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Q1:1. Select three different corporate bonds from three different companies. The bonds must have years to maturity at least 5 years apart from each other. One of the bonds should be issued by the company evaluated by your group in the first written assignment. a. A good bond data resource is: http://finra-markets.morningstar.com/ 2. Calculate the duration of each bond and the duration of a bond portfolio investing equally in the three bonds. 3. For reference purposes, select an additional two bonds issued by the companies from step 1 that match the longest maturity bond in your portfolio (i.e., you will analyze 5 bonds in total) a. Example: In step 1 you use a 2030 bond for Co. A, a 2040 bond for Co. B and a 2045 bond for Co. C. So, you choose a 2045 bond from Co. A and a 2045 bond from Co. B to be able to compare to the already selected 2045 bond from Co. C. b. Provide the key details for the additional bonds including spread to treasury. These two bonds are not included in your portfolio but will be useful in your overall analysis. 4. Your research indicates: a. Treasury bond rates will increase, and, b. The spread between corporate bonds and Treasury bonds will widen. 5. Forecast a change in yields for the three bonds in your portfolio. Discuss the properties of your three-bond portfolio with respect to returns and risk (interest rate risk and default risk). Including: What assumptions drive your change in treasury bond rates? What assumptions drive your change in spreads for each bond? How would you change the weights of the bonds in the portfolio (from equal) to take advantage of your research? How would you quantify the impact? What happens to the interest rate risk and default risk in your portfolio?See Answer
Q2:15 The "father" of modern portfolio theory is: (a) Markowitz. (b) Friedman. (c) Samuelson. (d) Sharpe. 16. To describe the random variable of the portfolio rate or return, the investor needs (a) mean and coefficient of correlation. (c) only the expected value. (b) median and standard deviation. (d) expected value and standard deviation. 17. Portfolio Á has an expected return of 16% with a standard deviation of 8%. Portfolio B has an expected return of 12% with a standard deviation of 7%. (a) Portfolio A has a lower risk/return. (b) Portfolio B has a larger expected terminal wealth. (c) The portfolios have the same risk/return. (d) Portfolio B has a more certain return. 18 For an investor's indifference curve (a) each portfolio on the curve has the same standard deviation. (b) all portfolios on the curve are equally desirable. (c) he will choose the portfolio where his set of curves intersect. (d) he will prefer a portfolio that lies to the "southeast" of the curve. 19. The development of an investor's indifference curves is based on (b) correlation theory. (c) economic theory. (a) cognitive psychology. (e) probability theory. (d) utility theory. 20. Modern Portfolio Theory assumes (a) risk averse. (c) not concerned with risk. investors are (c) is risk neutral. (d) is risk-seeking. (b) risk seekers. (d) risk neutral. 21. Assuming investor non-satiation, an investor (a) will choose the portfolio with the lowest risk. (b) will choose the portfolio with the highest return for a given level of risk. See Answer
Q3:Question 1. Answer all parts of the question. I. The following table shows a market where there are only three assets, and in the next time period, one of three possible outcomes will occur. State Probability E(r) City Lama Wool Excellent 0.3 16% 1.5% 25% James Alp Delta Good 0.5 (b) Calculate and interpret the returns correlation for each pair of assets. 13% 1.5% 18% (a) Calculate and interpret the expected return and standard deviation for each asset. (11 marks) (5 marks) E(r) 16.4% 9.25% 12% 12% II. The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset Poor 0.2 6% 1.5% 4% Standard deviation 19.25% 11.30% 13.125% 13.75% Market index The risk-free rate of interest is 1%. This stock market is in equilibrium according to the capital asset pricing model (CAPM). (a) Calculate and interpret the beta value of each of these three portfolios. (5 marks) (b) Do these three portfolios lie on the Capital Market Line and what do you conclude from this? (7 marks) (c) Two new assets, Nick and Roll, are introduced to this market at prices which imply expected returns of 9% and 16%, respectively. The expected beta values are 0.9 and 1.25, respectively. Do Nick and Roll lie on the Security Market Line and what do you conclude from this? (8 Marks) III. Critically analyse the advantages and disadvantages of direct/individual investment in stock and bonds versus investment in Mutual funds. (14 marks) [Total 50 marks] Page 3 of 5/nQuestion 2. Answer all parts of the question. I. Consider the following three bonds: Bond N £1,000 8% Bond S £1,000 5% Bond T £1,000 Par Value Coupon Zero Time to Maturity 7 years Required Yield 5% (a) Calculate and interpret the present values of each bond. (b) Calculate and interpret the Macaulay Duration for each bond. 4 years 5% 5 years 5% (11 marks) (7 marks) (c) If required yield increases from 5% to 6%, discuss the action that a bond portfolio manager should take in this situation. (3 marks) II. You are considering a new project that costs £2000m and you have estimated the following cash flows: Year 1: £300m; Year 2: £400m; Year 3: £1400m. If the discount rate is 9%, do you recommend the project? (4 marks) III. Discuss, providing examples, the similarities and differences between Active versus Passive investment strategies, and then explain the roles or responsibilities of portfolio managers in an efficient market environment. (25 marks) [Total 50 marks] Question 3. Answer all parts of the question. I. Discuss, providing insights from relevant literature, the main characteristics of external credit rating agencies and the key roles of credit ratings in financial markets. (25 marks) II. Discuss, providing examples, the motivation for hedging, speculation and arbitrage in financial markets. (25 marks) [Total 50 marks] Page 4 of 5/nQuestion 3. Answer all parts of the question. L. Discuss, providing insights from relevant literature, the main characteristics of external credit rating agencies and the key roles of credit ratings in financial markets. (25 marks) II. Discuss, providing examples, the motivation for hedging, speculation and arbitrage in financial markets. (25 marks) [Total 50 marks] Page 4 of 5/nQuestion 4. Answer all parts of the question. L. Consider the following information about Kaplan and Morris for one-time period: Expected return Standard Deviation 