Monte-Carlo simulation — generate many return paths stochastically from each asset's mean and variance
Performance Attribution
Top-down (Alpha) · Bottom-up (timing & selection) · Style analysis · BrinsonPerformance attribution is the review stage of the investment-management process in BAFI 6010: after you set objectives, allocate, and implement, you decompose a fund's realised return into the risk factors and manager decisions that produced it, so you can separate luck (market risk) from skill.
- Three evaluation steps — measurement (how well), attribution (which factors), appraisal (skill vs luck)
- Top-down vs bottom-up gate — the method is decided by whether holdings/exposures are available
- A valid attribution benchmark — Identifiable, Investable, Pre-specified, Representative
- Top-down measures — Sharpe (total σ), Treynor (β), information ratio (tracking error), Jensen's alpha (β-adjusted)
- Jensen's alpha & its test — α = actual − CAPM-required; t = α/SE(α); low p-value ⇒ significant skill
- Bottom-up Brinson — allocation (market timing) + selection (stock picking) + interaction, summing to total
Mutual Fund Analysis (Part 1)
Performance measures · US fund evaluation · Attribution appliedTopic 8 turns the performance-measure and attribution toolkit from earlier in BAFI 6010 loose on real US mutual funds (from LSEG/Refinitiv and Morningstar data) to answer one practical question: which manager deserves an active fee, and which is a closet indexer? Part 1 is the quantitative screen — risk-adjusted ratios (Sharpe, Treynor, information ratio), alpha/beta/R², capture ratios and drawdown, plus Active Share and quartile/peer ranking.
- Applying the toolkit — Topic-7 measures (alpha, beta, R², ratios, drawdown) run on real funds
- Absolute vs relative measures — Sharpe/SD/VaR/drawdown vs beta/R²/tracking error/information ratio
- Alpha, beta and the tracking-error band — alpha = SML intercept, TE = scatter around the line
- Information ratio — IR = alpha ÷ tracking error, the single best measure of active skill
- Active Share = ½ Σ |w_Fund,i − w_BM,i| — how active a portfolio is (evidence as predictor is MIXED)
- Capture ratios & R² — want >100 upside / <100 downside; high R² flags an index-like fund
Mutual Fund Analysis (Part 2)
Non-performance measures · Transaction costs · Liquidity · Fund qualityThis topic is the non-performance half of fund due diligence — everything a raw return number cannot show.
- Gross vs net return — skill is measured gross, but the investor only ever keeps net = gross minus fees minus transaction costs
- Two fee buckets — one-off shareholder (transaction) fees vs ongoing annual operating expenses; keep them separate
- The 12b-1 fee — an ongoing distribution/marketing fee inside the expense ratio, NOT a one-off sales load
- Total Expense Ratio (TER) — management fee + 12b-1 + other, as a percentage of average net assets, charged every year and compounding
- Four transaction-cost components — commission, bid/ask spread, market (price) impact, opportunity cost; three of the four are hidden
- Trade size vs ADV — size relative to average daily volume drives the hidden costs; the same order is cheap in a liquid name, convex-costly in a thin one
Structure and Regulations of Investment Companies
Open- vs closed-end funds · REITs · Capital structure · RegulationThis final topic opens up the vehicle that has held the portfolio all course long.
- What an investment company is — a financial intermediary that pools capital, invests in listed assets, and gives investors part-ownership; a large, concentrated global industry
- Fund structure — the management company creates the fund as a separate legal entity with no employees and contracts every service (adviser, custodian, distributor, administrator)
- The board of directors — at least 40% independent by law (75% target), with the primary duty of protecting shareholders and overseeing the service providers
- Net asset value (NAV) — (total market value of assets minus liabilities) divided by units outstanding; the one calculation the topic can ask you to compute
- Fund types and investor classes — single-asset, multi-asset and fund-of-funds; retail, wholesale, pension and endowment owners served by different share classes
- Creation and demise — why families launch funds, why merger beats liquidation (keeps AUM and defers investor tax), and scale economies vs diseconomies (Berk)
It is grounded in Lustig's Investment Assets Handbook and the classic theory papers (Markowitz, Sharpe, Berk, Black-Litterman), and applies them to a real endowment portfolio using Excel, LSEG and Morningstar data.
The assessment rewards two things above all: the ability to compute the core measures from memory (closed-book, no formula sheet) — CAPM/SML, Sharpe/Treynor/information ratios, marginal contribution to risk, duration, and Brinson attribution — and applied judgement, since roughly 80% of the final is discussion of when a method works, what its assumptions break, and which manager or structure to recommend.
Marks are lost far more often to weak conceptual reasoning than to arithmetic, so mastering the "why" behind each formula is what separates a pass from a distinction.
Worked example · free
Endowment total-return objective and payout policy
- +1Compute the current spending / payout rate as payout divided by assets: 12 / 240 = 5.0%.
- +1Assemble the required real return additively — spending rate + real growth target + management fee - real donations: 5.0% + 2.5% + 1.0% - 1.5% = 7.0% real (add expected inflation to convert to a nominal target).
