Asset Management Questions - May 2018 PDF

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Asset Management Questions - May 2018...

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Cass Undergraduate School BSc (Hons) Degree in Finance BSc (Hons) Degree in Business Studies BSc (Hons) Degree in Accounting & Finance BSc (Hons) Degree in Banking and International Finance

IF2210 Asset Management Stage 2 Examination

18 May 2018

14:30 – 16:45

Instructions to students: Candidates must answer ALL questions from Section A; ALL questions from Section B and ONE question from Section C. The number of marks allocated is shown at the end of each question. Please place all Section A answers on the optical scanning sheet provided following carefully the instructions on that form. This examination paper consists of 8 printed pages including the title page.

Materials: Multiple Choice Answers Sheet: 1 Number of answer books to be provided: 1 Only the Casio calculators FX-83 (MS, ES or GT+) or FX-85 (MS, ES or GT+) are permitted for use in this exam. Dictionaries are not permitted. This examination paper MAY be removed from the examination room.

External Examiner: Professor Alistair Milne Internal Examiner: Dr Aneel Keswani Page 1 of 8

SECTION A: ANSWER ALL QUESTIONS 10 Multiple Choice Questions: NEGATIVE MARKING (40 MARKS TOTAL - 4 marks per question, -1 for a wrong answer) Choose the most appropriate answer in each case. Question 1 The following data are available relating to the performance of Monarch Stock Fund and the market portfolio:

The risk-free return during the sample period was 4%. What is the information ratio measure of performance evaluation for Monarch Stock Fund? A. 1 B. 2.8 C. 4.4 D. 5 E. none of the above

Question 2 The following data are available relating to the performance of Seminole Fund and the market portfolio:

The risk-free return during the sample period was 6%. Calculate the M2 measure for the Seminole Fund. A. 4.0% B. 20.0% C. 2.86% D. 0.8% E. 40.0% Page 2 of 8

Question 3 Hedge funds...

I) are appropriate as a sole investment vehicle for an investor. II) should only be added to an already well-diversified portfolio. III) pose performance evaluation issues due to non-linear factor exposures. IV) have down-market betas that are typically larger than up-market betas. V) have symmetrical betas.

A. I only. B. II and V. C. I, III, and IV D. II, III, and IV E. I, III, and V

Question 4 Hedge fund incentive fees are essentially A. put options on the portfolio with a strike price equal to the current portfolio value B. put options on the portfolio with a strike price equal to the expected future C. portfolio value call options on the portfolio with a strike price equal to the expected future D. portfolio value call options on the portfolio with a strike price equal to the current portfolio E. value straddles

Question 5 The Santa effect in hedge funds discussed by Agarwal et al. (2007) refers to the fact that: A. Hedge fund managers get paid at the end of the year. B. Hedge fund risk levels go down at the end of the year. C. Hedge funds report higher returns in December due to misvaluing illiquid assets. D. Hedge funds report higher returns in January due to tax loss selling.

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Question 6 Soft dollars refers to:

A. Mutual fund companies being soft and allowing clients to trade at stale prices after markets close. B. Mutual fund companies paying excessively for their broker trades in return for research from brokers. C. Mutual fund clients paying excessive trading costs when buying and selling mutual fund shares. D. Mutual fund clients trading in the shares of international mutual funds to take advantage of soft timing restrictions.

Question 7 To understand whether mutual fund managers add value we should look at _____ and to understand whether they have skill we should look at_____

A. gross returns; gross returns after subtracting front-end and back-end loads. B. gross returns; gross returns after subtracting front-end and back-end loads and annual fees. C. gross returns after subtracting front-end and back-end loads and annual fees; gross returns. D. gross returns after subtracting annual fees; gross returns.

Question 8 Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's NAV was $42.13, how many shares must have been held in the fund? A. 43,000,000 B. 6,488,372 C. 5,601,709 D. 1,182,203 E. None of the above.

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Question 9 The yield difference between a 10 year German government bond and a 10 year Greek government bond (both Euro denominated) with similar size coupon rates and principal cannot be explained by differences in the following: A. The ability to repo the bonds. B. The liquidity risk of the bond. C. The interest-rate risk of the bonds. D. The credit risk of the bonds.

Question 10 Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend, and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share), and sell the shares for $36.45 each. The dollar-weighted return on your investment is _______. A. -1.75% B. 4.08% C. 8.53% D. 8.00% E. 12.35%

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SECTION B: ANSWER ALL QUESTIONS

(30 MARKS)

Question 11 Market Efficiency i.

Why is it argued that if market prices are efficient then they follow a random walk with drift?

(6 marks)

ii.

Why are event studies used to test for market efficiency?

(6 marks)

iii.

Give an example of an event study test used to test for market efficiency. Discuss its findings.

(6 marks)

(Total - 18 marks)

Question 12 Dimensional fund advisors

i. What techniques did DFA use to protect themselves from adverse selection when trading small stocks?

(6 marks)

ii. How did DFA's tax managed funds try to minimise the tax liabilities their investors faced?

(6 marks)

(Total - 12 marks)

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Section C: Answer 1 question of 2

(30 MARKS)

Question 13: Hedge Fund Fees a. Explain the fee structure of a typical hedge fund.

(6 marks)

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds and also charges its investors a 20% incentive fee. For simplicity assume also that management fees other than incentive fees are zero for all funds. Hedge fund 1 Start of year value

hedge fund 2

$100

Gross portfolio rate of return

20%

hedge fund 3

$100

$100

10%

30%

b. Compute the rate of return after incentive fees to an investor in the fund of funds. (6 marks) c. Suppose that instead of buying shares in each of the three hedge funds a standalone hedge fund (SA) purchases the same portfolio as the three underlying funds. The total value and composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund. After paying 20% incentive fees what would be the value of the investors’ portfolio at the end of the year?

(6 marks)

d. Now suppose that the return on the portfolio held by hedge fund three was -30% rather than +30%. Recalculate your answers to parts b and c. Why does the investor in the fund of funds portfolio still do worse than the investor in the standalone fund?

(6 marks)

e. Why might hedge funds be more sensitive to downside rather than upside market movements?

What are the implications of this for hedge fund performance

measurement?

(6 marks)

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Question 14 Mutual Fund Skill a. What have existing papers found regarding the performance persistence of top performing and poorly performing mutual funds? (10 marks)

b. Explain the Berk and Green model briefly. (5 marks)

c. In light of the Berk and Green model and the findings as regards persistence, what are your views as regards the existence of mutual fund manager skill? (10 marks) d. What have existing papers found regarding the existence of performance persistence in the hedge fund sector? How do we explain these findings in light of the Berk and Green model? (5 marks)

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