16% 24% Stock Kaplan Morris 18% 26% You invest 40% of your fund in Kaplan and 60% in Morris. (a) Calculate and interpret the expected return of your portfolio. (3 marks) (b) Calculate the standard deviation of returns on your portfolio, and interpret your results, for the following two different scenarios: (10 marks) i. the correlation coefficient between the returns for Kaplan and Morris is +0.55'. ii. the correlation coefficient between the returns for Kaplan and Morris is *-0.80. II. Suppose you have a portfolio of Koll and Nell with a beta of 1.6 and 0.7, respectively. If you put 60% of your money in Koll, 35% in Nell and 5% in the risk-free asset, calculate and interpret the beta of your portfolio. (4 marks) III. An investor wishes to: (1) have a shareholding in only one company, Jax, with a beta of 1.25, and (ii) have a portfolio with a beta value of one. What is your advice as to how the investor can achieve these twin objectives? (4 marks) IV. The share price of Carl is currently £250 and the last dividend was £5. The analyst is predicting a dividend growth rate of 6% and the required rate of return is 8%. According to the Gordon Growth model, is Carl's stock fairly priced? (4 marks) V. Analyse, providing examples, the steps involved in the process of portfolio investment. (25 Marks) [Total 50 marks] Page 5 of 5See Answer
Q4:4. Using the following two independent situations, calculate the ROI and ROI bonus for each branch both before and after the investment opportunity. Comment on any noted differences.See Answer
Q5:5. Using only Example 1, calculate the residual income for both branches both before and after the new investment opportunity, using a capital charge of 5%. Comment on any noted differences.See Answer
Q6:6. What are the measurement alternatives involved with using ROA as a performance measure? For example, in what ways can income be measured? In what ways can assets be measured?See Answer
Q7:7. What action should Higgins take in response to the question raised by Larry Hoffman, the Denver Branch Manager?See Answer
Q8:For each portfolio • explain the reasoning for your stock selection and weighting relative to the index • attach screenshots of your portfolios created in Workspace • report your results for each portfolio • provide comments on the total return/risk and active return/risk of your portfolios • discuss the sectors and securities' active weights in your portfolio • analyse the active return of your portfolios with reference to the allocation and selection effects What was the overall performance of the active portfolio, your passive portfolio and the benchmark index? describe any major market events that contributed to the return performance of the benchmark or of your portfolios • have you achieved (or not achieved) the goal for your passive/active portfolio Finally, which of the two portfolios will you recommend and why? RMIT Equity Investment and Portfolio Management UNIVERSITY Page 3 of 6See Answer
Q9:FALL 2023 EFIN/MFIN 304 INVESTMENT MANAGEMENT Building a portfolio by using a combination of instruments with maximum returns and just the right amount of risk is key to successful investing. In this course, you have learned about types of financial markets and investments, short-term and long-term investment goals, and portfolio management. For this assignment, you select one topic from the list below and write a 2,000-2300 word analysis and investment strategy proposal. The paper must be double-spaced in APA format with Times New Roman size 12 font. TOPICS: Select one of the following topics for your assignment. Research the required topics and use what you have learned in the course to create your analysis and investment strategy proposal. 1. Sandra is a retired 70-year-old who has $750,000 after selling her small business and paying taxes on the sale. She wants to invest this money. Sandra would like the capital to rise faster than inflation to maintain the purchasing power of her wealth. However, she would also like to make low-risk investments and have easy access to at least $80,000 per year for the next three years. 2. Maria and Carlos are both 50 years old. They have two main financial goals: saving for retirement and saving for their eleven-year-old son's college education. Carlos recently inherited money from his mum, and after taxes, has $600,000. They would like to aggressively invest this inheritance and an additional $1,500 each month from their combined incomes in hopes of achieving maximum return. They want to retire 15 years from now, and their daughter will need to begin drawing money from the college fund in 7 years. 3. Simon is 35 years old. He just won the lottery and decided to take a lump sum payment. After paying taxes, he has $2.5 million left. Simon wants to immediately spend $450,000 and invest the rest. He doesn't want to aggressively risk his money, but he does want to maximize his return so that he can quit his job now and live the most lavish lifestyle that he can afford for the rest of his life. No matter which alternative you select, your analysis and investment strategy proposal should: 1. Explain in general how stocks, bonds, funds, futures, debts, and other investment instruments are traded in financial markets. 2. Analyze investment opportunities that align with the financial goals of the scenario. 3. Recommend specific investments to create a portfolio from the available capital. 4. Evaluate the risks of the recommended investments and the impact that diversification, taxes, inflation, and currency fluctuation could have on the proposed portfolio. 5. Calculate projected rates of return on each item in the proposed investment portfolio 6. Recommend strategies for long-term and short-term investment; include justifications for the recommendations you make./nUsing Sources You may refer to the course material for supporting evidence, but you must also use at least 5 sources and cite them using APA format. Please include a mix of both primary and secondary sources, with at least one source from a scholarly peer-reviewed journal. • Primary sources are first-hand accounts such as interviews, advertisements, speeches, company documents, statements, and press releases published by the company in question. • Secondary sources come from peer-reviewed scholarly journals, such as the Journal of Finance. You may use sources like JSTOR, Google Scholar, and OMICS International to find articles from these journals. Secondary sources may also come from reputable websites with.gov, .edu, or .org in the domain. (Wikipedia is not a reputable source,.) Content MFIN/EFIN 304 GROUP ASSIGNMENT MARKING GUIDE Structure of essay CRITERIA Formulating arguments Excel calculations Research & referencing Academic writing skills Total Presentation POINTS AVAILABLE 1 2 2 3 1 1 5 15 POINTS ACHIEVEDSee Answer