- +1State the objective in words: earn a long-run total return of at least 7.0% above inflation, net of fees, enough to fund a 5% payout while preserving real capital in perpetuity.
- +1Classify the objective as absolute — it is tied to the Trust's own spending needs and real capital preservation, not to beating a market benchmark.
- +1Specify a risk objective as a downside / shortfall constraint, e.g. keep the probability of a real capital decline over any rolling 3-year window below 10%, consistent with a growth-biased but not aggressive allocation.
- +1Explain the smoothing: a trailing-average payout decouples spending from any single bad year, dampening distribution volatility and lowering the chance a market drawdown forces a spending cut — directly supporting the capital-preservation risk objective.
Key terms
- Strategic Asset Allocation (SAA)
- The long-run policy mix of asset classes chosen to meet the investor's return and risk objectives; the anchor the whole portfolio is built and rebalanced around, with tactical ranges layered on top.
- Efficient frontier
- The set of portfolios offering the highest expected return for each level of risk (or lowest risk for each return), derived from Markowitz mean-variance optimisation; portfolios below it are inferior.
- CAPM and the Security Market Line (SML)
- The model E(r) = r_f + beta x (E(r_m) - r_f) pricing an asset's expected return off its systematic risk; assets plotting above the SML are underpriced (positive alpha), below are overpriced.
- Beta
- An asset's sensitivity to market-wide (systematic) risk, Cov(i, market) / Var(market); the only risk CAPM rewards, since firm-specific risk can be diversified away.
- Sharpe / Treynor / Information ratio
- Reward-per-risk measures: Sharpe uses total risk (sigma), Treynor uses systematic risk (beta), and the information ratio uses active risk (alpha divided by tracking error) — the key gauge of active skill.
- Marginal Contribution to Risk (MCR)
- Each asset's share of total portfolio risk, w_i x beta_i x sigma_p, where beta_i is the asset's beta against the portfolio; the contributions sum to total risk, so proportions sum to 100%.
- Risk parity
- A weighting scheme where every asset contributes equal marginal risk, so higher-volatility assets receive smaller dollar weights — the opposite of capitalisation weighting.
- Tracking error
- The standard deviation of the return difference between a fund and its benchmark (or the residual of a single-index regression); passive managers minimise it, active managers deliberately take it on.
- Macaulay and modified duration
- Macaulay duration is the present-value-weighted average time to a bond's cash flows; modified duration = Macaulay / (1 + y) gives the approximate percentage price change per unit yield move, refined by convexity.
- Jensen's alpha
- The risk-adjusted active return — actual return minus the CAPM-required return; its statistical significance (p-value from a t-test), not its raw size, is what signals repeatable manager skill.
- Brinson attribution
- A bottom-up decomposition of outperformance into an allocation (market-timing) effect and a selection (stock-picking) effect, plus an interaction term (often folded into selection), which together sum to the total value added versus the benchmark.
- Open-end vs closed-end fund
- Open-end funds issue and redeem shares on demand at NAV and are largely all-equity (low leverage); closed-end funds (including REITs) have fixed shares traded on an exchange at a premium or discount to NAV and may use leverage.
BAFI 6010 FAQ
How is BAFI 6010 assessed?
Three components: a mid-semester test worth 30% (in-person, closed-book, 1.5 hours, five short-answer questions with sub-parts covering Topics 1-5, no formula sheet), a group assignment worth 30% (an endowment / asset-management case built in Excel across four tabs plus a report, using LSEG and Morningstar data), and a final examination worth 40%.
Is there a final exam?
Yes. The final is in-person and worth 40% — 7 questions in 150 minutes, split roughly 20% calculation and 80% applied concepts and discussion. It covers all topics except the Testing Portfolios topic, which is assessed through the group assignment instead.
Is the exam open- or closed-book?
Closed-book. The mid-semester test explicitly provides no formula sheet, so you must recall every formula from memory, and the final follows the same supervised, in-person convention.
What is the hardest part of the course?
Most students find the shift from dollar allocation to risk allocation the hardest — computing marginal contribution to risk with betas against the portfolio, handling negative covariances in a risk-parity build, and reasoning through bullet-versus-barbell convexity. The other common trap is separating raw outperformance from statistically significant alpha in performance attribution.
How should I prepare?
Practise the core calculations until they are automatic (CAPM/SML, Sharpe/Treynor/information ratios, duration and convexity, marginal contribution to risk, Brinson allocation-versus-selection), and rehearse the discussion answers — assumptions, criticisms and 'which would you recommend' — since about 80% of the final rewards applied reasoning, not arithmetic.
Work timed past-style questions closed-book, especially through the revision week.
Do I need to memorise formulae?
Yes. Because the assessments are closed-book with no formula sheet, you must reproduce every formula — portfolio variance, CAPM, the performance ratios, duration, marginal contribution to risk and the Brinson effects — as well as apply them correctly.
Is this page official or affiliated with the University of Adelaide?
No. This is an independent AskSia study resource created to help students revise. It is not produced, endorsed by, or affiliated with the University of Adelaide, and it is not a substitute for the official course materials and Canvas announcements.
Questions students ask in each BAFI 6010 chapter
- How do I build an endowment's return objective in the exam?
