Questions: a) Compare and contrast active equity portfolio management versus passive equity portfolio management, giving examples of each.
b) Recommend which investment approach is the most appropriate for the Client's US equity portfolio.
c) What investment instrument would you choose for this allocation? List its Ticker Symbol When it comes to emerging markets, the client is torn between which one of the BRICs (Brazil, Russia, India, and China) he should invest in.
2. a) Identify the primary stock market in each country.
b) What is the current Price/Earnings and Price/Book ratio for each market? Compare them to the levels in March 2009. Comment.
c) Compare the Earnings Yield (inverse of the P/E multiple) & Dividend Yield with the Yield on their respective Government 10-year bonds. Are you getting a better cash yield from stocks or from government bonds?
d) Based on your answers above, GDP growth forecasts for each country, as well as current geopolitical events, which BRIC country would you recommend that the client invest in? The client is very interested in European stocks since he feels the weaker Euro will be good for exports.
3. a) Given the client's view above, which stock would be the best choice out of Nestle, British Gas or Ferrari? Why?
b) German company Volkswagen is one of their national champions. Describe the history of this company and its recent emissions scandal.
c) Assume Rrf = 1.5% and the return on market Rm = 8%. Using the company's current beta, calculate its required return using CAPM.
d) For D0 use Volkswagen's last full year dividend in Euros. Assume a dividend growth rate of 3% which will stay constant into perpetuity. Value the stock using the Gordon model, using the CAPM rate of return derived in (c).
e) Assuming the dividend grows by 5% for 3 years and 3% thereafter, value the stock again using the multi-stage DDM model, discounting the cashflows by the CAPM rate of return derived in (c).
4. Populate a Yield and Maturity Table and plot the Yield Curves of the US, Japan, Swiss and German government bond markets (Yield on the Y-axis, Maturity on the X-axis). Using current inflation rates, calculate the real yields of each government's 10-yr bonds in a table below the graph
5. In about 150 words, explain why an investor would be willing to buy a government bond with a negative yield?
6. With reference to bond duration, why should an investor be cautious about holding long-dated Swiss bonds today? Of the sovereign government bonds plotted above, which country and which maturity would you choose to satisfy the fixed income allocation?
7. Compare and contrast Private Equity with CTAs/Managed Futures in terms of their liquidity and their correlation to stocks. Which would you choose for this portfolio?
8. Based on your answers above, show a sample portfolio including security/instruments chosen and their dollar value that satisfies the following asset allocation:
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Asset Class % Allocation
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US Equities 40%
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Emerging Market Equities 10%
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European Equities 10%
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Bonds 20%
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Alternatives 20%
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