Questions and Answers of Accounting For Investments

What products and services do you offer? Are you only supposed to recommend a limited number of products or services to me? If so, why? L02
Where did you go to school? What is your recent employment history? L02
What experience do you have, especially with people in my circumstances? L02
How are you paid for your services? What is your usual hourly rate, flat fee, or commission? L02
Have you ever been sued by a client who was not happy with your work, the services you provided, or the products you recommended? L02
Have you or your firm ever been disciplined by any regulator? If yes, for what reasons and how was the matter resolved? L02
Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA)? L02
How much of the difference between the two statements is due to the age of the investors? L02
Now consider the financial situation of your closest friend or relative who is in about 35 years old. Write down the objectives and constraints that would fit that individual’s investment decision.
a. Think about the financial circumstances of your closest relative in your parents’ generation (e.g., your parents’ household if you are fortunate enough to have them around).Write down the
Experiment with both the size of your views as well as the confidence you assign to them to see how they affect portfolio allocation and adjusted return. L02
Now express some views about either absolute return or over/underperformance. Given those views, find the adjusted return of each asset class and the recommended portfolio allocation. L02
Specify an initial portfolio using the asset classes provided in the drop-down menus. What are the equilibrium returns implied by your allocation? L02
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
Make up a view and replace the one in Spreadsheet 27.2 in Section 27.3. Recalculate the optimal asset allocation and portfolio expected performance. L02
Make up new alpha forecasts and replace those in Spreadsheet 27.1. Find the optimal portfolio and its expected performance. L02
Figure 27.3 includes a box for the econometrics unit. Item (3) is to “help other units.” What sorts of specific tasks might this entail? L02
How would the application of the BL model to a stock and bond portfolio (per the example in the text) affect security analysis? What does this suggest about the hierarchy of use of the BL and TB
Even low-quality forecasts are valuable. Almost imperceptible R-squares of only .001 in regressions of realizations on analysts’ forecasts nevertheless can substantially improve portfolio
The Treynor-Black and Black-Litterman models are complementary tools. Both should be used:The TB model is more geared toward security analysis, while the BL model more naturally fits asset allocation
The Black-Litterman model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure. L02
Alpha forecasts must be shrunk (adjusted toward zero) to account for less-than-perfect forecasting quality. Compiling past analyst forecasts and subsequent realizations allows one to estimate the
Constraining tracking risk (i.e., the variance of the return difference between the managed and the benchmark portfolio) acts to keep the Treynor-Black portfolio within reasonable weights. L02
Treynor-Black portfolio weights are sensitive to large alpha values, which can result in practically infeasible long/short portfolio positions. The full-blown Markowitz optimal risky portfolio is
The RRK buyout fund is considering an investment in a fertilizer distribution center. The stock currently trades at $20 per share with 150,000,000 shares outstanding. RRK offers $25 per share, 80% of
Consider a start-up that is valued at cost throughout the early stages of its life.a. Round A: Cyprus Ventures invests $250,000, bringing the post-round valuation to $800,000.What are the ownership
Return to Problem 18. Instead of a 5% preferred rate, assume there is an 8% preferred rate with a 100% catch-up.a. Recalculate the yearly cash flows.b. What is the IRR to the endowment, net of
An endowment invests $150,000,000 in WeGrow II, an early-stage venture fund with a 20%incentive fee and a 5% preferred return [hurdle rate]. The fund invests in the following companies (for
You manage a multi-stage VC fund conducting due diligence on an pharmaceutical start-up.The required rate of return is 33%. You will participate in an A round initially, a B round in four years, and
You are an early-stage VC conducting due diligence on an IT start-up. You are willing to contribute $1,500,000 in the A round of financing and require a capital return (i.e., capital multiplier) of
What are the similarities between angels and seed/early-stage venture capital? What are the fundamental differences? P-68
Does early-stage or late-stage venture capital generally have a higher expected rate of return?Why do you think this is the case? P-68
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
Return to Problem 11, parts (a)–(c). 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
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 believes that Waterworks is underpriced, with an alpha of
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
Log in to Connect and link to Chapter 26 to find a spreadsheet containing monthly values of the S&P 500 index. Suppose that in each month you had written an out-of-the-money put option on one unit of
A market-neutral fund ($150,000,000) strives for very low market risk (β = .15). It believes it can generate α = .04 per quarter. The β of the underlying portfolio is 1.35. The risk-free rate is
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 of 20% of annual returns, but its current high-water
Reconsider the hedge fund in Problem? P-68
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? P-68
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
Is statistical arbitrage true arbitrage? Explain in the context of a hedge fund. P-68
Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager? P-68
How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio? P-68
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
Both hedge funds and private equity typically charge investors a management fee and an incentive fee equal to a percentage of profits beyond some threshold value, typically capital returned plus a
Performance evaluation of alternative assets is complicated by the liquidity premia, reporting biases, and unreliable market valuations of infrequently traded assets. Performance evaluation is
