Portfolio Management
Descriptive Type: Answers Length: Aprox 350 word each
PART-A
1. What are basic assumptions of CAPM? What are the advantages of
adopting CAPM model in the portfolio management?
2. State the reason for the Treynor and Sharpe indices of portfolio
performance? Which do you recommend and why?
3. “The average cost per share of stocks purchased under rupee cost
averaging is lower”. Does this hold good all the time? Explain.
4. Why is it important to understand competitive position of the product
of the company in purchasing the shares of the company?
5. How does technical analysis differ from the fundamental analysis?
PART-B
1. Describe Redington’s
Immunization theory investment management.
2. How does new information affect the pricing
of securities? How is new information related to efficient market
theory?
3. Define Markowitz diversification. Explain the statistical method used
by Markowitz to obtain the risk reducing benefit?
Case
Study: Asian Paint
Paint industry growht was at a rate of 12%
during 1995-96. The industry as a whole will continue its grow at not less than
8- 10% rate in the coming years. Assian Paints is the leader in decorative
paints, controlling 45% of market segment of the total of Rs. 1,800 crore
paints and varnishes industry. In industrial paints, it is the largest player
with a market share of 14%. With a low per capita consumption of paints in our
country, it has good future prospects. The prospects for exports are good with
an actual export of Rs. 16 crore in 1995-96. The users in industrial sector,
namely, automobiles and its accessories, Household appliances and consumer
durables etc. are showing prospects of rapid growth Thus, the potential for the
industry both in the domestic and export sector is good. Asian Paints which is
a leader in this industry has an installed capacity of 1.08 lakh T.P.A. of
Paints enamels and varnishes. Its gross block grew from Rs. 123 crores in
1993-94 to Rs. 187 crores in 1995-96, due to continuous expansion of capacity.
The sales turnover recorded a compound growth rate of 13.5% p.a. during the
last five years, while its net profit grew faster by 27.5% during the same
period.
This company has many plus factors:
1. Good Collaborator namely, Chemische Werke
HHals A.G. Germany for manufacture of Vinyl Pyrdine Latex and PPG Industries
Ine. USA, for electro deposition coating on automobiles.
2. Product differentiation and brand image is
secured by Assian Paints by spending only 1.5% of revenue on advertiseents to
testing the quality, availability and
dependability.
3. Plants well distributed geographically.
4. Six joint collaborations in foreign countries
and good export growth.
5. Good stress on R & D for absorption of
foreign technologies and their upgradation.
Asian Paints is one of the three winners of the
ET – Harward Business School Association of India awards for its performance in
1994-95. The measures used by them are as follows :
Financial
Ratios of the Company
Gross Profits / Total assets 21.36%
Retained Profits/Net worth 18.24 %
Net Profit / Net Worth 25.96%
Growth in Market Cap / Growth in Net worth (over
5 years)
1.60
Cash flow to gross assets 20.64
Questions:
1. Comment over company’s
financial position?
2. Prepare fundamental
analysis?
3. Explain company’s
Growth Prospects?
PART - C
1. In the Treynor-Black model
A) portfolio
weight are sensitive to large alpha values which can lead to infeasible long or
short position for many portfolio managers.
B) portfolio
weight are not sensitive to large alpha values which can lead to infeasible
long or short position for many portfolio managers.
C) portfolio
weight are sensitive to large alpha values which can lead to the optimal
portfolio for most portfolio managers.
D) portfolio
weight are not sensitive to large alpha values which can lead to the optimal
portfolio for most portfolio managers.
2. Benchmark portfolio risk is defined as
A) the
return difference between the portfolio and the benchmark
B) the
variance of the return of the benchmark portfolio
C) the
variance of the return difference between the portfolio and the benchmark
D) the
variance of the return of the actively-managed portfolio
3. Benchmark portfolio risk
A) is
inevitable and is never a significant issue in practice.
B) is
inevitable and is always a significant issue in practice.
C) cannot
be constrained to keep a Treynor-Black portfolio within reasonable weights.
D) can
be constrained to keep a Treynor-Black portfolio within reasonable weights.
4. ____________ can be used to measure forecast
quality and guide in the proper adjustment of forecasts.
A) regression
analysis
B) exponential
smoothing
C) ARIMA
D) moving
average models
5. Even low-quality forecasts have proven to be
valuable because R-squares of only ____________ in regressions of analysts'
forecasts can be used to substantially improve portfolio performance.
A) 0.656
B) 0.452
C) 0.258
D) 0.001
6. The ____________ model allows the private views
of the portfolio manager to be incorporated with market data in the
optimization procedure.
