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Homework answers / question archive / 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

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

Finance

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 rg = 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 rG = 3 (per cent), and two widely-diversified portfolios K and N with returns

rk = 9 + 2.25f1 + 0.75f2;    rn = 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 ra = 0.13 (13 per cent). You are willing to take an active position in that stock, based on your beliefs about ra.

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

What is the weight wa 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

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