Portfolio management
DECLARATION OF FITNESS TO SIT EXAMINATION
FIT TO SIT POLICY – IMPORTANT
Under the above policy, any student who attends the assessment is deemed to be “fit to sit”
that assessment. This is important. It means that you may not (for example) later submit an
application to the Mitigating Circumstances Panel relating to impaired performance in that assessment
because of illness, or any other mitigating factor, which affected you at the start of the assessment. If
you are not “fit to sit”, you should not attempt the assessment.
Students must complete the information below and submit with the completed Assessment.
v
School (please tick one)
Business School
Programme
BSc Business Management
Examination
Portfolio Management
Law School
Date
Name
I am not aware of any medical or
other extenuating circumstances that
would impair my performance in this
examination
Signature
……………………………………..
This sheet should be submitted with your completed work.
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BSc Business Management
Portfolio Management
Open Book Assessment
Release Date 15/12/2014 Time: / 10.00am
Submission Date 19/12/2014 Time: / 4.00pm
Lecturer: I o a n n i s M a n t z a r i s
Students’ instructions – PLEASE READ
PART A: Requirement and Instructions
Please read the following instructions carefully.
Key Assessment Requirements
1.
Analyse the scenarios presented in each question.
2.
Present clear recommendations where required
3.
Show all logical analytical steps (calculations) used to arrive at conclusions
4.
Present a critical report of your analysis and responses to all questions
5.
Where appropriate, present key Finance and Economics theories to support your answers and
present assumptions used in your analysis and any practical implications these may have.
Submission Requirements
6.
You need to submit an individually completed report via VLE using turnitin® during the submission
period. All submissions should be made in the format of word documents as this is the preferred
format for submissions. Any excel calculations can be copied and pasted into the word file.
7.
The fully completed report must not exceed a word count of 1,500. Appendices are not included in
your word count.
8.
Your work should be uploaded into the VLE using a dedicated turnitin® submission link to be provided.
9.
Do not send your completed work via email. Under no circumstances will the work be accepted when
emailed to any member of the faculty.
10. Note that there are penalties for late submission. Any work submitted after the designated deadline
will not be marked.
Referencing
11. You need to follow a proper referencing system in your paper.
12. You also need to do a full bibliography of your sources.
Number of words
13. There is no target number of words for this assessment as this provides students with the flexibility
to refine their work and present it in the best possible way. Students are however encouraged to
reflect fully when producing answers to questions and to ensure that their work is presently
succinctly. The guiding word limit of 5,000 is indeed a guide and should help to set the expectation
that it would not be necessary to exceed this limit to produce and excellent piece of work.
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Pass mark
This assessment constitutes 100% of the overall mark for the module. The pass mark for this assessment is
40%. If this is not your first attempt at this assessment the maximum mark you can obtain is 40%.
There are 9 questions in total worth 90 marks. You are required to answer all the
questions in full. Each question may have more than one section and you are
required to complete all sections for all questions. There is also a maximum of 10
marks available for formatting, referencing, structure, spelling, and general
presentation resulting in a total of 100 available marks for this assignment.
Mode of Assessment and Submission
This Assessment is individual. All the relevant material for the assessment should be contained in an
appropriately typed report to be submitted electronically via VLE.
Each student should submit only one document.
submission will not be marked.
Material that is not contained in the single electronic
Allowed Time and Submission Deadline
You are allowed to work on the assessment f ro m the date it is released to you to the final submission
deadline. You may submit completed work before the final submission deadline (19/12/2014, at 4.00pm).
No work will be accepted after this date under any circumstances.
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Questions
Section One: Market Efficiency
1.
Discuss the implications of the efficient market hypothesis for investment policy as it relates to:
a. technical analysis such as charting
b. fundamental analysis
6 marks
2.
Briefly describe two primary roles or responsibilities of portfolio managers in an efficient market
environment.
6 marks
Section Two: Asset Pricing Models
3. Briefly explain whether investors should expect a higher return from holding Portfolio A versus
Portfolio B under the capital asset pricing theory (CAPM).
3 marks
Systematic
(Beta)
Specific Risk
Risk
Portfolio A
1.5
Portfolio B
1.5
High
Low
4. Use the information in the table below to answer the following questions.
The following standard deviations and correlations have been obtained for four FTSE 100 companies
on an annualised basis. The standard deviation of the FTSE 100 is 5.5.
Company
Lloyds
Banking
Group
Rolls-Royce
Diageo
Glaxo
a.
Standard
deviation
?i
12.1
14.6
7.6
10.2
Correlation with Actual Return
the market ? i,m
.72
20 percent
.33
.55
.60
15 percent
19 percent
10 percent
Compute the beta coefficient for each of the four stocks shown in the table.
4 marks
b.
Assuming a risk-free rate of 8 percent and an expected return for the market portfolio of 15
percent, compute the expected (required) return using the Capital Asset Pricing Model
(CAPM) for all four stocks shown in the table.
4 marks
c.
Plot the actual returns above on the SML for all four stocks and indicate which stocks are
undervalued or overvalued relative to your calculations of the expected returns in the
previous question.
7 marks
Question 4 total marks 15
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5. Refer to the data contained in the table below which lists 30 monthly excess returns for two
different actively managed stock portfolios (A and B) and three different common risk factors (1, 2,
and 3). Note: You may find it useful to use Microsoft Excel to calculate your answers.
a. Compute the average monthly return for each portfolio. Annualise the portfolio returns.
Compute the average monthly standard deviation for each portfolio and all three risk factors.
Annualise the standard deviation for the portfolio returns and the risk factors.
7 marks
b. Based on the return and standard deviation calculations for the two portfolios from Part a, is
it clear whether one portfolio outperformed the other over this time period?
