INVESTMENT MANAGEMENT CUSTOM ESSAY

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This is a team assignment and is due within seven days

  1. [4 marks]Go to http://finance.yahoo.comand download the daily data on the Dow Jones Industrial Average from 1 Oct 1928 to 1 Oct 2011.
    1. Report the 5 largest up and down days by point changes;
    2. Report the 5 largest up and down days by return percentages;
    3. How did the DJIA perform in the one year after the dates in (b)? Is it profitable to trade against the market after observing large price movements?
    4. How did the DJIA perform in the one year after al-Qaeda attacks on the United States on 11 September 2001 and the U.S. invasion of Iraq on 19 March 2003? Is it profitable to sell U.S. stocks following major security or military events?

 

  1. [8 marks]Download from the course website the file named “USD rates.csv”. It contains exchange rates against USD and the yield of 1‐year U.S. T‐bill over the sample period 2002/1/1/ to 2011/7/31.
    1. Find data exchange rates of your assigned currencies against the U.S. dollar. Calculate the following statistics of daily currency returns for each of the following periods: 2002‐04, 2005‐07, 2008‐11, and the full sample. Summarize your findings.

Currency 1

Currency 2

Mean

St.Dev.

Mean

St.Dev.

Correlation

2002-04

2005-07

2008-11

Full Sample

 

  1. Assume that you do not earn interest on foreign currencies. Use two currency pairs, e.g. AUD and KRW, to form a combination line for each of the periods and the full sample. Comment on how the combination line has changed over time.
  2. Plot the 1-year yield of U.S. T-bills over the sample period. Comment on the trend in U.S. interest rate.
  3. Suppose that at the start of each period, e.g. 1 Jan 2005, you decided to invest in a combination of the above two currencies for 1 year. Calculate the optimal risky portfolio for each period and the full sample. Explain what drives the variations in the optimal risky portfolio across periods.
  4. Using the full sample data, calculate the optimal combined portfolio for A = 1, 3, and 5.

 

  1. [2 marks]The price of BHP was $33 per share.
    1. Suppose you bought BHP using a 70% margin. At what price would you face a 40% maintenance margin call?
    2. Suppose you shorted 500 shares of BHP using a 60% margin. When the BHP price rose to $43, you received a maintenance margin call to restore your margin to 60%. How much money did you have to add to your margin account?

 

  1. [8 marks]Go to http://finance.yahoo.comand download the daily data of your assigned two stocks and the S&P 500 index over the sample period of 1 Jan 2002 to 1 Dec 2011.
    1. Use the market model to estimate the betas of both stocks for 2002‐07, 2008‐11, and the full sample. Discuss how betas have changed and factors leading to the changes.
    2. Calculate the total risk and the systematic risk (as percentage of the total risk) for 2002‐07,2008‐11, and the full sample. Discuss how these risks have changed and factors leading to the changes.
    3. Use the sample covariance formula to calculate the covariance between the two stocks for 2002‐07, 2008‐11, and the full sample. Discuss how covariance has changed and factors leading to the changes.
    4. Calculate covariance using Cov(rA,rB) = βAβBσ2S&P  for the full sample, where A and B are your assigned stocks. Discuss the difference with the covariance estimates in (c) and factors leading to the differences.

 

  1. [3 marks]Suppose there are two stocks in the market, YTT and AZZ. The price of YTT today is $30. The price of YTT next year will be $25 if the economy is in a recession, $33 if the economy is normal, and $38 if the economy is expanding. The probabilities of recession, normal, and expansion are 0.4, 0.5 and 0.1, respectively. YTT pays no dividends and has a correlation of 0.6 with the market portfolio. AZZ has an expected return of 10%, a standard deviation of 13%, a correlation with the market portfolio of 0.35, and a correlation with YTT of 0.5. The market portfolio has a standard deviation of 10%. Assume the CAPM holds.
    1. If you are a typical, risk averse investor with a well diversified portfolio, which stock would you prefer? Why?
    2. What are the expected return and standard deviation of a portfolio consisting of 70% of YTT and 30% of AZZ? What is the beta of the portfolio? Show your calculation.

 

  1. [5 marks]The Glover Foundation has decided to allocate 9% of Glover’s total portfolio to one of the three international equity managers: Plateau Investments, Varnu Asset Management, and Soroto Advisors. Portfolio analysis for Glover’s current total portfolio and each of the three alternative equity managers are given below. The appropriate risk‐free rate of return is 3.82%. All returns are U.S.‐dollar based.

Glover Foundation Portfolio Analysis

Glover’s Current Total Portfolio Plateau Investments Varnu Asset Management Soroto Advisors
Return Prior 5 years

1.10%

-2.10%

-3.10%

-0.90%

Expected Return

7.20%

7.20%

8.50%

9.30%

Expected Standard Deviation

15.00%

25.00%

18.50%

30.00%

Expected Correlation with Glover

100.00%

30.00%

80.00%

65.00%

Recommend one of the three international equity managers being considered by Glover’s Board of Trustees. Justify your response with reference to the portfolio analysis for all three managers. What other factors would you consider to supplement a recommendation for an investment manager?

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