A) Black-Litterman
B) Treynor-Black
C) Treynor-Mazuy
D) Black-Scholes
7. The Black-Litterman model and Treynor-Black model are
A) nice
in theory but practically useless in modern portfolio management.
B) complementary
tools that should be used in portfolio management.
C) contradictory
models can not be use together; therefore, portfolio managers must choose which
one suits their needs.
D) not
useful due to their complexity.
8. The Black-Litterman model is geared toward
____________ while the Treynor-Black model is geared toward ____________.
A) security
analysis; security analysis
B) asset
allocation; asset allocation
C) security
analysis; asset allocation
D) asset
allocation; security analysis
9. Alpha forecasts must be ____________ to account
for less-than-perfect forecasting quality.
When alpha forecasts are ____________ to account for forecast
imprecision, the resulting portfolio position becomes ____________.
A) shrunk,
shrunk, far less moderate
B) shrunk,
shrunk, far more moderate
C) grossed
up, grossed up, far less moderate
D) grossed
up, grossed up, far more moderate
10. Tracking error is defined as
A) the
difference between the returns on the overall risky portfolio versus the
benchmark return.
B) the
variance of the return of the benchmark portfolio
C) the
variance of the return difference between the portfolio and the benchmark
D) the
variance of the return of the actively-managed portfolio
11. The tracking error of an optimized
portfolio can be expressed in terms of the ____________ of the portfolio and
thus reveal ____________.
A) return;
portfolio performance
B) total
risk; portfolio performance
C) beta;
portfolio performance
D) beta;
benchmark risk
12. The Treynor-Black model is a model that shows
how an investment manager can use security analysis and statistics to construct
__________.
A) a
market portfolio
B) a
passive portfolio
C) an
active portfolio
D) an
index portfolio
13. If a portfolio manager consistently obtains a
high Sharpe measure, the manager's forecasting ability __________.
A) is
above average
B) is
average
C) is
below average
D) does
not exist.
14. Active portfolio management consists of
__________.
A) market
timing
B) security
analysis
C) indexing
D) A
and B
15. The critical variable in the determination of
the success of the active portfolio is ________.
A) alpha/systematic
risk
B) alpha/nonsystematic
risk
C) gamma/systematic
risk
D) gamma/nonsystematic
risk
16. In the Treynor-Black model, the weight of each
security in the portfolio should be proportional to its __________.
A) alpha/beta
B) alpha/beta/residual
variance
C) beta/residual
variance
D) alpha/residual
variance
17. Active portfolio managers try to construct a
risky portfolio with __________.
A) a
higher Sharpe measure than a passive strategy
B) a
lower Sharpe measure than a passive strategy
C) the
same Sharpe measure as a passive strategy
D) very
few securities
18. The beta of an active portfolio is
1.20. The standard deviation of the
returns on the market index is 20%. The
nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the
active portfolio is __________.
A) 3.84%
B) 5.84%
C) 19.60%
D) 26.0%
19. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is
16%. The variance of return on the
market portfolio is 4%. The
nonsystematic variance of the active portfolio is 1%. The risk-free rate of
return is 8%. The beta of the active
portfolio is 1. The optimal proportion
to invest in the active portfolio is __________.
A) 0%
B) 25%
C) 50%
D) 100%
20. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is
16%. The variance of the return on the
market portfolio is 4%. The
nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is
1.05. The optimal proportion to invest
in the active portfolio is __________.
A) 48.7%
B) 50.0%
C) 51.3%
D) 100.0%
E) none
of the above
21. There appears to be a role for a theory of
active portfolio management because
A) some
portfolio managers have produced sequences of abnormal returns that are
difficult to label as lucky outcomes.
B) the
"noise" in the realized returns is enough to prevent the rejection of
the hypothesis that some money managers have outperformed a passive strategy by
a statistically small, yet economic, margin.
C) some
anomalies in realized returns have been persistent enough to suggest that
portfolio managers who identified these anomalies in a timely fashion could
have outperformed a passive strategy over prolonged periods.
D) A,
B, and C.
22. The Treynor-Black model
A) considers
both macroeconomic and microeconomic risks.
B) considers
security selection only.
C) is
relatively easy to implement.
D) A
and C.
23. To improve future analyst forecasts using the
statistical properties of past forecasts, a regression model can be fitted to
past forecasts. The intercept of the
regression is a __________ coefficient, and the regression beta represents a
__________ coefficient.
A) bias, precision
B) bias, bias
C) precision, precision
D) precision,
bias
24. A purely passive strategy is defined as
A) one
that uses only index funds.
B) one
that allocates assets in fixed proportions that do not vary with market
conditions.
C) one
that is mean-variance efficient.
D) both
A and B.
25. Consider these two investment strategies:
Strategy ___ is the dominant strategy
because __________.
