Portfolio Management and Investments Semester 1, 2020
1) Please submit to Canvas by 9:00am AEST, 27th June 2020
2) This assessment will account for 60% of the total assessment for the unit.
3) There are four questions on the last assessment. You are required to answer ALL questions.
4) Begin each question with a sub-header. Discuss your answer in complete sentence and not in point form. Give specific example where possible.
a. List and discuss two (2) evidences from the financial markets that have been identified as investors may not always behave rationally.
b. Consider a market comprised of shares A, B and C. Details of these shares are presented in the following table:
Share No of shares on issue Price at the end of December 2019 Price at the end of December 2018
A 12,000 $ 4.00 $ 2.50
B 3,500 $13.50 $16.50
C 2,000 $ 7.50 $ 10.50
Suppose an investor was interested in using an index approach to determine aggregate movements in the market.
Form three portfolio, using (1) price-weighted, (2) value-weighting and (3) equallyweighted schemes. Calculate the return for each scheme over the 2019 year. Use continuous time when you calculate the returns for the portfolio.
c. What is the limit order book, and how it is useful to a potential trader? What types of information does it provide to someone who wishes to submit an order?
(4 + 6 + 5 = 15 marks)
a. What is a major criticism of Fama and French model? How are the risk premiums in the Fama and French model estimated?
b. Using the findings of Bailey & Jagtiani (1994), what would be your stock selection criteria if you are going to invest in a market which imposes restrictions on foreign ownership?
c. Identify and explain two (2) of the common characteristics of emerging markets as an asset class?
(5 + 5 + 5 = 15 marks)
a. Describe how an index tracking fund operates. What are some of the problems faced by Index tracking funds?
b. Do you believe technical analysis is complimentary or competitive with fundamental analysis? Why is the consideration of trading volume regarded as important?
c. Should expected returns to private equity be different from expected returns to public equity? Why? Provide some justifications to your answer.
(5 + 5 + 5 = 15 marks)
a. There is considerable debate as to whether asset returns are generated by asset allocation, stock selection or a combination of both. Define the terms: asset allocation and stock selection. Compare tactical asset allocation and active stock selection. Could investors make a profit by using these strategies?
b. Use the table below to answer the following sections (I, II). If the long-term Commonwealth bonds’ rate is 2.50%p.a., the return (standard deviation) for market-index is 9.65% p.a. (17% p.a.)
Fund STR Fund SHP Fund ENT Fund GLX
Average Return (% p.a.) 10.50 20.70 12.30 18.40
Standard deviation (% p.a.) 3.40 5.60 7.40 5.85
Beta 1.00 1.97 0.73 1.19
I. Which fund has the lowest overall risk versus its return?
II. Which funds following Jensen’s alpha outperformed the market?
c. The date is 14 August, and NWORC Ltd is trading at $75.40, the current continuous risk-free interest rate is 2.50%p.a. You have been approached to provide a fair price for an individual share futures contract that expires on 15 December.
I. There are 124 days between 14 August and 15 December, what is the fair price of the futures assuming dividend yield is 3.5%?
II. 44 days after the initiation of the contract, the price of the share finished at $65. What is the value of the position for someone who is short in the trade?
(5 + [2 + 3] + [2 + 3] = 15 marks)