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accounting

Questions and Answers of Accounting

You ran a regression of the yield of KC Company’s 10-year bond on the 10-year U.S. Treasury benchmark’s yield using month-end data for the past year. You found the following result:YieldKC = 0.54
Is it possible that a positive alpha will be associated with inferior performance? Explain.
We know that the geometric average (time-weighted return) on a risky investment is always lower than the corresponding arithmetic average. Can the IRR (the dollar-weighted return) similarly be ranked
We have seen that market timing has tremendous potential value. Would it therefore be wise to shift resources to timing at the expense of security selection?
Consider the rate of return of stocks ABC and XYZ.a. Calculate the arithmetic average return on these stocks over the sample period.b. Which stock has greater dispersion around the mean?c. Calculate
XYZ stock price and dividend history are as follows:An investor buys three shares of XYZ at the beginning of 2007, buys another two shares at the beginning of 2008, sells one share at the beginning
A manager buys three shares of stock today, and then sells one of those shares each year for the next 3 years. His actions and the price history of the stock are summarized below. The stock pays no
Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 12% and 16%, respectively. The beta of A is .7, while that of B is 1.4. The T-bill
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 marketâ€™s average return was 14%. Performance is measured
Evaluate the market timing and security selection abilities of four managers whose performances are plotted in the accompanyingdiagrams.
Consider the following information regarding the performance of a money manager in a recent month. The table represents the actual return of each sector of the manager€™s portfolio in
A global equity manager is assigned to select stocks from a universe of large stocks throughout the world. The manager will be evaluated by comparing her returns to the return on the MSCI World
Conventional wisdom says that one should measure a manager’s investment performance over an entire market cycle. What arguments support this convention? What arguments contradict it?
Does the use of universes of managers with similar investment styles to evaluate relative investment performance overcome the statistical problems associated with instability of beta or total
During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%.a. Evaluate the manager based on the portfolio alpha.b.
Bill Smith is evaluating the performance of four large-cap equity portfolios: Funds A, B, C, and D. As part of his analysis, Smith computed the Sharpe ratio and the Treynor measure for all four
What is the within-sector selection effect for each individual sector?Primo Management Co. is looking at how best to evaluate the performance of its managers. Primo has been hearing more and more
Calculate the amount by which the Primo portfolio out- (or under-)performed the market over the period, as well as the contribution to performance of the pure sector allocation and security selection
If Primo decides to use return-based style analysis, will the R2 of the regression equation of a passively managed fund be higher or lower than that of an actively managed fund?Primo Management Co.
Which of the following statements about Primo€™s global fund is most correct? Primo appears to have a positive currency allocation effect as well asa. A negative market allocation effect
Kelli Blakely is a portfolio manager for the Miranda Fund (Miranda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the S&P 500. Although the
You and a prospective client are considering the measurement of investment performance, particularly with respect to international portfolios for the past 5 years. The data you discussed are
Carl Karl, a portfolio manager for the Alpine Trust Company, has been responsible since 2015 for the City of Alpine€™s Employee Retirement Plan, a municipal pension fund. Alpine is a
The Retired Fund is an open-ended mutual fund composed of $500 million in U.S. bonds and U.S. Treasury bills. This fund has had a portfolio duration (including T-bills) of between 3 and 9 years.
An analyst wants to evaluate portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average
Assume you invested in an asset for 2 years. The first year you earned a 15% return, and the second year you earned a negative 10% return. What was your annual geometric return?
A portfolio of stocks generates a 2 9% return in 2008, a 23% return in 2009, and a 17% return in 2010. What is the annualized return (geometric mean) for the entire period?
In measuring the performance of a portfolio, the time-weighted rate of return is superior to the dollar-weighted rate of return because:a. When the rate of return varies, the time-weighted return is
A pension fund portfolio begins with $500,000 and earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $500,000. What were the
During the annual review of Acme’s pension plan, several trustees questioned their investment consultant about various aspects of performance measurement and risk assessment.a. Comment on the
Trustees of the Pallor Corp. pension plan ask consultant Donald Millip to comment on the following statements. What should his response be?a. Median manager benchmarks are statistically unbiased
James Chan is reviewing the performance of the global equity managers of the Jarvis University endowment fund. Williamson Capital is currently the endowment fundâ€™s only large- capitalization
Return to the box “International Investing Raises Questions.” The article is excellent, but was written several years ago. Do you agree with its response to the question, “Can U.S. companies
In Figure, we provide stock market returns in both local and dollar-denominated terms. Which of these is more relevant? What does this have to do with whether the foreign exchange risk of an
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£.a. How many
If each of the nine outcomes in Problem 3 is equally likely, find the standard deviation of both the pound- and dollar-denominated rates of return.
