Mod 7 questions
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mod_7_questions.docxMod 7 12/14
Chapter 18 # 1, 5, CFA 1, CFA 2
Chapter 22 # CFA 1, CFA 2, CFA 3, CFA 5, CFA 6, CFA 9
1) 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.
5) Based on a current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8 while that of B is 1.5 The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 index is 12%. The standard deviation of portfolio Ais 10% annually, while that of B is 31%, and that of the index is 20%.
CFA 1) A plan sponsor with a portfolio manager who invests in small-capitalization, high growth stocks should have the plan sponsors’ performance measured against which one of the following?
a) S&P 500 index
b) Wilshire 500 index
c) Dow Jones Industrial Average
d) Russell 2000 index
CFA 2) Assume you purchased a rental property for $50,000 and sold it one year later for $55,000 (there was no mortgage on this property). At the same time of the sale, you paid $2,000 in commissions and $600 in taxes. If you received $6,000 in rental income ( all of it received at the end of the year ), what annual rate of return did you earn?
CFA 1) Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in eight years, but educational costs keep going up”. Based on this statement alone, which one of the following appears to be least important to your client’s investment policy?
a) Time horizon
b) Purchasing power risk
c) Liquidity
d) Taxes
CFA 2) The aspect least likely to be included in the portfolio management process is
a) Identifying an investor’s objectives, constraints, and preferences
b) Organizing the management process itself
c) Implementing strategies regarding the choice of assets to be used
d) Monitoring market conditions, relative values, and investor circumstances
CFA 3) A clearly written investment policy statement is critical for
a) Mutual funds
b) Individuals
c) Pension funds
d) All investors
CFA 5) Under the provisions of a typical corporate defined-benefit pension plan, the employer is responsible for:
a) Paying benefits to retired employees
b) Investing in conservative fixed-income assets
c) Counseling employees in the selection of asset classes
d) Maintaining an actuarially determined, fully funded pension plan
CFA 6) Which of the following statements reflects the importance of the asset allocation decision to the investment process? The asset allocation decision:
a) Helps the investor decide on realistic investment goals
b) Identifies the specific securities to include in a portfolio
c) Determines most of the portfolio’s returns and volatility over time
d) Creates a standard by which to establish an appropriate investment time horizon
CFA 9) Several discussion meetings have provided the following information about one of your firm’s new advisory clients, a charitable endowment fund recently created by means of a one-time $10 million gift:
Objectives:
Return requirement. Planning is based on a minimum total return of 8% per year, including an initial current income component of $500,000 (5% on beginning capital). Realizing this current income target is the endowment fund’s primary return goal. (see “unique needs” below)
Constraints:
Time horizon. Perpetuity, except for requirement to make an $8,500,000 cash distribution on June 30, 2010 (See “unique needs” below)
Liquidity needs. None of a day-to-day nature until 2010. Income is distributed annually after year-end (see “unique needs” below)
Tax considerations. None; this endowment fund is exempt from taxes
Legal and regulatory considerations. Minimal, but the prudent investor rule applies to all investment actions.
Unique needs, circumstances, and preferences. The endowment fund must pay out to another tax-exempt entity the sum of $8,500,000 in cash on June 30, 2010. The assets remaining after this distribution will be retained by the fund in perpetuity. The endowment fund has adopted a “spreading rule” requiring a first-year current income payout of $500,000; thereafter, the annual payout is to rise by 3% in real terms> Until 2010, annual income in excess of that required by the spending rule is to be reinvested. After 2010, the spending rate will be reset at 5% of the then existing capital.
With all this information and information, do the following:
a) Formulate an appropriate investment policy statement for the endowment fund
