Chapter 6: Q21-15I (page 712)
Project your social security benefit with the parameters of Section 21.6.
Damaging own property, misrepresenting to claim government assistance
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Could portfolio A show a higher Sharpe ratio than that of B and at the same time a lower M2 measure? Explain.
Consider the following information regarding the performance of a money manager in a recent month. The table presents the actual return of each sector of the manager’s portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column (4).
a. What was the manager’s return in the month? What was her over- or under - performance?
b. What was the contribution of security selection to relative performance?
c. What was the contribution of asset allocation to relative performance? Confirm that the sum of selection and allocation contributions equals her total “excess” return relative to the bogey.
You are being interviewed for a job as a portfolio manager at an investment counseling partnership. As part of the interview, you are asked to demonstrate your ability to develop investment portfolio policy statements for the clients listed below:
a. A pension fund that is described as a mature defined benefit plan, with the workforce having an average age of 54, no unfunded pension liabilities, and wage cost increases forecast at 5% annually.
b. A university endowment fund that is described as conservative, with investment returns being utilized along with gifts and donations received to meet current expenses, the spending rate is 5% per year, and inflation in costs is expected at 3% annually.
c. A life insurance company that is described as specializing in annuities; policy premium rates are based on a minimum annual accumulation rate of 7% in the first year of the policy and a 4% minimum annual accumulation rate in the next five years.
List and discuss separately for each client described above the objectives and constraints that will determine the portfolio policy you would recommend for that client.
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.
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?
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