Now suppose the investor in Problem 3 also sells forward £5,000 at a forward exchange rate of $2.10/£.a. Recalculate the dollar-denominated returns for each scenario.b. What happens to the
Calculate the contribution to total performance from currency, country, and stock selection for the manager in the example below. All exchange rates are expressed as units of foreign currency that
If the current exchange rate is $1.75/£, the 1-year forward exchange rate is $1.85/£, and the interest rate on British government bills is 8% per year, what risk-free dollar-denominated return
If you were to invest $10,000 in the British bills of Problem 7, how would you lock in the dollar-denominated return?
Much of this chapter was written from the perspective of a U.S. investor. But suppose you are advising an investor living in a small country (choose one to be concrete). How might the lessons of this
You are a U.S. investor who purchased British securities for £2,000 one year ago when the British pound cost U.S. $1.50. What is your total return (based on U.S. dollars) if the value of the
The correlation coefficient between the returns on a broad index of U.S. stocks and the returns on indexes of the stocks of other industrialized countries is mostly _______, and the correlation
An investor in the common stock of companies in a foreign country may wish to hedge against the _______ of the investor’s home currency and can do so by _______ the foreign currency in the forward
John Irish, CFA, is an independent investment adviser who is assisting Alfred Darwin, the head of the Investment Committee of General Technology Corporation, to establish a new pension fund.Darwin
You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the 6-month discount on Canadian
A global manager plans to invest $1 million in U.S. government cash equivalents for the next 90 days. However, she is also authorized to use non-U.S. government cash equivalents, as long as the
The Windsor Foundation, a U.S.-based, not-for-profit charitable organization, has a diversified investment portfolio of $100 million. Windsor’s board of directors is considering an initial
After much research on the developing economy and capital markets of the country of Otunia, your firm, GAC, has decided to include an investment in the Otunia stock market in its Emerging Markets
Would a market-neutral hedge fund be a good candidate for an investor’s entire retirement portfolio? If not, would there be a role for the hedge fund in the overall portfolio of such an investor?
How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio?
Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?
Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds?a. Survivorship bias and backfill bias both
Which of the following would be the most appropriate benchmark to use for hedge fund evaluation?a. A multifactor model.b. The S&P 500.c. The risk-free rate.
With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of:a. Both the extra layer of fees and the
Which of the following hedge fund types is most likely to have a return that is closest to risk-free?a. A market-neutral hedge fund.b. An event-driven hedge fund.c. A long/short hedge fund.
Is statistical arbitrage true arbitrage? Explain.
A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and
A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Is the value of its incentive fee more or less than it would be if the high water mark were $67?
Reconsider the hedge fund in the previous problem. Suppose it is January 1, the standard deviation of the fund’s annual returns is 50%, and the risk-free rate is 4%. The fund has an incentive fee
Go to the Online Learning Center at www.mhhe.com/bkm, link to Chapter 26, and find there a spreadsheet containing monthly values of the S&P 500 index. Suppose that in each month you had written an
Suppose a hedge fund follows the following strategy. Each month it holds $100 million of an S&P 500 index fund and writes out-of-the-money put options on $100 million of the index with exercise price
The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 index. A hedge fund manager believes that Waterworks is underpriced, with an
Return to the previous problem.a. Suppose you hold an equally weighted portfolio of 100 stocks with the same alpha, beta, and residual standard deviation as Waterworks. Assume the residual returns
Now suppose that the manager misestimates the beta of Waterworks stock, believing it to be .50 instead of .75. The standard deviation of the monthly market rate of return is 5%.a. What is the
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
How would the application of the BL model to a stock and bond portfolio affect security analysis? What does this suggest about the hierarchy of use of the BL and TB models?