Q10:✓ 17. Suppose the following information is quoted for a hypothetical Treasury security: Issite Bid Ask Change Yield 4% 3/21/2040-8 a. What is the bid price per $100 of par value? b. If an investor wanted to purchase $100,000 of par value of this Treasury security. what is the clean price? 110.25 24 c. What is the ask price per $100 of par value? d. If an investor wanted to purchase $100,000 of par value of this Treasury security. what is the clean price? e. What does the "Change" of -5 mean? f. What does the "Yield" column mean? g. Suppose that instead of a bid of 110.25 it is 110.25+. What would be the clean price per $100 of par value?See Answer
Q11:18. Suppose a bond is purchased with a settlement date of October 15 and the next cou- pon payment is on December 1. The par amount purchased on the bond is $100,000, and its annual coupon rate is 4% paid semiannually. a. What is the accrued interest using the 30/360 day count convention? b. What is the accrued interest using the actual/actual day count convention?See Answer
Q12:Problem 7-11 Chapter 07: Assignment-Asset Pricing Models Attempts 8. Problem 7-11 eBook Problem 7-11 Consider the following information about two stocks (D and E) and two common risk factors (1 and 2): 3.6 3.0 3.0 E(R.) 12.34% 16.60% a. Assuming that the risk-free rate is 4.3%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor bets and the expected returns for the two stocks. Round your answers to one decimal place. AL b. You expect that in one year the prices for Stocks D and E will be $58 and $35, respectively. Also, neither stock is expected to pay a dividend over the next year. What should the price of each stock be today to be consistent with the expected return levels listed at the beginning of the problem? Round your answers to the nearest cent. Today's price for Stock D: $ Today's price for Stock E: $ c. Suppose now that the risk premium for Factor 1 that you calculated in Part a suddenly increases by 0.20% (ie, from a to ( + 0.20%, where is the value established in Parta. What are the new expected returns for Stocks D and E7 Round your answers to two decimal places. Expected return for Stock D Expected return for Stock E: d. If the increase in the Factor 1 risk premium in Part c does not cause you to change your opinion about what the stock prices will be in one year, what adjustment will be necessary in the current (ie, today's) prices? Do not round intermediate calculations. Round your answers to the nearest cent. Today's price for Stock D: $ Today's price for Stock E: $See Answer
Q13:Chapter 07: Assignment-Asset Pricing Models Back to Assignment Attempts 9. Problem 7-13 eBook Average/28 Problem 7-13 Consider the data contained in the table below, which lists 30 monthly excess returns to 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 a computer spreadsheet program such as Microsoft Excel to calculate your answers.) Factor 2 Factor 3 Portfolio A Portfolio B 1.02% 0.00% 7.63 6.67 5.13 6.07 1.10 -1.86 4.28 -0.83 -15.44 6.02 7.60 7.76 Period 1 2 3 5 6 7 9 10 11 12 13 14 15 16 17 9.61 5.27 -3.21 5.44 2.36 0.30 -1.61 2.44 4.05 5.43 2.74 -0.52 2.65 7.31 0.14 Factor 1 0.01% 6.85 4.73 0.66 -2.97 2.86 -2.72 -16.21 6.04 7.05 5.95 5.84 3.45 -4.09 3.33 4.47 -2.42 4.75 0.26 -1.51 0.47 -3.56 0.02 1.19 -5.61 2.79 3.37 3.50 -1.23 0.17 4.27 5.64 -3.71 1.70 2.99/nChapter 07: Assignment-Asset Pricing Models Monthly Average Sed Dev Chapter 07: Assignment-Asset Pricing Models Monthly Sed Dev B 9 10 Average HEDSGRANR 11 12 13 equal to 1 alto indefinite 14 15 16 17 18 19 20 21 22 23 24 25 26 27 29 29 -15.44 6.02 7.60 29 7.76 9.61 5.27 -3.21 5.44 2.36 -2.83 6.43 -3.29 -1.20 -1.50 5.95 2.15 7.12 4.88 0.99 -3.38 3.80 -15.48 -16.21 6.04 -3.38 4.05 6.80 5.43 2,74 -0.52 2.65 7.31 0.14 1.66 -4.15 0.13 5.33 7.02 -2.69 -2.07 5.21 7.05 5.95 5.84 3.45 -4.09 3.33 4.47 4.75 -2.09 5.77 3.25 7.37 2.37 5.35 -4.20 -5.92 -3.44 1.28 1.19 -3.85 2.79 3.37 3.50 1.92 -1.26 3.34 -6.57 7.64 6.96 4.01 21.34 -16.62 -1.58 1.73 13.34 a. Compute the average monthly return and monthly standard return deviation for each portfolo and all three risk factors. Also state these values on an annualized basis. (Hint: Monthly returns can be annualized by multiplying them by 12, while monthly standard deviations can be annualized by multiplying them by the square root of 12.) Use a minus sign to enter negative values, any. Do not round intermediate calculations. Round your answers to three decimal places Portfolio A Portfolio B 5.64 -3.71 -2.82 -3.74 -4.96 -6.23 1.70 -3.14 2.76 2.90 -4.30 0.77 Correlation between 1 & 3 Correlation between 2 & 3: d. In theory, what should be the value of the correlation coefficient between the common risk factors? Explain why In theory the correlations should be select because we want the factors to be se -1.24 -3.24 -8.15 -9.08 -0.00 -12.07 1.73 13.34 a. Compute the average monthly return and monthly standard retum deviation for each portfolio and all three risk factors. Also state these values on an annualized basis. (Hint: Monthly returns can be annualized by multiplying them by 12, while monthly standard deviations can be annualized by multiplying them by the square root of 12.) Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to three decal places Portfolio A Portfolio B Factor 1 8.32 5.46 -8.86 Factor 2 Factor 3 Factor 2 b. Based on the return and standard deviation calculations for the two portfolios from Part & clear whether one portale outperformed the other over this time period? Do not make any additional calculations to answer this question Factor 3 Portfolio A earned a return and standard deviation than Portale B. Therefore, dear that one portfolo outperformed the other over this time period. <. Calculate the correlation coefficients between each pair of the common risk factors , 182, 183, and 2 & 3). Use a manus sign to enter negative values, if any. Do not round intermediate calculations, Round your answers to four decimal places Correlation between 1 & 2:/nChapter 07: Assignment-Asset Pricing Models -3.38 3.80 1.73 a. Compute the average monthly return and monthly standard return deviation for each portfolio and all three risk factors. Also state these values on an annualized basis. (Hint: Monthly returns can be annualized by multiplying them by 12, while monthly standard deviations can be annualized by multiplying them by the square root of 12.) Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to three decimal places. Factor 2 Factor 3 Portfolio A Portfolio B Factor 1 Monthly: Std Dev Annual: 29 4.70 -5.79 13.34 Sed Dev 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? Do not make any additional calculations to answer this question. 5.46 Portfolio A earned a select return and a select-standard deviation than Portfolio B. Therefore, itect clear that one portfolio outperformed the other over this time period. c. Calculate the correlation coefficients between each pair of the common risk factors (e, 1&2, 1 & 3, and 2 & 3). Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to four decimal places. Correlation between 1 & 2: Correlation between 1 & 3: Correlation between 2 & 3: d. In theory, what should be the value of the correlation coefficient between the common risk factors? Explain why In theory the correlations should be -Select- because we want the factors to be elect independent of each otherSee Answer
