Chapter 6: Q11I (page 663)
Suppose that the spot price of the euro is currently \(1.30. The one-year futures price is \)1.35. Is the U.S. interest rate higher than the euro rate?
US interest rate higher
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Verify that the traditional tax shelter with a progressive tax (Spreadsheet 21.7) acts as a hedge. Compare the effect of a decline of 2% in the ROR to an increase of 2% in ROR.
Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund. Her portfolio holds only stocks found in the S&P 500 and cash. Blakely was able to produce exceptional returns last year (as outlined in the table below) through her market-timing and security selection skills. At the outset of the year, she became extremely concerned that the combination of a weak economy and geo-political uncertainties would negatively impact the market. Taking a bold step, she changed her market allocation. For the entire year her asset class exposures averaged 50% in stocks and 50% in cash. The S&P’s allocation between stocks and cash during the period was a constant 97% and 3%, respectively. The risk-free rate of return was 2%.
a. What are the Sharpe ratios for the Miranda Fund and the S&P 500?
b. What are the M2 measures for Miranda and the S&P 500?
c. What is the Treynor measure for the Miranda Fund and the S&P 500?
d. What is the Jensen measure for the Miranda Fund?
You are a portfolio manager and senior executive vice president of Advisory Securities Selection, Inc. Your firm has been invited to meet with the trustees of the Wood Museum Endowment Funds. Wood Museum is a privately endowed charitable institution that is dependent on the investment return from a \(25 million endowment fund to balance the budget. The treasurer of the museum has recently completed the budget that indicates a need for cash flow of \)3 million in 2013, \(3.2 million in 2014, and \)3.5 million in 2015 from the endowment fund to balance the budget in those years. Currently, the entire endowment portfolio is invested in Treasury bills and money market funds because the trustees fear a financial crisis. The trustees do not anticipate any further capital contributions to the fund.
The trustees are all successful businesspeople, and they have been critical of the fund’s previous investment advisers because they did not follow a logical decision-making process.
In fact, several previous managers have been dismissed because of their inability to communicate with the trustees and their preoccupation with the fund’s relative performance rather than the cash flow needs.
Advisory Securities Selection, Inc., has been contacted by the trustees because of its reputation for understanding and relating to the client’s needs. The trustees have asked you, as a prospective portfolio manager for the Wood Museum Endowment Fund, to prepare a written report in response to the following questions. Your report will be circulated to the trustees before the initial interview on June 15, 2013.
Explain in detail how each of the following relates to the determination of either investor objectives or investor constraints that can be used to determine the portfolio policies for this three-year period for the Wood Museum Endowment Fund.
a. Liquidity requirements.
b. Return requirements.
c. Risk tolerance.
d. Time horizon.
e. Tax considerations.
f. Regulatory and legal considerations.
g. Unique needs and circumstances.
With a 3% inflation (Spreadsheet 21.2), by how much would your retirement annuity grow if you increase the savings rate by 1%? Is the benefit greater in the face of inflation?+
For Questions 1–4, answer true or false. Explain your answer.
Question: The principle of diversification assures us that diversifying a U.S. portfolio internationally will reduce standard deviation.
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