Assignemnt: Portfolio Management
Question 1
You are provided with the following data concerning two portfolios and the market. The risk free rate is currently 2%.
|
Year
|
Returns % Portfolio A
|
Returns % Portfolio B
|
Returns % Market
|
|
1996
|
5.0
|
8.1
|
12.0
|
|
1997
|
6.0
|
6.48
|
9.6
|
|
1998
|
6.6
|
3.89
|
7.68
|
|
1999
|
6.6
|
2.33
|
6.91
|
|
2000
|
7.26
|
2.57
|
8.99
|
|
2001
|
7.99
|
2.82
|
6.29
|
|
2002
|
8.78
|
1.98
|
6.92
|
|
2003
|
7.03
|
1.19
|
6.92
|
|
2004
|
6.32
|
0.71
|
7.61
|
|
2005
|
6.96
|
0.71
|
8.93
|
|
2006
|
8.35
|
0.5
|
5.73
|
|
2007
|
10.02
|
0.7
|
6.13
|
|
2008
|
8.01
|
0.77
|
7.5
|
|
2009
|
6.41
|
1.07
|
8.3
|
|
2010
|
7.05
|
1.5
|
9.89
|
|
2011
|
7.76
|
2.1
|
7.92
|
|
2012
|
6.21
|
2.1
|
5.54
|
|
2013
|
5.59
|
1.89
|
3.88
|
|
2014
|
5.03
|
2.46
|
3.1
|
|
2015
|
5.03
|
9.0
|
3.41
|
a. You are required to calculate the expected return and standard deviation of a portfolio comprising 25% of Portfolio A and 75% of Portfolio B. Show all workings.
b. Comment on the efficiency of Portfolio B. You should provide necessary data to support your comments.
c. A portfolio (C) has a standard deviation of 4.32% and a return of 8%. Design a portfolio, comprising the market portfolio and borrowing or lending at the risk free rate, which has the same risk as Portfolio C. What is its expected return?
d. Demonstrate using Sharpe's ratio that the portfolio you designed in part c. is more efficient than Portfolio C.
a) ‘Active investors seek to produce alpha.'
Discuss this statement in light of the Efficient Market Hypothesis. Your answer should include a brief description of EMH and a definition of alpha.
b) A trader has been provided with price sensitive information. Describe the process by which this knowledge is rendered useless in a strong form market. Your answer needs to include a scenario by which the trader's information does not give an advantage.
Question 3
You have in issue bonds with the following characteristics:
Principal £100
Coupon 6%
Maturity 25 years
Yield to maturity (redemption yield) 4.5%
Number of bonds 250,000
The bonds only pay coupons once a year.
a) Using the modified duration method, estimate the new price if the yield to maturity is increased by 1 %.
b) Some bonds do not have a coupon. Give an example, with explanation, of a situation where a borrower would need to issue such a bond.
c) You wish to immunize these bonds using two income producing assets. Asset A has duration of 5 years and Asset B has duration of 35 years. Create the immunizing portfolio, stating how much you would invest in both portfolios.
Question 4
a. You are provided with the following data for a company.
It has just paid a dividend of 20p per share. Its net profit this year was £1m and according to its balance sheet, its shareholders' funds are £20 million.
The company plows back at a rate of 40%. The risk free rate is 2%. Returns have been:
|
Year
|
Return % Share
|
Return % Market
|
|
2000
|
8.0
|
14.2
|
|
2001
|
11.2
|
15.9
|
|
2002
|
12.3
|
13.4
|
|
2003
|
6.2
|
12.0
|
|
2004
|
6.2
|
19.2
|
|
2005
|
8.0
|
23.0
|
|
2006
|
4.0
|
11.5
|
|
2007
|
3.2
|
9.4
|
|
2008
|
3.5
|
4.3
|
|
2009
|
4.2
|
2.8
|
|
2010
|
5.1
|
-3.1
|
|
2011
|
2.5
|
6.2
|
|
2012
|
3.0
|
1.6
|
|
2013
|
3.3
|
8.2
|
|
2014
|
4.4
|
5.3
|
|
2015
|
6.1
|
9.2
|
a. You are required to estimate the share's price using the Constant Growth Dividend method and the Capital Asset Pricing Model.
b. Explain, in your own words, the following terms:
i. Market Risk (systemic risk)
ii. An Efficient Portfolio
iii. The Efficient Frontier.