Q14:10. Problem 7-14 ebook Problem 7-14 Consider the data contained in the table below, which lasts 30 monthly excess returns to 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 a computer spreadsheet program such as Microsoft Excel to calculate your answers.) Chapter 07: Assignment-Asset Pricing Models Period 1 2 3 4 3 7 . 10 11 12 13 14 15 17 19 19 20 71 15 BADEERANA 16 17 18 20 21 22 23 24 25 25 27 29 Portfolio 1.00% 7.49 5.09 1.18 -1.97 4.15 -0.76 -15.54 5.97 7.72 9.67 -3.29 5.30 2.29 -2.96 6.44 -3.45 LAL 5.39 2.29 -2.80 6.44 -3.45 5.95 1.97 7.27 4.74 1.02 9.01 -3.34 1.94 Portfolio B Factor I Factor 2 0.00% 0.03% -1.04% 6.58 0.31 0.44 2.34 -2.57 -15.44 4.09 6.75 3.55 4.39 2.64 -0.04 2.56 0.07 3.58 -3.90 2.58 7.25 0.07 3.58 -3.99 0.07 5.19 2.21 -2.00 5.30 Regression for Portale A Constant 4.77 Factor 1 Factor 2 Factor 3 Regression for Portfole 2.92 -16.18 7.10 3.38 3.35 4.70 -1.37 3.35 4.49 4.70 -3.41 -1.37 -2.73 4.45 2.54 5.08 0.41 b -3.40 0.03 1:36 -0.29 1.08 -3.72 2.94 3.36 1.30 -3.72 2.94 3.38 347 -1.39 1.20 7.69 6.92 4.17 21.48 -16.63 Factor 3 -1.60% 1.94 0.23 4.25 -161 -1.04 5.76 -2.54 -3.70 -4.98 -8.26 1.72 -3.10 3.13 0.63 -1.28 -3.10 2.06 3.13 4.24 0.63 5.45 1.39 13.36 -4.87 a. Using regression analysis, calculate the factor betas of each stock associated with each of the common risk factors. Which of these coefficients are statistically significant at 5% level of significance? Fill in the table below. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers for factor betas to three decimal places and answers for t-statistics to two decimal places -1.28 -3.10 -3.11 4.03 -0.09 -11.98 7.74 -statistic Significance Select significant not significant/nChapter 07: Assignment-Asset Pricing Models signincancer in the tacie pelow. use a minus sign to enter negative values, ir any vo net round intermediate cacuations wound your answers for actor pecas to three decima places and answers for t-statistics to two decimal places. statistic Significance Regression for Purtule A Constant Factor 1 Factor 2 Factor 3 Regression for Portfolio Constant Factor 1 Factor 1 Factor 2 Factor 3 Regression for Portfolio A Constant -Sect Factor 2 Factor 3 Select b. How well does the factor model explain the variation in portfolio retums? On what besis can you make an evaluation of this nature? The factor models explain Select as the select values in both regressions are t c. Suppose you are now told that the three factors used in the models represent the risk exposures in the Fame-French characteristic-based model (ie, excess market, SMB, and HML), Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why Regression for Portfolio B Constant Select is the most likely candidate for the market factor because it has a effect on both portfolios. d. Suppose it is further revealed that Factor 3 is the HPL factor Which of the two portfoliosis most likely to be a growth-oriented and and which is a value-oriented fund? Explain why use a minus sign to enter negative values, ir any. Do not rouna intermediate calculations. Kound your answers to o two decimal places. t-statistic Significance b Regression for Portfolio A Constant Factor 1 Factor 2 Factor 3 bi Regression for Portfolio B Constant GENT -Select- significant bi V ✔ signincancer it in the table below. use a minus sign to enter negative values, ir sny. Lo not found intermecere calculations. Hound your answers for factor tetas to three decima places and answers for t-statistics to two decimal places. -Select- -Select- -Select- -Select- significant not significant -Select- -Select Select t-statistic Significance Select Select significant not significare Factor 1 Factor 2 Factor 3 Select Seet b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature?/nb. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? Chapter 07: Assignment-Asset Pricing Models places and answers for t-statistics to two decimal places. Chapter 07: Assignment-Asset Pricing Models Regression for Portfolio A Constant Chapter 07: Assignment-Asset Pricing Models Factor 1 Factor 2 Factor 3 Regression for Portfolio B Constant Factor 1 Factor 2 Factor 3 places and answers for t-statistics to two decimal places. Regression for Portfolio A Constant Factor 1 Factor 2 Factor 3 Regression for Portfolio B Constant Factor 1 Factor 2 Factor 3 t-statistic Significance b₁ -Select- -Select- -Select- -Select- Select -Select- significant not significant Select t-statistic Significance -Select- -Select- -Select- -Select- -Select- -Select- -Select- significant not significant/nRegression for Portfolio A Constant Factor 1 Factor 2 Factor 3 Chapter 07: Assignment - Asset Pricing Models Regression for Portfolio B Constant Factor 1 Factor 2 Factor 3 -Select- significant b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluations more? The factor modale avolain Elect, sean the „Esinet. selualuen in hath rancaccinne ara | „Esinet- places and answers for t-statistics to two decimal places. Regression for Portfolio A Constant Factor 1 Factor 2 Factor 3 Regression for Portfolio B Constant -Select- -Select- -Select- -Select- by -Select- -Select- significant t-statistic Significance -Select- -Select- -Select- -Select- -Select- Factor 1 -Select -Select- Factor 2 Factor 3 -Select- -Select- b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evalual significant The factor models explain -Select- as the -Select-values in both regressions are-Select- not significant re?