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Questions Problem Set 7

The document contains 5 investment management questions: 1) A global equity manager's performance is compared to a benchmark portfolio. Calculations are required to determine excess return and the impact of country allocation and stock selection. 2) Performance metrics are calculated for value, small, and momentum portfolios to analyze past performance and strategies. 3) Stock selection and market timing abilities are evaluated for 4 managers based on their portfolio returns relative to market excess returns. 4) A money manager's sector allocation and security selection is analyzed to determine their return, performance, and the impact of allocation and selection. 5) The question asks if Warren Buffett's success is evidence that markets are inefficient.

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Mustafa Chatila
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12 views

Questions Problem Set 7

The document contains 5 investment management questions: 1) A global equity manager's performance is compared to a benchmark portfolio. Calculations are required to determine excess return and the impact of country allocation and stock selection. 2) Performance metrics are calculated for value, small, and momentum portfolios to analyze past performance and strategies. 3) Stock selection and market timing abilities are evaluated for 4 managers based on their portfolio returns relative to market excess returns. 4) A money manager's sector allocation and security selection is analyzed to determine their return, performance, and the impact of allocation and selection. 5) The question asks if Warren Buffett's success is evidence that markets are inefficient.

Uploaded by

Mustafa Chatila
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Investment Management questions to Problem Sheet 7

True-false questions

1. If you have split your portfolio between several managers, it is not important how
much risk each manager takes because risks are likely to diversify away across
managers.

2. Agency problems are more important for mutual funds than hedge funds.

3. What are market timing strategies?

4. Actively managed mutual funds can only hold individual stocks. Therefore, they
cannot pursue “market-timing” strategies.

Questions

1. A global equity manager is assigned to select stocks from a universe of large stocks
throughout the world. The manager will be evaluated by comparing her returns to the return
on the MSCI World Market Portfolio, but she is free to hold stocks from various countries in
whatever proportions she finds desirable. Results for one month are given in the following
table:

(a) Calculate the manager’s excess return on the portfolio as whole.

(b) Calculate the excess due to country allocation decisions.

(c) Calculate the excess due to stock selection within countries.

(d) Verify the sum of (b) and (c) is equal to (a).

2. In the spreadsheet question2 in worksheet Data you have time series data on various
portfolios, sorted on stock characteristics, like B/M ratio, market value, past return, etc.
a. The literature has shown that winners tend to produce higher returns, as do value stocks
and small stocks. Calculate the Jensen, Treynor, Fama, Sharpe and information appraisal
ratios of these three portfolios. Comment on your answer.

[note you will need to calculate average returns, and volatilities of these portfolios. You will
need to calculate betas, systematic volatility and idiosyncratic volatility, and then calculate
the various portfolio evaluation metrics. To get the betas you need to run a regression.

Note that the Winner portfolio contains stocks that have experienced the highest returns in the
last 12 months. To form the portfolio we sort all stocks listed in the market according to their
one year prior return in month t, and then buy the stocks that fall into the top 10% of this
distribution. We then hold this position for one month (i.e., t+1), then rank again, etc.

Value means buy stocks with a high B/M ratio. Sort all stocks every June according to B/M,
and buy the stocks in the top 10% of this distribution. Hold the position for one year and then
repeat the ranking next June, etc.

Small means buy stocks with low market value. Sort all stocks every June according to
market value, and buy the stocks in the bottom 10% of this distribution. Hold the position for
one year, and then repeat the ranking next June, etc.

b. It seems that the winner portfolio does well relative to the others. Is this a strategy worth
pursuing on an active basis?
3. Use the diagrams below to evaluate the stock selection and timing abilities of the 4 managers
shown in the diagrams below. The x-axis shows the excess return on the market, and the y-
axis the excess return of the managers’ portfolios.
4. The table below shows the information regarding the performance of a money manager in a
recent month. The table shows the actual return of each sector of the manager’s portfolio in
column 1, the fraction of the portfolio allocated in the sector in column 2, the benchmark
allocations in column 3, and the return of the sector indices in column 4.

a. What is the manager’s return in that month? What was her over or under
performance?
b. What was the contribution of security selection to relative performance? What
was the contribution of asset allocation?

Actual return Actual weight Benchmark Index return


weight

Equity 2% 0.7 0.6 2.5%

Bonds 1% 0.2 0.3 1.2%

cash 0.5% 0.1 0.1 0.5%

5. According to Wikipedia Warren Buffet “is considered one of the most successful
investors in the world and has a net worth of US$78.9 billion as of August 2020, making him
the world's seventh-wealthiest person”. Is the success of Warren Buffet evidence that the
market is inefficient?

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