3 marks
c. Calculate the correlation coefficients between each pair of the common risk factors (i.e., 1 &
2, 1 & 3, and 2 & 3). In theory, what should be the value of the correlation coefficient
between the common risk factors? Explain why.
5 marks
Question 5 total marks 15
THIS TABLE IS FOR QUESTION 5
PERIOD
PORTFOLIO A PORTFOLIO B
1
1.08
0.00
2
7.58
6.62
3
5.03
6.01
4
1.16
0.36
5
(1.98)
(1.58)
6
4.26
2.39
7
(0.75)
(2.47)
8
(15.49)
(15.46)
9
6.05
4.06
10
7.70
6.75
11
7.76
5.52
12
9.62
4.89
13
5.25
2.73
14
(3.19)
(0.55)
15
5.40
2.59
16
2.39
7.26
17
(2.87)
0.10
18
6.52
3.66
19
(3.37)
(0.60)
20
(1.24)
(4.06)
21
(1.48)
0.15
22
6.01
5.29
23
2.05
2.28
24
7.20
7.09
25
(4.81)
(2.79)
26
1.00
(2.04)
27
9.05
5.25
28
(4.31)
(2.96)
29
(3.36)
(0.63)
30
3.86
1.80
FACTOR 1
0.0001
6.89
4.75
0.66
(2.95)
2.86
(2.72)
(16.11)
5.95
7.11
5.86
5.94
3.47
(4.15)
3.32
4.47
(2.39)
4.72
(3.45)
(1.35)
(2.68)
5.80
3.20
7.83
(4.43)
2.55
5.13
(6.24)
(4.27)
4.67
FACTOR 2
(1.01)
0.29
(1.45)
0.41
(3.62)
(3.40)
(4.51)
(5.92)
0.02
(3.36)
1.36
(0.31)
1.15
(5.59)
(3.82)
2.89
3.46
3.42
2.01
(1.16)
3.23
(6.53)
7.71
6.98
4.08
21.49
(16.69)
(7.53)
(5.86)
13.31
FACTOR 3
(1.67)
(1.23)
1.92
0.22
4.29
(1.54)
(1.79)
5.69
(3.76)
(2.85)
(3.68)
(4.95)
(6.16)
1.66
(3.04)
2.80
3.08
(4.33)
0.70
(1.26)
(3.18)
(3.19)
(8.09)
(9.05)
(0.16)
(12.03)
7.81
8.59
5.38
(8.78)
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Section Three: Bonds
6. Table 1 shows the characteristics of two coupon paying bonds from the same issuer making annual
coupon payments with the same seniority in the event of default and Table 2 displays spot interest
rates. Neither bond’s price is consistent with the spot rates. Using the information in Tables 1 and 2,
recommend either Bond A or Bond B for purchase. Justify your choice.
8 marks
TABLE 1
Bond Characteristics
Coupons
Maturity
Coupon rate
Yield to maturity
Price
Bond A
Annual
3 years
10%
10.65%
98.4
Bond B
Annual
3 years
6%
10.75%
88.34
TABLE 2
Term
1 year
2 year
3 year
Spot Interest Rates
Spot Rates
(Zero Coupon)
5%
8%
11%
7. On May 30, 2014, an investor is considering purchasing one of the following newly issued 10-year
AAA corporate bonds shown in the following exhibit. The investor notes that the yield curve is
currently flat.
BOND CHARACTERISTICS
Description
Seminole due May 30, 2024
Carolina due May 30, 2024
Coupon
6.00%
6.20%
Price
100
100
Call Feature
Noncallable
Currently callable
Call Price
Not applicable
102
a. Contrast the effect on the price of both bonds if yields decline more than 100 basis points.
(No calculation is required).
4 marks
b. State and explain under which interest rate forecasts (rising, stable, declining) the investor
would prefer the Carolina bond over the Seminole bond.
4 marks
c. Explain the difference between the price yield relationship of callable bonds and
noncallable bonds.
4 marks
Question 7 total marks 12
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8. a. What is the aim of the passive bond strategy of immunization? Explain analytically the approach
for an effective immunization strategy. What are the risks of not achieving perfect immunization?
4 marks
b. Consider a £ 1 million face value, 5% annual coupon bond, yielding 9%. It has a maturity of 5 years.
Calculate the bond’s price and its duration.
3 marks
c. Describe how this bond can be used to meet a £ 1,191,960 liability that has the same duration. Show
your calculations.
5 marks
d. Give an example of two industries in which companies are using passive bond strategies to meet
their liabilities.
3 marks
Question 8 total marks 15
Section Four: Asset Allocation
A university endowment has total assets of $50 million. The objective of the endowment is to provide
scholarship places at the university for students who lack the resources to pay for their own education.
The endowment currently aims to distribute $2 million a year to pay for the education and living
expenses for these students and wishes to maintain this level of spending in future years in real terms.
The annual inflation rate is 2% and the inflation rate for educational costs is expected to be 2% greater
than this. Expenses for the endowment are estimated at 0.5% of the portfolio value. The endowment
wishes the shortfall risk of the portfolio to be a maximum of – 15% in any one year.
Details of possible asset allocations for the endowment are as follows.
Asset class
Cash equivalents
US bonds
US stocks
International stocks
Real estate
Total
Expected annual return
Expected standard deviation
A
2%
40%
40%
18%
100%
8.6%
11.1%
Allocation
B
C
2%
4%
30%
20%
40%
50%
20%
15%
8%
11%
100%
100%
8.8%
8.9%
11.1%
12.2%
D
8%
37%
35%
10%
10%
100%
7.8%
10.2%
9. Recommend which asset allocation appears to be most suitable for the endowment, given the
information above. Provide three reasons why your recommendation is most suitable.
10 marks
End of Assessment
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