ECOM050 Investment Management
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
Main Examination period, 2019
ECOM050 Investment Management
Section A (Answer Two Questions)
Question 1
a). Describe the Chen, Roll and Ross (1986) Five Factor Model. What are the results from testing this model? Discuss.
[13 marks]
b). Describe the Fama-French (1993) Three-Factor Model. What are the results from testing this model? Discuss.
[12 marks]
Question 2
a). Describe in detail the Single Index model of returns and discuss the advantages and disadvantages of this model compared with the Markowitz model for portfolio optimization.
[10 marks]
b). Show how the analysis of the effects of the diversification on portfolio risk simplifies when the Single Index model is used instead of the Capital Asset Pricing Model (CAPM).
[5 marks]
c). “The expected return of a two assets portfolio is a linear combination of the expected returns on the two assets in the portfolio but the risk of the portfolio is not always a linear combination of the two assets risk”. Explain this fully by giving a formal definition for expected return and risk of the two assets portfolio, and by discussing different scenarios for both the correlation coefficient and the opportunity sets of risky assets.
[10 marks]
Question 3
“The premise of Behavioural Finance is that conventional financial theory ignores how real people make decisions.” Explain this statement fully by discussing the Behavioural Finance vision of the Market Efficiency.
[25 marks]
Section B (Answer ALL Questions)
Question 4
Table 1 reports the following estimates for two stocks:
Table 1
Stock |
Expected Return |
Beta |
Firm-Specific Standard Deviation |
TM |
13% |
0.8 |
30% |
BMW |
18% |
1.2 |
40% |
The market index has a standard deviation of 22%, and the risk-free rate is 8%.
a). What are the standard deviations of stocks TM and BMW?
[12 marks]
Suppose that we were to construct a portfolio with proportions:
Stock TM: 0.30
Stock BMW: 0.45
T-Bills: 0.25
b). Compute the expected rate of return on the portfolio and the beta of the portfolio.
[13 marks]
Explain your answers.
Question 5
Consider the two (excess return) index-model regression results for Stocks A and B. The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns.
Table 2
|
Stock A |
Stock B |
Index model regression estimates |
1% + 1.2 (rM -rf) |
2% + 0.8 (rM -rf) |
R-squared |
0.576 |
0.436 |
Residual standard deviation, σ(ep) |
10.30% |
19.10% |
Standard deviation of excess returns |
21.60% |
24.90% |
Using the information in Table 2:
a). Calculate the following statistics for each stock:
i. Alpha
ii. Information Ratio
iii. Sharpe measure
iv. Treynor measure
[16 marks]
b). Which stock is the best choice under the following circumstances?
i. This is the only risky asset to be held by the investor.
ii. This stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market index fund.
iii. This stock is one of many stocks that the investor is analysing to form an actively managed stock portfolio.
[9 marks]
Explain your answers.
2021-12-29