Chapter 6: Q4B (page 622)
Two portfolio managers use different procedures to estimate alpha. One uses a single index model regression, the other the Fama-French model. Other things equal, would you prefer the portfolio with the larger alpha based on the index model or the FF model?
FF model
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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.
Renée Michaels, CFA, plans to invest $1 million in U.S. government cash equivalents for the next 90 days. Michaels’s client has authorized her to use non-U.S. government cash equivalents, but only if the currency risk is hedged to U.S. dollars by using forward currency contracts.
a. Calculate the U.S.-dollar value of the hedged investment at the end of 90 days for each of the two cash equivalents in the table below. Show all calculations.
b. Briefly explain the theory that best accounts for your results.
c. Based upon this theory, estimate the implied interest rate for a 90-day U.S. government cash equivalent.
Now suppose the investor in Problem 5 also sells forward £5,000 at a forward exchange rate of $2.10/£.
a. Recalculate the dollar-denominated returns for each scenario.
b. What happens to the standard deviation of the dollar-denominated return? Compare it to both its old value and the standard deviation of the pound-denominated return.
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: What is the within-sector selection effect for each individual sector?
With a traditional tax shelter (Spreadsheet 21.5), compare the effect on real consumption during retirement of a 1% increase in the rate of inflation to a 1% increase in the tax rate.
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