Chapter 6: Q3B (page 662)
For Questions 1–4, answer true or false. Explain your answer.
Question: For a passive investor, the minimum-variance portfolio of country indexes is optimal.
False
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What is the insurance aspect of the Social Security annuity?
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: Calculate the amount by which the Primo portfolio out- (or under-) performed the market over the period, as well as the contribution to performance of the pure sector allocation and security selection decisions.
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.
The finance committee of an endowment has decided to shift part of its investment in an index fund to one of two professionally managed portfolios. Upon examination of past performance, a committee member proposes to choose the portfolio that achieved a greater alpha value.
a. Do you agree? Why or why not?
b. Could a positive alpha be associated with inferior performance? Explain.
After much research on the developing economy and capital markets of the country ofOtunia, your firm, GAC, has decided to include an investment in the Otunia stock marketin its Emerging Markets Commingled Fund. However, GAC has not yet decidedwhether to invest actively or by indexing. Your opinion on the active versus indexing decisionhas been solicited.
The following is a summary of the research findings:
Otunia’s economy is fairly well diversified across agricultural and natural resources, manufacturing(both consumer and durable goods), and a growing finance sector. Transaction costs in securitiesmarkets are relatively large in Otunia because of high commissions and government “stamp taxes”on securities trades. Accounting standards and disclosure regulations are quite detailed, resultingin wide public availability of reliable information about companies’ financial performance.
Capital flows into and out of Otunia, and foreign ownership of Otunia securities is strictly regulatedby an agency of the national government. The settlement procedures under these ownership rulesoften cause long delays in settling trades made by non-residents. Senior finance officials in the governmentare working to deregulate capital flows and foreign ownership, but GAC’s political consultantbelieves that isolationist sentiment may prevent much real progress in the short run.
a. Briefly discuss aspects of the Otunia environment that favor investing actively, andaspects that favor indexing.
b. Recommend whether GAC should invest in Otunia actively or by indexing. Justifyyour recommendation based on the factors identified
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