Chapter 6: Q10B (page 685)
Is statistical arbitrage true arbitrage? Explain.
Answer
No, because not able to establish a risk-free position.
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You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the six month discount on Canadian-dollar forward contracts is - .75% versus the U.S. dollar..
Calculate the expected price change required in the Canadian government bond that would result in the two bonds having equal total returns in U.S. dollars over a six-month horizon.
Assume that the yield on the U.S. bond is expected to remain unchanged.
John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund. Darwin asks Irish about international equities and whether the Investment Committee should consider them as an additional asset for the pension fund.
a. Explain the rationale for including international equities in General’s equity portfolio. Identify and describe three relevant considerations in formulating your answer.
b. List three possible arguments against international equity investment, and briefly discuss the significance of each.
c. To illustrate several aspects of the performance of international securities over time, Irish shows Darwin the accompanying graph of investment results experienced by a U.S. pension fund in the recent past. Compare the performance of the U.S.-dollar and non-U.S.-dollar equity and fixed-income asset categories, and explain the significance of the result of the account performance index relative to the results of the four individual asset class indexes.
Use the following information to answer Problems l2–16:
Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more about benchmark portfolios and is interested in trying this approach. As such, the company hired Sally Jones, CFA, as a consultant to educate the managers on thebest methods for constructing a benchmark portfolio, how best to choose a benchmark, whether the style of the fund under management matters, and what they should do with their global funds in terms of benchmarking.
For the sake of discussion, Jones put together some comparative two-year performance numbers that relate to Primo’s current domestic funds under management and a potential benchmark.
As part of her analysis, Jones also takes a look at one of Primo’s global funds. In this particular portfolio, Primo is invested 75% in Dutch stocks and 25% in British stocks.
The benchmark invested 50% in each—Dutch and British stocks. On average, the British stocks outperformed the Dutch stocks. The euro appreciated 6% versus the U.S. dollar over the holding period, while the pound depreciated 2% versus the dollar. In terms of the local return, Primo outperformed the benchmark with the Dutch investments but underperformed the index with respect to the British stocks.
Question: If Primo decides to use return-based style analysis, will the R2 of the regression equation of a passively managed fund be higher or lower than that of an actively managed fund?
With a progressive tax (Spreadsheet 21.6), compare the effects of an increase of 1% in the lowest tax bracket to an increase of 1% in the highest tax bracket.
The same ship owner advertises a tariff whereby the freight charged for all cargo will be the same. What kind of good can the ship owner expect to attract?
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