/nFactor 2 Factor 3 Regression for Portfolio B Select 3 Sret b. How well does the factor model explain the vanation in portfolie retums? On what bass can you make an evaluation of this nature? as the values in both regressions are e The factor models explain Select c. Suppose you are now told tree factors used in the models represent the risk exposures in the fame-French characteristic-based model -e, excess market, SMB, and HML). ich one of these factors is the most likely to be the market factor? Explain why Based on your regression -Select the most skaly candidate for the market factor, because it has a sec affect on both portfolios d. Suppose it is further revealed that Factur 3 is the HML factor Which of the two portfolios is mest ikely to be a growth-oriented fund and which is a value-oriented fund? Explain why Selects the mars Ekely candidate for the value-oranted portfule as it has a loading on this factor is the more likely candidate for the growth-oriented portfolio as it has a loading on this factor Factor 2 Factor 3 New b. How well does the factor model explain the variation in portfolio returns? On what ban can you make an evaluation of this nature? The factor models planetas the c. Suppose you are now told that the three faceted Based on your regression results, which one intrat select is the most likely candidate for the market factor, because the models represent the risk exposures in the Fama-Franch characteristic-based model (ie, excess market, SMB, and HML), is is the most likely to be the market factor? Explain why effect on both portfolios d. Suppose it is further revealed that Factor 3 is the HM factor Which of the two portfolios a mostly to be a growth-oriented fund and which is a value-oriented fund? Explain why. Select is the more likely candidate for the value-oriented portfolio as it has a seloading on this factor is the more likely candidate for the growth-oriented portfolio as it has a select loading on this factor. b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? The factor models explain eect was the Select values in both regressions are sent ugh c. Suppose you are now told that the three factors used in the models represent the risk ex high enough Based on your regression results, which one of these factors is the most likely to be the na-french characteristic-based model (le, excess market, SMB, and HMC). why -Select-is the most likely candidate for the market factor, because it has Select effect on both portfolios d. Suppose it is further revealed that Factor 3 is the HMC factor Which of the two portfolios is most likely to be a growth-oriented fund and which is a value oriented fund? Explain why. elects the more likely candidate for the value-oriented portfolio as it has a -telects the more likely candidate for the growth-oriented portfolio as e has a loading on this factor loading on this factor Select b. How well does the factor model explain the vanation in portfolio returns? On what besis can you make an evaluation of this nature? The factor models explain Sect as the values in both regressions are a c. Suppose you are now told that the three factors used in the models represent the risk exposures in the Fama French characteristic-based model (ie, excess market, SMB, and PMC). Based on your regression results, which one of these factors is the most haly to be the market factor? Explain why is the most likely candidate for the market facto, because it has a effect on both portfolios. d. Pacter 1 is further revealed that Factor 3 is the AM factor. Which of the two portfales is most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why Factor 2 Factor 3 is the more likely candidate for the value-orientad portfolio as it has a loading on this factor is the more likely candidate for the growth-oriented portfold as it has a loading on this factor/nractor 3 b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? The factor models explains the values in both regressions are sec Suppose you are now told that the three factors used in the models represent the risk exposures in the Fama-French characteristic-based model (e, excess market, SMB, and HML). Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why -Select- is the most likely candidate for the market factor because it has d. Suppose it is further revealed that Factor 3 is the HML factor Which of the targe, significant, and positive arge, significant, and negative -Select is the more likely candidate for the value-oriented portfolio as it cand a -Select is the more likely candidate for the growth-oriented portt effect on both portfolios growth-oriented fund and which is a value-oriented fund? Explain why. factor Factor 3 b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? The factor models explain Sect as the values in both repressions are select c. Suppose you are now told that the three factors used in the models represent the risk exposures in the Fame-French characteristic-based model (ie, excess market, SMB, and MMC) Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why -Gelect is the most likely candidate for the market factor, because it has act effect on both portfolios d. Suppose it is further revealed that Factor 3 is the ML factor. Which of the two portfolios is most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why. Selects the more likely candidate for the value-oriented portfolic as it has a Select loading on this factor Por is the more likely candidate for the growth-oriented portfolio as it has a loading on this factor Portfolio Factor 3 b. How well does the factor model explain the variation in portfolio returns? On what besis can you make an evaluation of this nature? The factor models explain -Select- as the select values in both regressions are elect c. Suppose you are now told that the three factors used in the models represent the risk exposures in the fame-french characteristic-based model (ie, excess market, SMB, and HML). Based on your regression results, which one of these factors is the most likely to be the market factor? Exp -Seat is the most likely candidate for the market factor, because it has a effect on both portfolios d. Suppose it is further revealed that Factor 3 is the AME factor. Which of the two portfoliosis most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why -Select-is the more likely candidate for the value-oriented portfolie as it has a leading on this factor Select is the more likely candidate for the growth-oriented portfolio as it has loading on this factor/nFOUR & Factor 2 Factor 3 -Select- b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? The factor models explain -Select- as the -Select- values in both regressions are select c. Suppose you are now told that the three factors used in the models represent the risk exposures in the Fama-French characteristic-based model (i.e., excess market, SMB, and HML). Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why. "DEMELE -Select- is the most likely candidate for the market factor, because it has a-Select- effect on both portfolios. d. Suppose it is further revealed that Factor 3 is the HML factor. Which of the two portfolios is most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why. -Select is the more likely candidate for the value-oriented portfolio as it has a select loading on this factor is the more likely candidate for the growth-oriented portfolio as it has a select loading on this factor -Select- Portfolio A Portfolio B Factor 3 b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? The factor models explain -Select- as the elect values in both regressions are c. Suppose you are now told that the three factors used in the models represent the risk exposures in the Fama-French characteristic-based model (ie, excess market, SMB, and HML). Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why. -Select- is the most likely candidate for the market factor, because it has a select effect on both portfolios. d. Suppose it is further revealed that Factor 3 is the HML factor. Which of the two portfolios is most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why. Select is the more likely candidate for the value-oriented portfolio as it has a Select loading on this factor -Select- is the more likely candidate for the growth-oriented portfolio as it has a -Select-loading on this factorSee Answer
Q15: BUSA 3700-Investment Analysis Vanderbilt University Investment Policy Paper – IPP 1 - Overview The Investment Policy Paper (IPP), will be an individual project focused on applying a comprehensive understanding of investment analysis to make practical investment recommendations. You are responsible for a written pitch explaining your detailed investment strategy and how it fits the client's goals. You will select a representative investment client from four profiles provided, interpret the current market environment, and perform research and analysis to support an investment allocation recommendation for your client appropriate for his or her risk profile, investment objectives and personal situation. You will determine an appropriate asset allocation suitable to this client, and then provide a reasonable estimate of projected annual rates of return to be expected from your recommended allocation. After the client accepts your proposal, you will then propose financial instruments you will use to execute on your strategy. Part A - Select a US-based Client Choose one US-based client to take on from the four profiles provided below, and answer the following two questions: a. Summarize the investor's situation and desired return. Interpret their risk tolerance, liquidity requirements, investment horizon, and target portfolio value (real or nominal) 400 words max b. Calculate the portfolio's target nominal return - including investment returns as well as withdraws. (i.e. The target return is derived from using the profile description only - and does take your allocations into account.) Investor Profiles (choose one from list below) Investment Profile I - Personal investor middle class • • Investor has received an insurance settlement related to a traffic accident of $1 million. She holds a middle management position at a data processing firm with room for promotions and regular salary increases; she is 35 years old and is able to pay living expenses for her family, including mortgage payments, from present salary though she would like to supplement her income with a withdrawal of $10,000 per year from the fund. Husband, two children ages three and one. Her husband does not work; they do not expect to have any more children. BUSA 3700 Investment Analysis - Vanderbilt University She does not expect to withdraw any other money from the fund of $1 million until withdrawing as much as $500k in about 15-18 years for her children's college tuition and associated expenses in order to spare them student loan debt. The remaining $500k will continue to be invested for her retirement • She hopes to retire in about 25 years with enough money to live comfortably on the aggregate value of her investment. Investment Profile II - Personal investor High-Net-Worth individual • Unmarried with no children. • • Stanford programmer that sold the app Chatsnap for $1 million to Google. Pursues a career as a software developer earning about $180,000 per year but wishes to open his own software development company within the next 5 years. This will allow him to work on a contract basis and potentially develop more apps in the future. Hopes to use money from the sale of his app to live a comfortable lifestyle regardless of his employment income. He expects to spend his current salary on housing and living expenses which will consume all of his salary income. He is willing to roll the dice and wants an aggressive investment plan that will maximize his returns over next 5 years. If he wins, it takes pressure off his launch of his own business; if he loses, he has his salary earnings potential regardless. - Investment Profile III – Retirement already here • Charlotte, a 65-year-old widow who has received $1 million from her husband's life insurance plan. With her children out of the house and no job to fall back on, it has been estimated that Charlotte needs around $50,000 to allow her to live without working. This need is not met by the $14,200 received from Social Security so she needs to withdraw roughly $36,000 from her savings each year to maintain her lifestyle. • Though her children are well established financially, she would like to leave the capital as inheritance for her grandchildren at her death (e.g. $1 million) • • . This is her only wealth other than the house she lives in, and with no other possessions to fall back on Charlotte is totally dependent upon this money to pay off her expenses. The AARP recently released data stating that the total medical cost for those over 65 averages $24,000 a year until death. She feels her present medical insurance will offset at least half of that figure. Charlotte is risk averse and doesn't want to experience a roller coaster ride with the money that she depends upon to live out her life comfortably. Investment Profile IV – Cherry Oaks Endowment fund - • • • • - BUSA 3700 Investment Analysis Vanderbilt University A new private school named Cherry Oaks Engineering School has recently been opened in Franklin, Tennessee. An anonymous donor has given it $1,000,000 for its endowment on the condition that only the excess returns over 3.5% per annum may be paid out for use by the school. The school would like to be able to take out $50,000 each year in order to fund one teaching post. After an assessment of the