Remote Assessment Rubric / Cover Sheet

University of Bath

School of Management

MN50322 Investment Management

MN50322 Coursework ( Assignment )

ALL four (4) questions:

Q1 Trading on a falling price

At 10am, stock HJK trades at 400 pence per share, and investor Peter expects that by 4pm, the share will trade at 270 pence. SafetyFirst is a large pension fund that holds large volumes of HJK, with no intention of selling. In the morning, investor Jane is interested in selling HJK shares and investor Hans is interested in buying. Similarly, in the afternoon, investor Sarah is interested in selling and investor George is interested in buying.

How should Peter proceed to exploit his belief that the price of HJK will fall? Give full details of a typical trading scenario. What eventualities does he need to prepare for and what are his risks?

WORD LIMIT Q1: Two (2) normally formatted pages, or the equivalent of 500 words.

[20 Marks]

Q2 A single-factor market

The asset market has a factor structure with a single factor, f, which has zero mean. Investors have access to two large portfolios, H and L. Portfolio H is fully diversified ( zero residuals), but portfolio L is only partially diversified and has some residual risk. The factor-load equations for these portfolios are

;

(in per cent). Investors also have access to a risk-free bond G with return r_g = 2 (per cent). There are no other assets. The residual _l of portfolio L is such that it is either +1 or -1 (per cent), with equal likelihoods.

Using the APT as your framework, give a full analysis of this market. Will there be any arbitrage trading, and do you expect any price adjustments?

WORD LIMIT Q2: Two (2) normally formatted pages, or the equivalent of 500 words.

[20 Marks]

Q3 Style investing

You provide tailored investment solutions to wealthy clients. The market has a factor structure with two factors, f₁ and f₂, both with zero mean. You have access to three assets: the risk-free bond G with rate r_G = 3 (per cent), and two widely-diversified portfolios K and N with returns

r_k = 9 + 2.25f₁ + 0.75f₂;    r_n = 12 + 0.25f₁ + 1.75f₂;

(in per cent). The factors have standard deviations of σ₁ = 2, σ₂ = 8 and a correlation of ρ12 = 1/3.

Your client desires an investment style where her exposure to factorf₂ is twice as large as her exposure to factor f₁: b₂/b₁ = 2. Her target rate of return is 9 (per cent).

Solve your client’s investment problem and provide a full performance evaluation of the recommended portfolio.

You client has also received investment advice from Dr Cappem, who adopts a meanvariance approach to investment. His suggestion to your client is to divide her equity investment half-half between the K and N. Comment on this recommendation.

WORD LIMIT Q3: Three (3) normally formatted pages, or the equivalent of 750 words.

[30 Marks]

Q4 Active investing

You operate in a CAPM market and follow the consensus. The one exception is stock A, where your research tells you that its expected return is r_a = 0.13 (13 per cent). You are willing to take an active position in that stock, based on your beliefs about r_a.

The market portfolio has an expected return of is r_m = 0.09 with a standard deviation of 0.22. The standard deviation of r_a is 0.6, and the beta of stock A is β_a = 0.7. The risk-free bond G has rate r_g = 0.05.

What is the weight w_a of A in the optimal portfolio mix of stock A and market M?

Explain your workings and interpret your result.

WORD LIMIT Q4: Three (3) normally formatted pages, or the equivalent of 750 words.

[30 Marks]

MD