Exam 21: Investors and the Investment Process

Kane,Marcus,and Trippi (1999)show that the annualized fee that investors should be willing to pay for active management,over and above the fee charged by a passive index fund,depends on I.the investor's coefficient of risk aversion II.the value of at-the-money call option on the market portfolio III.the value of out-of-the-money call option on the market portfolio IV.the precision of the security analyst V.the distribution of the squared information ratio of in the universe of securities

A decrease in the cash TSX 60 index to 390 would represent a decrease of __________ in the value of the portfolio composed of 4500 shares of each of the three stocks.

A position in stocks and options that is hedged with respect to fluctuations in the price of the underlying asset is said to be

A corporate treasurer expects to receive $1 million in the near future.He wishes to invest the amount in 90-day maturity T-bills.To protect the investment from a decline in the short-term rates,the investor would most likely:

A decrease in the TSX 60 index futures to 400 would lead to a __________ on each long TSX 60 futures contract.

The beta of an active portfolio is 1.45.The standard deviation of the returns on the market index is 22%.The nonsystematic variance of the active portfolio is 3%.The standard deviation of the returns on the active portfolio is _________.

Hedging

A portfolio manager holds a $10 million bond portfolio with a modified duration of 7 years.What is the price value of a basis point (PVBP)?

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct _________.

You hold a portfolio of stocks and you are concerned about a decline in the market value of the portfolio.You might hedge with:

Consider the Treynor-Black model.The alpha of an active portfolio is 2%.The expected return on the market index is 16%.The variance of return on the market portfolio is 4%.The nonsystematic variance of the active portfolio is 1%.The risk-free rate of return is 8%.The beta of the active portfolio is 1.The optimal proportion to invest in the active portfolio is _________.

A portfolio of corporate bonds is best hedged with:

The contribution of asset allocation across markets to the total excess return was

To determine the optimal risky portfolio in the Treynor-Black Model,macroeconomic forecasts are used for the _________ and composite forecasts are used for the _________.

Discuss the relationship between hedging demands,the capital asset pricing model,and arbitrage pricing theory.

Discuss the problem associated with hedging interest rate risk.What is cross-hedging? Is cross-hedging of any value? Explain.

A purely passive strategy is defined as

A fund places 40% of its money in an active portfolio and 60% in a market index.If the return on the market index is 16% and the return on the active portfolio is 18%,the return on the entire fund is _________.

Active portfolio management consists of _________.

Approximately how many TSX 60 futures contracts are needed to hedge a portfolio constructed of 4500 shares of each of the three stocks,X,Y and Z against a 20 point movement in the TSX?