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A risk averse charity has a small equity portfolio. The trustees are considering the award of a new mandate to an active equity manager to generate higher returns. The charity has short listed four managers as part of their selection process. They have been provided with the following information on performance over the last four quarters: Manager Q2 03 04 Covariance with index A 2.5% 1.5% 4.5% 6.0% 0.5 B 1.5% -2.5% 5.0% 4.5% 0.3 6.0% 3.5% 2.5% 10.5% 0.74 D 3.5% 4.0% 4.0% 6.0% 0.35 Index benchmark return 2.0% 2.0% 3.0% 3.0% Standard deviation of index 0.7 Risk-free rate 4% p.a. (i) Calculate the outperformance over the last year of each investment manager relative to the benchmark. . State the identity of the highest performing manager. . List the managers who outperformed their benchmark over the period. [6] (ii) . Calculate the risk adjusted performance of the four investment managers using the Jensen measure. . State the identity of the highest performing manager. [9] (iii) Assess which manager is likely to be the most suitable for the investor. [3] (iv) Explain the circumstances in which standard deviation is a more appropriate(i) State four methods by which the government could have a role in the provision of retirement benefits. [2] The government of a developed country requires all employees of private sector companies to enrol in a defined contribution (DC) pension arrangement provided by their employers and which meets the government's criteria. The criteria include: . All employees must take benefits at age 65. . At retirement an individual's accumulated fund must be used to purchase an inflation-linked annuity, which includes a 50% spouse's reversionary pension. The government is proposing to remove these two criteria, instead allowing all employees to receive their benefits any time after they reach 55, and use the accumulated fund however they wish. (ii) Suggest reasons for the government's proposal. (3] (iii) Set out the advantages and disadvantages of removing the criteria for: (a) employers. (b) employees. (c) annuity providers. [6] A recent national survey found that 95% of the members of these arrangements have their pension assets invested in lifestyling funds which are structured to target annuity purchase at age 65. (iv) Discuss the issues that the providers of the lifestyling funds will need to consider if the criteria are to be removed. [9] [Total 20]The directors of a quoted company have the opportunity to invest in a profitable project, but will be unable to raise sufficient finance in the required timeframe unless they substantially reduce the next dividend payment compared with that paid in previous years. Discuss the implications of reducing the dividend under these circumstances, [5]