Leveraged buyouts buy publicly traded companies, taking them private to improve their governance, operations, and financial structure. To amplify equity returns, LBOs use large amounts of debt to
Venture capital is professionally managed money that invests in start-ups. Venture capital funds provide financing in exchange for ownership positions. This form of private equity actively tries to
Portable alpha is a strategy that invests in positive-alpha positions, hedges the systematic risk of those investments, and establishes market exposure where desired by using passive index products
Statistical arbitrage uses quantitative systems to find potential misalignments in relative pricing.It ensures profits by averaging over many small bets. P-68
Hedge funds pool the assets of several clients and manage these assets on their clients’ behalf.Directional hedge funds take a stance on the performance of broad market sectors. Nondirectional
Like traditional assets, alternative assets are governed by the laws of supply and demand as well as risk and expected return. However, alternative assets differ from traditional assets with respect
Analyze the factor betas of the fixed-income arbitrage index in Table 26.3. On the basis of these results, are these funds typically market neutral? if not, do their factor exposures make sense in
Why do LBOs use massive amounts of debt in their acquisitions? Suppose an LBO acquires a firm for $25,000,000 and exits five years later by selling the firm for $48,000,000. Find the IRR for
Return to Example 26,3.a. What is the initial ownership required if there are two subsequent rounds of financing, diluting initial shares by 25% each round?b. What is the initial ownership if the VC
What would be the dollar value and rate of return on the market-neutral position from Example 26.2 if the value of the residual,e, turns out to be −4%? P-68
Classify each of the following strategies of a hypothetical hedge fund as directional or nondirectional.a. The fund buys shares in the India Investment Fund, a closed-end fund that is selling at a
Are any of these funds of interest to you? How might your screening choices differ if you were choosing funds for various clients?.P-96
Look at the Management section of the report. Was the same manager in place for the entire 10-year period?.P-96
What are the beta and alpha coefficients using both the standard index and the best-fit index?How do these compare to the fund’s parameters?.P-96
What is the standard index? What is the best-fit index?.P-96
What is the fund’s Treynor ratio?.P-96
What is the fund’s Sharpe ratio?.P-96
What is the fund’s standard deviation?.P-96
James Chan is reviewing the performance of the global equity managers of the Jarvis University endowment fund. Williamson Capital is currently the endowment fund’s only large-capitalization global
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
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
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
In measuring the performance of a portfolio, the time-weighted rate of return may be preferred to the dollar-weighted rate of return because:a. When the rate of return varies, the time-weighted
A 2-year investment of $2,000 results in a cash flow of $150 at the end of the first year and another cash flow of $150 at the end of the second year, in addition to the return of the original
A portfolio of stocks generates a −9% return in 2020, a 23% return in 2021, and a 17% return in 2022. What was the annualized return (geometric mean) for the entire period?.P-96
Assume you invested in an asset for two 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?.P-96
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
What is the Sharpe performance measure for portfolio Q?.P-96
What is the Treynor performance measure for portfolio P?.P-96
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 three and nine
Carl Karl, a portfolio manager for the Alpine Trust Company, has been responsible since 2025 for the City of Alpine’s Employee Retirement Plan, a municipal pension fund. Alpine is a growing
You and a prospective client are considering the measurement of investment performance, particularly with respect to international portfolios for the past five years. The data you discussed are
Go to Kenneth French’s data library site at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. Select two industry portfolios of your choice and download 36 months of data. Download
Although the Miranda portfolio generally mirrors the asset class and sector weightings of the S&P, Blakely is allowed a significant amount of leeway in managing the fund.Blakely was able to produce
Kelli Blakely is a portfolio manager for the Miranda Fund, a core large-cap equity fund.The benchmark for performance measurement purposes is the S&P.P-96
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 and a
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?.P-96
Calculate the amount by which the Primo portfolio out-(under-)performed the market over the period, as well as the contribution to performance of the pure sector allocation and security selection
What is the within-sector selection effect for each individual sector?.P-96
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
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%. What was the manager’s alpha?.P-96
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
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?.P-96
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
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 column 1, the
Evaluate the market timing and security selection abilities of four managers whose performances are plotted in the accompanying diagrams..P-96
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
The expected rates of return and risk measures for two portfolios as well as the market index are given in the following table. The T-bill rate is currently 5%.Portfolio A Portfolio B Market Index
A manager buys three shares of stock today and then sells one of those shares each year for the next three years. His actions and the price history of the stock are summarized below. The stock pays
XYZ’s stock price and dividend history are as follows:Year Beginning-of-Year Price Dividend Paid at Year-End 2020 $100 $4 2021 120 4 2022 90 4 2023 100 4 An investor buys three shares of XYZ at the
Consider the rate of return of stocks ABC and XYZ.Year rABC rXYZ 1 20% 30%2 12 12 3 14 18 4 3 0 5 1 −10a. Calculate the arithmetic average return on these stocks over the sample period.b. Which
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?.P-96

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