BU5526 – Portfolio Analysis MOCK EXAMINATION
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MOCK EXAMINATION
Question 1
A. Consider the following securities:
Security Correlation with the Market index Standard Deviation Historical return
|
1 |
0.40 |
10% |
6.00% |
|
2 |
1.90 |
12% |
8% |
|
3 |
0.20 |
33% |
15% |
|
Market Index |
1.00 |
8% |
5.5% |
|
Risk-free rate |
0.00 |
0% |
2% |
|
1) Using the CAPM, calculate the beta of security 1, 2 and 3, and the beta of the market-index and the risk-free rate. [10 marks]
2) Using the CAPM, calculate the expected return of security 1, 2 and 3, and the expected return of the market-index and the risk-free rate. [10 marks]
3) A portfolio manager invests 12% in security 1, 65% in security 2 and 23% in security 3. a. Calculate the portfolio historical return. b. Using the CAPM, calculate the portfolio beta. c. Using the CAPM, calculate the portfolio expected return. [10 marks]
4) With the above-mentioned portfolio, a portfolio manager achieves a return of 10%. Calculate the Jensen’s alpha. [10 marks]
Solution: |
|||||||||||
|
Security |
Correlation with the Market index |
Standard Deviation |
Historical return |
Beta |
Expected Return |
Security Weight |
Portfolio beta |
Portfolio expected return |
Portfolio historical return |
Portfolio realized return |
Jensen's alpha |
|
1 2 3 Market Index Risk- free rate |
0.40 1.90 0.20 1.00 0.00 |
10% 12% 33% 8% 0% |
6.00% 8% 15% 5.5% 2% |
0.50 2.85 0.83 1.00 0% |
3.75% 11.98% 4.89% 5.50% 2% |
12% 65% 23% |
2.10 |
9.36% |
9.37% |
10% |
0.64% |
B. Consider the following graph:
1) Explain the equation of the slope.
Solution: The slope is the market price of risk. It compares the return of the portfolio when the riskfree rate is removed, divided by the standard deviation of the market. A higher slope means a higher price of risk. [6 marks]
2) Explain what the capital market line is.
Solution: The capital market line is a special case of the capital allocation line in which the risky portfolio is the market portfolio. Investors allocate their wealth between the market portfolio and the risk-free asset. [6 marks]
3) Based on the CAPM theory, where does any investor lies in the graph?
Solution: Any investor should lie on the CML, with different weights of risk-free and risky assets. [6 marks]
4) Explain the difference between borrowing and lending curb.
Solution: The difference is due to different lending and borrowing interest rates. [6 marks]
5) How can an investor access point B?
Solution: By leveraging the portfolio: borrowing at the risk-free borrowing rate and investing more than 100% of its wealth in the risky portfolio. [6 marks]
C. Describe the different actors of the portfolio industry.
Solution: See chapter 1. [30 marks]
Question 2
At the end of 2014, the Chinese insurer Anbang purchased the landmark Waldorf Astoria building from Hilton for $1.95bn. Located at the Park Avenue in Manhattan, the hotel in the building is a prime destination for wealthy travelers from all over the world. Under the new ownership, the building will undergo major renovations, which should include the conversion of some floors into condominiums. Hilton will continue running the hotel business in the renovated building with a 100 year lease contract.
A. Describe three characteristics of direct real estate investments that distinguish them from investments in government bonds and blue chip equities. Explain the characteristics at hand of the Waldorf Astoria.
Solution: See lectures. [50 marks]
B. Discuss critically why direct real estate might be a suitable asset for the investment portfolio of an insurance company. Your answer must show understanding of the business of such companies.
Solution: See lectures. [50 marks]
2023-01-30