A) 1,
it is riskless
B) 1,
it has the highest reward/risk ratio
C) 2,
its return is at least equal to Strategy 1 and sometimes greater
D) 2,
it has the highest reward/risk ratio
26. The Treynor-Black model assumes that
A) the
objective of security analysis is to form an active portfolio of a limited
number of mispriced securities.
B) the
cost of less than full diversification comes from the nonsystematic risk of the
mispriced stock.
C) the
optimal weight of a mispriced security in the active portfolio is a function of
the degree of mispricing, the market sensitivity of the security, and its
degree of nonsystematic risk.
D) all
of the above are true.
27. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is
18%. The standard deviation of the
return on the market portfolio is 25%. The
nonsystematic standard deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to invest in the
active portfolio is __________.
A) 50.0%
B) 69.4%
C) 72.3%
D) 80.6%
28. According to the Treynor-Black model, the
weight of a security in the active portfolio depends on the ratio of __________
to __________.
A) the
degree of mispricing; the nonsystematic risk of the security
B) the
degree of mispricing; the systematic risk of the security
C) the
market sensitivity of the security; the nonsystematic risk of the security
D) the
nonsystematic risk of the security; the systematic risk of the security
29. One property of a risky portfolio that combines
an active portfolio of mispriced securities with a market portfolio is that,
when optimized, its squared Sharpe measure increases by the square of the
active portfolio's
A) Sharpe
ratio.
B) information
ratio.
C) alpha.
D) Treynor
measure.
30. A purely passive strategy
A) uses
only index funds.
B) uses
weights that change in response to market conditions.
C) uses
only risk-free assets.
D) is
best if there is “noise” in realized returns.
31. A manager who uses the mean-variance theory to
construct an optimal portfolio will satisfy
A) investors
with low risk-aversion coefficients.
B) investors
with high risk-aversion coefficients.
C) investors
with moderate risk-aversion coefficients.
D) all
investors, regardless of their level of risk aversion.
32. Ideally, clients would like to invest with the
portfolio manager who has
A) a
moderate personal risk-aversion coefficient.
B) a
low personal risk-aversion coefficient.
C) the
highest Sharpe measure.
D) the
highest record of realized returns.
33. An active portfolio manager faces a tradeoff between
I)
using the Sharpe measure.
II)
using mean-variance analysis.
III)
exploiting perceived security mispricings.
IV)
holding too much of the risk-free asset.
V)
letting a few stocks dominate the portfolio.
A) I
and II
B) II
and V
C) III
and V
D) III
and IV
34. To determine the optimal risky portfolio in the
Treynor-Black Model, macroeconomic forecasts are used for the _________ and
composite forecasts are used for the __________.
A) passive
index portfolio; active portfolio
B) active
portfolio, passive index portfolio
C) expected
return; standard deviation
D) expected
return ; beta coefficient
35. The beta of an active portfolio is 1.45. The standard deviation of the returns on the
market index is 22%. The nonsystematic
variance of the active portfolio is 3%.
The standard deviation of the returns on the active portfolio is
__________.
A) 36.30%
B) 5.84%
C) 19.60%
D) 24.17%
36. Consider the
Treynor-Black model. The alpha of an
active portfolio is 1%. The expected
return on the market index is 11%. The
variance of return on the market portfolio is 6%. The nonsystematic variance of the active
portfolio is 2%. The risk-free rate of
return is 4%. The beta of the active
portfolio is 1.1. The optimal proportion
to invest in the active portfolio is __________.
A) 45%
B) 25%
C) 50%
D) 100%
37. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is
10%. The variance of the return on the
market portfolio is 4%. The
nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is
1.15. The optimal proportion to invest
in the active portfolio is __________.
A) 48.7%
B) 98.3%
C) 51.3%
D) 100.0%
38. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is
12%. The variance of the return on the
market portfolio is 4%. The
nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is
1.15. The optimal proportion to invest
in the active portfolio is __________.
A) 48.7%
B) 98.3%
C) 47.6%
D) 100.0%
39. Perfect timing ability is equivalent to having
__________ on the market portfolio.
A) a
call option
B) a
futures contract
C) a
put option
D) a
commodities contract
40. Kane, Marcus, and Trippi (1999) show that the
annualized fee that investor should be willing to pay for active management,
over and above the fee charged by a passive index fund, depends on
I)
the investor's coefficient of risk aversion
II)
the value of at-the-money call option on the market portfolio
III)
the value of out-of-the-money call option on the market portfolio
IV)
the precision of the security analyst
V)
the distribution of the squared information ratio of in the
universe of securities
A) I,
II, IV
B) I,
III, V
C) II,
IV, V
D) I,
IV, V
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