Portfolio Management

Transcription

1 Subject no. 57A Diploma in Offshore Finance and Administration Portfolio Management February 2014 Friday afternoon 7 February 2014 Time allowed: 3 hours Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room. This examination paper is divided into three sections. You must attempt all parts of Question 1 in Section A, all questions in Section B, and two questions only in Section C. Section A carries 10 marks (1 mark for each part of Question 1). Section B carries 40 marks (4 marks for each question). Questions in Section C each carry 25 marks. You should allow yourself approximately 20 minutes in total to answer the questions in Section A, 70 minutes in total to answer the questions in Section B and 45 minutes for each of the questions attempted in Section C. Note: Unless otherwise specified, you should assume that an Act or an organisation referred to in the questions is a UK Act or organisation. ICSA, 2014 Page 1 of 7

2 Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1. (i) The basis of a futures contract is: A. The difference between the futures price and the spot price of the underlying asset. B. A positive amount that measures the cost of carrying the underlying asset forward to the futures contract delivery date. C. The amount of the underlying asset that a futures contract holder receives on the contract delivery date. D. A sum offered to a futures contract seller as a reward for taking on the risk that the price of the underlying asset might change. (ii) A nominee account is an account: A. In the name of a beneficial owner which is used for trading and holding financial securities. B. That an investor nominates as the one to which dividends, interest payments and other cash flows from assets should be credited. C. Used to trade and hold financial assets which is registered in a name other than that of the beneficial owner of the assets. D. Used by a stockbroking company to trade and hold securities on its own behalf. (iii) In portfolio theory, a correlation coefficient of zero between the return profiles of two assets indicates that: A. A portfolio consisting of the two assets generated a return of 0% over the period in question. B. The level of risk associated with a portfolio consisting of the two assets was zero. C. The return profiles of the two assets exhibited no systematic relationship. D. A portfolio consisting of the two assets offered no risk reduction benefits to investors over the period in question. ICSA, 2014 Page 2 of 7

3 (iv) The following list shows types of bonds in pairs. Identify the pair in which the two terms do not have the same meaning. A. Zero-coupon bond and pure discount bond. B. Variable-rate bond and index-linked bond. C. Coupon-paying bond and interest-bearing bond. D. Callable bond and redeemable bond. (v) When a company declares a dividend, recipients of the dividend will be those who are shareholders on the: A. Dividend declaration date. B. Record date. C. Dividend payment date. D. Ex-dividend date. (vi) A capitalisation issue of shares is another term for a: A. Bonus issue. B. Rights issue. C. Stock split. D. Stock consolidation. (vii) The concept of duration provides a framework for estimating: A. By how much the expected return on equity is affected by alterations in the risk-free rate of return. B. By how much the price of a bond changes in response to a change in the yield on the bond. C. The extent to which the yield on a bond is expected to change with the decline in its term to maturity. D. The average term to maturity of the coupon payments on a bond. (viii) An alpha return is the element of return on an investment: A. In excess of the risk-free return. B. Which remains after subtracting the expenses incurred by the asset manager. C. In excess of the return on a benchmark portfolio. D. Which the asset manager generates after adjustments for the risk taken. ICSA, 2014 Page 3 of 7

4 (ix) The Capital Market Line (CML) model defines the market price of risk as a measure of the: A. Market portfolio risk premium divided by market risk. B. Return on the market portfolio divided by market risk. C. Return on a portfolio divided by market risk. D. Return on a portfolio divided by the total risk of the portfolio. (x) Which of the following is not registered as a Nationally Recognized Statistical Rating Organization with the Securities and Exchange Commission in the USA? A. Moody s Investors Service B. Standard & Poor s Ratings Service C. Fitch D. Experian (Total: 10 marks) ICSA, 2014 Page 4 of 7

5 Section B Answer all ten questions. 2. An investor owns bonds offering fixed annual interest payments for the next five years. Having come to the view that interest rates are set to rise, the investor intends to enter into a swap agreement to convert the fixed payments into floating rate payments. Explain two advantages of using a swap rather than a series of forward rate agreements. 3. Define the concept of a yield curve and provide one reason why they are useful to practitioners in financial markets. 4. Explain the difference between a value-oriented investment outlook and a growthoriented investment outlook. 5. Explain what is meant by the term contrarian investing. 6. Explain two ways in which option contracts differ from futures contracts. 7. Explain what a haircut is in the context of a sale and repurchase agreement ( Repo ). 8. When investors receive entitlements to new shares under a rights issue they have four basic options in terms of how to respond. Explain the four choices. 9. Explain the difference between a top-down and bottom-up approach to asset management. 10. Explain the significance of the fact that exchange-traded futures are marked-to-market. 11. Many finance experts make extensive use of technical analysis to inform their investment decisions. Briefly discuss the implications of this for the claim that capital markets are efficient. (Total: 40 marks) ICSA, 2014 Page 5 of 7

6 Section C Answer two questions only. 12. Identify and discuss five characteristics which you might expect to encounter when examining an asset portfolio. (25 marks) 13. (a) Explain the main benefits that the institutionalisation of asset management offers to investors. (15 marks) (b) Discuss the dangers of institutionalised asset management for investors and the mechanisms for protecting investors interests. (10 marks) (Total: 25 marks) (continued) ICSA, 2014 Page 6 of 7

7 14. A portfolio consists of three assets whose beta values are provided in the table below. Asset 1 Asset 2 Asset 3 Beta The risk free rate of return was 3% and the return on the market portfolio was 9%. (a) Using the Capital Asset Pricing Model, calculate the expected return for each of the three assets. Expected return = risk free return + beta(market return risk-free return) (3 marks) (b) You have invested 40% of your funds in Asset 1, 30% in Asset 2 and 30% in Asset 3. Calculate the portfolio beta and the expected return on your investment. Portfolio beta = sum of each asset s weighting x its beta (3 marks) (c) The actual return on the three-asset portfolio was 17%. Calculate the Treynor ratio for the market portfolio (for which the beta value is 1) and for your threeasset portfolio. Comment on whether the results suggest that your skill in choosing the assets was responsible for at least some of the return. Treynor ratio = portfolio risk premium/portfolio beta (6 marks) (d) Many actively managed funds have been criticised for being little more than expensive closet trackers or index huggers. Discuss the rationale for actively managed investment funds and the reasoning behind the criticism. (13 marks) (Total: 25 marks) The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. ICSA, 2014 Page 7 of 7

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