current condition of facilities, the school is looking to use a cumulative $1.2 million for renovations during years 15-20. The faculty emphasize the importance of laboratory work and right now the school is well equipped for the five lab-based courses it provides. As enrollment grows and technology advances, the school would need $60,000 every 7 years for lab upgrades. The school projects to start receiving an estimate of $15,000 as donation after the first 5 years. As its alumni network grows in the future, the annual donation is expected to grow by 10%. To support the school's long-term plans, the endowment has a goal of reaching $12.5 million in 30 years. Part B - Current Market Environment and Asset Allocation After selecting the investor profile that will be your client for the term, you should conduct research and analysis to interpret the current market environment and propose your asset allocation plan by answering these questions below: 1. Inflation a. Forecast inflation rate over the investment horizon and briefly provide rationale (140 words max) 2. Determine allocation to each asset type based on investor's profile. Institutional publications and the market research will be helpful for projections. a. Utilize at least FIVE distinct asset types similar to those found in the JPMorgan handout to compose the portfolio. You need at least one equity and one fixed income asset type. Alternative assets classes should not represent more than 20% of the portfolio in aggregate. Alternative asset classes include commodities, real estate (incl. REITS), collectibles, foreign currency, insurance products, derivatives, venture capital, private equity, and distressed securities. b. For each asset, present the forecasted nominal return and risk over the investment horizon, percent allocation, and dollar allocation. (Hint: for this question, a long-term capital market projection report by JP Morgan is provided as an outside source. You are expected to find other similar outsides sources to back up your projection.) (100 words max each asset type) - BUSA 3700 Investment Analysis Vanderbilt University c. Calculate expected return for the portfolio d. Calculate risk (standard deviation) for the portfolio – accounting for cross-asset correlations. (Hint: You are expected to calculate the risk using the covariance matrix method. The TA's can help with this topic.) 3. Explain the investment strategy's suitability for the client's investment goals a. For each of the three asset types with the highest allocations, identify two macroeconomic trends or factors driving the asset's risk-return profile going forward. (75 words per trend max) b. Compare the projected return to the target return. How much of the target return is projected to be achieved through asset allocation? c. Summarize how your strategic asset allocation is optimal for the client's risk tolerance, liquidity needs, and investment horizon. (250 words max) Important Notes and Guidance: Submit your project as a PDF to BrightSpace. Your Excel back must be submitted as well but the PDF must be readable and understandable as a standalone file. You should provide historical data such as trend graphs to back up your forecasts. As quantifying attributes of asset types, financial markets, and the broad economies is a perpetual and tremendous effort, much of this project will reference outside sources. Please be comprehensive in citing reference materials. The return referred to in Part A (b) is the same as the target return in Part B (3b). This is based on the investor's profile and required returns as provided in the prompt, independent of your asset choices. The expected return in part B (2c) is based on the expected performance of your selected asset types. State any assumptions you're making if something isn't clear. - The target return from Part A (b) is based on the investor and the prompt. ("b. Calculate the portfolio's nominal return – including investment returns as well as withdrawals."), means calculate the target return. An example would be if I wanted to invest $1m today and withdraw $1.2m next year, my target would be 20%. Your expected return will be based on the assets you choose and their weighted average. If I chose 100% of private equity returning 7.25%, then my expected return is 7.25%. To compare them, I could say my expected return from asset allocation achieves about 1/3 of the target i.e. (7.25/20). In IPP 1, it is NOT always the case that THE EXPECTED RETURN CAN MEET THE TARGET RETURN YOU HAVE SET but you need to support your work as to how close you think you - BUSA 3700 Investment Analysis Vanderbilt University can come. In IPP 2, you will have a better chance of getting to the target through stock selection. In terms of calculating variance of a 5 asset portfolio for part 1. Below is what the variance would look like for 4 assets; - you can extrapolate to 5. • • • • • • σ²(portfolio) = w1201² + w2²σ2² + w3²σ3² + w4²σ4² + 2w1w201σ2p(1,2) + 2w1w30103p(1,3) + 2w1w40104p(1,4) + 2w2w3σ2σ3p(2,3) + 2w2w4o2σ4p(2,4) + 2w3w40304p(3,4) Every Part of this assignment should be written in paragraph form. In Part 1, tables and figures should be embedded in the PDF - only reference support files for backup, not for anything you are showing. You may choose to factor taxes into your calculations or state that you are ignoring them. The JP Morgan Long Term Capital Markets Assumptions Matrices in the IPP tab are a useful guideline for asset performance but there exist many other credible sources (BlackRock, Vanguard, etc.) Note: Each row in that JP Morgan file is one asset type You are not trying to calculate the singular correlation between any two assets. That is already provided in JPMorgan. You should calculate the total portfolio Std Dev. accounting for all cross-correlations of 5 or more assets. (See above) As noted, it may be the case that you are unlikely to realize the client's desired return solely just through asset allocation. Additional returns can be realized in IPP Part II, through security selection. In IPP 1, it is more important that you have defined the client's investor profile well and used proper methodology As always, The TA's will have a good perspective on what needs to be done.See Answer