- Compute the spending rate (payout ÷ assets), then stack it additively: spending + real growth target + fees − donations, in real terms. Add expected inflation for the nominal figure. Then classify it as absolute or relative and attach a risk objective. Markers reward the label and the correct signs (fees add, donations subtract) as much as the arithmetic. Chapter 01 · Investment Return and Risk Objectives
- What is the difference between the CML and the SML?
- The CML plots reward against TOTAL risk (σ) and only describes efficient portfolios — blends of the risk-free asset and the market portfolio. The SML plots required return against SYSTEMATIC risk (β) and holds for EVERY asset, efficient or not. Swapping the x-axis is the single most common Topic 2 mistake. Chapter 02 · Modern Portfolio Theory & CAPM
- What is the difference between a dollar allocation and a risk allocation?
- A dollar (or cap) allocation decides how much money each asset gets; a risk allocation decides how much of the portfolio's total risk each asset is allowed to consume. They can look very different — an asset with a moderate dollar weight can supply most of the risk if it is volatile and co-moves with the book, which is exactly the gap risk budgeting exists to manage. Chapter 03 · Risk Budgeting and Risk Allocation
- What does an inverted yield curve signal?
- An inverted (downward-sloping) curve, where short yields sit above long yields, is a classic leading indicator of recession — it reflects markets pricing in future rate cuts as growth slows. A normal upward curve signals expansion; a flat curve often marks a turning point. Chapter 04 · Characteristics of Traditional Assets
- Are Sharpe (1991) and Berk (2004) actually examined?
- Yes — the course names both papers and expects you to argue them. Sharpe (1991) gives the arithmetic (before costs = the market, after costs below it); Berk (2004) gives the equilibrium mechanism (capital flows compete the investor's alpha away and it decays to the benchmark). Learn each as a one-line mechanism you can apply to a fund in the exam. Chapter 05 · Passive and Active Investment Strategies
- Is Testing Portfolios examined in the final exam?
- No. In BAFI 6010 Topic 6 is explicitly excluded from the final exam. It is, however, directly assessed in the Excel group assignment, where you build a Strategic Asset Allocation and then test it. So do not treat it as free final-exam marks — there are none — but do master it, because the marks live in the assignment (choosing the right test, running it cleanly, interpreting the downside). Chapter 06 · Testing Portfolios
- Why can a fund have large bottom-up outperformance but an insignificant top-down alpha?
- Bottom-up (Brinson) outperformance is a raw weight × return gap with NO risk adjustment, while alpha is beta-adjusted — it strips out the return earned simply by taking more market (beta) risk. A fund can beat its benchmark by holding more systematic risk; once that beta is removed, the genuine skill (alpha) is much smaller. And a numerically large alpha with a high p-value is statistically indistinguishable from zero, so it is no evidence of repeatable skill. Judge skill by significance, not size. Chapter 07 · Performance Attribution
- Is a high Active Share a reliable sign a fund will outperform?
- No. The course is explicit that the evidence Active Share PREDICTS outperformance is mixed. It only tells you how different a fund is from its benchmark, not how good it is — a manager can be very active and very wrong. Pair it with bottom-up analysis (holdings, process, alpha reliability) before drawing a conclusion. Treating Active Share as a standalone buy signal loses the discussion mark. Chapter 08 · Mutual Fund Analysis (Part 1)
- What is the difference between shareholder fees and annual operating expenses?
- Shareholder (transaction) fees are one-off charges you pay when you buy, sell or switch — sales loads, redemption fees and the like — so they hit only when you transact. Annual operating expenses are ongoing charges taken every year as a percentage of average net assets: the management fee, the 12b-1 fee and other administration, which together form the expense ratio. The exam wants you to keep the one-off bucket and the ongoing bucket clearly separate. Chapter 09 · Mutual Fund Analysis (Part 2)
- What exactly is an investment company?
- It is a financial intermediary that pools many investors' money, invests it in listed assets, and gives each investor part-ownership of the resulting portfolio. The management company creates the fund as a separate legal entity that has no employees of its own and contracts out every service it needs — the investment adviser to run the money, plus a custodian, distributor, transfer agent and administrator. Chapter 10 · Structure and Regulations of Investment Companies
How to study for the exam
Treat the course as one continuous funds-management workflow rather than ten isolated topics: start every revision session by placing the concept in the arc (objectives, then allocation, then risk budgeting, then strategy, then attribution and structure), because the exam rewards students who connect the stages.
Split your effort deliberately — drill the calculation-heavy chapters (MPT/CAPM, risk budgeting, duration, attribution) until you can reproduce each formula and worked example closed-book from a blank page, since there is no formula sheet, and separately rehearse the discussion chapters (active-vs-passive theory, Berk and Sharpe, fund structure and regulation) as short-answer plans that name assumptions, criticisms and a clear recommendation.
Practise past-style questions under timed, closed-book conditions during the revision week, checking your work with the built-in reconciliations (risk contributions sum to 100%; allocation + selection = total outperformance), and always finish a numerical answer with one sentence of interpretation — the applied judgement is where most of the marks sit.
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