Figure includes a box for the econometrics unit. Item (3) is to €œhelp other units.€ What sorts of specific tasks might thisentail?
Make up new alpha forecasts and replace those in Spreadsheet. Find the optimal portfolio and its expectedperformance.
Make up a view and replace the one in Spreadsheet. Recalculate the optimal asset allocation and portfolio expectedperformance.
Suppose that sending an analyst to an executive education program will raise the precision of the analyst’s forecasts as measured by R -square by .01. How might you put a dollar value on this
Your neighbor has heard that you successfully completed a course in investments and has come to seek your advice. She and her husband are both 50 years old. They just finished making their last
What is the least-risky asset for each of the following investors?a. A person investing for her 3-year-old child’s college tuition.b. A defined benefit pension fund with benefit obligations that
George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as investment choices. He is 40 years old and has an accumulation of
The difference between a Roth IRA and a conventional IRA is that in a Roth IRA taxes are paid on the income that is contributed but the withdrawals at retirement are tax-free. In a conventional IRA,
Angus Walker, CFA, is reviewing the defined benefit pension plan of Acme Industries. Based in London, Acme has operations in North America, Japan, and several European countries. Next month, the
Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in 8 years, but educational costs keep going up.” On the basis of
The aspect least likely to be included in the portfolio management process isa. Identifying an investor’s objectives, constraints, and preferences.b. Organizing the management process itself.c.
Sam Short, CFA, has recently joined the investment management firm of Green, Spence, and Smith (GSS). For several years, GSS has worked for a broad array of clients, including employee benefit plans,
Jarvis University (JU) is a private, multiprogram U.S. university with a $2 billion endowment fund as of fiscal year-end May 31, 2009. With little government support, JU is heavily dependent on its
Susan Fairfax is president of Reston Industries, a U.S.-based company whose sales are entirely domestic and whose shares are listed on the New York Stock Exchange. The following are additional facts
John Franklin is a recent widower with some experience in investing for his own account. Following his wife’s recent death and settlement of the estate, Mr. Franklin owns a controlling interest in
Christopher Maclin, aged 40, is a supervisor at Barnett Co. and earns an annual salary of £80,000 before taxes. Louise Maclin, aged 38, stays home to care for their newborn twins. She recently
Louise and Christopher Maclin have purchased their house and made the donation to the local charity. Now that an investment policy statement has been prepared for the Maclins, Grant Webb recommends
Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (that is, bundling and unbundling financial assets) might be
Why would you expect securitization to take place only in highly developed capital markets?
What is the relationship between securitization and the role of financial intermediaries in the economy? What happens to financial intermediaries as securitization progresses?
Although we stated that real assets comprise the true productive capacity of an economy, it is hard to conceive of a modern economy without well-developed financial markets and security types. How
Firms raise capital from investors by issuing shares in the primary markets. Does this imply that corporate financial managers can ignore trading of previously issued shares in the secondary market?
Suppose housing prices across the world double.a. Is society any richer for the change?b. Are homeowners wealthier?c. Can you reconcile your answers to ( a ) and ( b )? Is anyone worse off as a
Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni’s owners. For each of the
Reconsider Lanni Products from the previous problem.a. Prepare its balance sheet just after it gets the bank loan. What is the ratio of real assets to total assets?b. Prepare the balance sheet
Examine the balance sheet of commercial banks in Table. What is the ratio of real assets to total assets? What is that ratio for nonfinancial firms (Table)? Why should this difference beexpected?
Consider Figure, which describes an issue of American gold certificates.a. Is this issue a primary or secondary market transaction?b. Are the certificates primitive or derivative assets?c. What
Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and
We noted that oversight by large institutional investors or creditors is one mechanism to reduce agency problems. Why don’t individual investors in the firm have the same incentive to keep an eye
Give an example of three financial intermediaries and explain how they act as a bridge between small investors and large capital markets or corporations.
The average rate of return on investments in large stocks has outpaced that on investments in Treasury bills by about 7% since 1926. Why, then, does anyone invest in Treasury bills?
What are some advantages and disadvantages of top-down versus bottom-up investing styles?
You see an advertisement for a book that claims to show how you can make $1 million with no risk and with no money down. Will you buy the book?

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