Q16:Consider the following two stocks and T-Bill: Expected Price Per σ РАВ Security return Share A B 12% 30% 9% T-Bill 2% 20% 0% $100 $75 0.8 a. Suppose you buy 50 shares of stock A and 50 shares of stock B. What is the expected return of this portfolio and what is its standard deviation? (Hint - first calculate what fraction of your investment in A and in B). b. Suppose that instead of buying 50 shares of stock A and 50 shares of stock B you decided to buy only 25 shares of stock A, 25 shares of stock B, and with the rest of the money buy Treasury bills. What is the expected return of this portfolio and what is its standard deviation. (Hint: use the result in (a) to calculate the standard deviation of a portfolio composed of half (A+B) and half in T-bill)./nYou are currently invested in the Farrallon Fund, a broad-based fund of stocks and other securities with an expected return of 8% and a volatility of 33%. Currently, the risk-free rate is 2%. Your broker suggests that you add a new VC fund to your current portfolio. The VC fund has an expected return of 21% and a volatility of 76%. It has a correlation of 0.19 with the Farrallon Fund. Should you add the VC fund to your portfolio? Explain. (Hint: Assume that the fund is the "market" portfolio). Here are the steps you need to take: a. What is the beta of the VC fund with respect to the Farralon fund? b. Given the beta, what return should you expect to get on the VC fund assuming the CAPM holds? c. What return do you expect to get? Is this return better than the beta-based return?/nConsider the following risky portfolios a. A B с D E F G H Expected return (%) 10 12.5 15 16 17 18 8 18 20 Standard deviation (%) 23 21 25 29 29 29 32 35 45 Plot these portfolios on a graph where the x axis is the standard deviation and the y axis is the return. b. Five of the portfolios are efficient, and three are not. Which are the inefficient ones? Explain. Suppose you are prepared to tolerate a standard deviation of 25 percent on your portfolio. C. d. What is the maximum expected return that you achieve if you cannot borrow or lend? What is your optimal strategy if you can borrow or lend at 12% and are prepared to tolerate a standard deviation of 25 percent. What is the maximum expected return that you can achieve? (Hint: think CML)/nInvesting on the CML is considered better than investing in any one particular security. This question shows the benefits of investing on the CML: Your investment portfolio consists of $1 million invested in only one stock - IBM. The expected return of the stock is 11% and the standard deviation is 46%. The market portfolio has an expected return of 9% and volatility of 22%. The risk free rate is 5%. a. Under the CAPM assumptions, what portion of IBM's volatility can be eliminated by investing on the CML while having the same expected return as IBM. What portfolio on the CML should you recommend (i.e., find the weights)? b. Under the CAPM assumptions, what extra return can you achieve in the market relative to IBM, if you are willing to tolerate a standard deviation of returns similar to IBM. What portfolio on the CML should you recommend (i.e., find the weights)?See Answer
Q17:1. Capital budgeting. Calculate initial investment, appropriate cash flows, and use the net present value criteria to evaluate the following investment opportunity: a. Initial investment: b. Intermediate cash flows (or their PV) C. Net present value: d. Accept/reject? Why?See Answer
Q18:FIN 352 INVESTMENTS Written Assignment #3 Descriptions: In the exercise, students will perform stock valuation using the price relative approach and learn how to use stock screening tools to build a peer group to assist in the valuation analysis.See Answer
Q19:1. Select three different corporate bonds from three different companies. The bonds must have years to maturity at least 5 years apart from each other. One of the bonds should be issued by the company evaluated by your group in the first written assignment. a. A good bond data resource is: http://finra-markets.morningstar.com/ 2. Calculate the duration of each bond and the duration of a bond portfolio investing equally in the three bonds. 3. For reference purposes, select an additional two bonds issued by the companies from step 1 that match the longest maturity bond in your portfolio (i.e., you will analyze 5 bonds in total) a. Example: In step 1 you use a 2030 bond for Co. A, a 2040 bond for Co. B and a 2045 bond for Co. C. So, you choose a 2045 bond from Co. A and a 2045 bond from Co. B to be able to compare to the already selected 2045 bond from Co. C. b. Provide the key details for the additional bonds including spread to treasury. These two bonds are not included in your portfolio but will be useful in your overall analysis. 4. Your research indicates: a. Treasury bond rates will increase, and, b. The spread between corporate bonds and Treasury bonds will widen. 5. Forecast a change in yields for the three bonds in your portfolio. Discuss the properties of your three-bond portfolio with respect to returns and risk (interest rate risk and default risk). Including: What assumptions drive your change in treasury bond rates? What assumptions drive your change in spreads for each bond? How would you change the weights of the bonds in the portfolio (from equal) to take advantage of your research? How would you quantify the impact? What happens to the interest rate risk and default risk in your portfolio?See Answer
Q20:15 The "father" of modern portfolio theory is: (a) Markowitz. (b) Friedman. (c) Samuelson. (d) Sharpe. 16. To describe the random variable of the portfolio rate or return, the investor needs (a) mean and coefficient of correlation. (c) only the expected value. (b) median and standard deviation. (d) expected value and standard deviation. 17. Portfolio Á has an expected return of 16% with a standard deviation of 8%. Portfolio B has an expected return of 12% with a standard deviation of 7%. (a) Portfolio A has a lower risk/return. (b) Portfolio B has a larger expected terminal wealth. (c) The portfolios have the same risk/return. (d) Portfolio B has a more certain return. 18 For an investor's indifference curve (a) each portfolio on the curve has the same standard deviation. (b) all portfolios on the curve are equally desirable. (c) he will choose the portfolio where his set of curves intersect. (d) he will prefer a portfolio that lies to the "southeast" of the curve. 19. The development of an investor's indifference curves is based on (b) correlation theory. (c) economic theory. (a) cognitive psychology. (e) probability theory. (d) utility theory. 20. Modern Portfolio Theory assumes (a) risk averse. (c) not concerned with risk. investors are (c) is risk neutral. (d) is risk-seeking. (b) risk seekers. (d) risk neutral. 21. Assuming investor non-satiation, an investor (a) will choose the portfolio with the lowest risk. (b) will choose the portfolio with the highest return for a given level of risk. See Answer

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