Part 1 Sector Performance Investment managers strive to outperform both the sector they focus on and broad market indexes such as the S P 500 The performance of a portfolio is determined by both the weightings given to different types of investments as well as the actual performance of these investments In addition, the level of risk an investor is willing to take on will impact the design of a portfolio To answer the questions in Part 1, youll use the information provided about the portfolio in the table below The portfolio is broken out by sectors and shows the investors portfolios weighting and performance and the S P 500s weighting and performance in each sector The final column shows the individual investments overall contributions to the portfolio Note that an investment can underperform the S P and still have a positive contribution to the portfolio based on the difference in weighting Portfolio Information Sector (1) Portfolio Weighting (2) S P Weighting (3) Differen ces in Weighting (4) Portfolio Return (5) S P Return (6) Sector Over or Under Perform ance (7) (3) x (6) Sector Allocation Contributions Telecom munications Services 3 10 5 90 a 2 50 3 10 k u Utilities 7 50 3 80 b 3 10 1 90 l v Information Technology 14 30 17 90 c 4 90 3 20 m w Materials 6 30 3 70 d 4 80 5 10 n x Financials 13 40 17 10 e 6 20 4 80 o y Consumer Discretionary 12 70 13 50 f 2 10 4 00 p z Industrials 14 10 11 90 g 4 90 3 10 q aa Energy 8 40 8 00 h 3 70 8 60 r bb Healthcare 15 30 11 70 i 9 80 5 70 s cc Consumer Staples 4 90 6 50 j 1 50 13 20 t dd Fill in the missing values in the table above for a quarterly comparison of sectors with the S P 500 Index Remember when performing calculations that the numbers shown are percentage values Record your answers as percentage values to two decimal places a k u b l v c m w d n x e o y f p z g q aa h r bb i s cc j t dd Did the performance turned in by the investment manager underperform or outperform the S P 500 By how much Show your work Which sector turned in the greatest positive contribution to the portfolios performance Explain why this investment made the greatest positive contribution based on the differences in weighting and the sector over or under performance Which sector made the greatest negative contribution to the portfolios performance Explain why this investment made the greatest negative contribution based on the differences in weighting and the sector over or under performance Part 2 Portfolio Analysis Use the three portfolios shown below to answer questions 58 in Part 2 Portfolio 1 Security Amount Invested Expected Return Beta Security A $ 4,000 9 80 Security B $ 5,000 12 1 15 Security C $ 12,000 14 95 Security D $ 8,000 15 1 23 Portfolio 2 Security Amount Invested Expected Return Beta Security A $ 3,000 16 1 22 Security B $ 11,000 13 1 54 Security C $ 9,000 8 87 Security D $ 6,000 11 81 Portfolio 3 Security Amount Invested Expected Return Beta Security A $15,000 10 1 72 Security B $12,000 9 81 Security C $ 3,000 12 72 Security D $ 2,000 15 1 54 Based on beta, which portfolio has the highest level of systematic risk Show your work If the risk free rate is 5 5 percent, which of these portfolios has the highest reward to risk ratio Show your work Suppose that the risk free rate is 5 5 percent, the return over three years for each portfolio matches its expected return, and the portfolios have 3 year annual return standard deviations as follows Portfolio 1 22 Portfolio 2 26 Portfolio 3 18 If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having the best ratio of excess return per unit of total risk as measured by its Sharpe ratio Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows Portfolio 1 11 3 Portfolio 2 12 5 Portfolio 3 9 4 Also, assume that the risk free rate was 5 5 percent and the average return on the market portfolio was 8 percent Which of the three portfolios has the highest Jensens alpha Show your work Which has the highest Treynor ratio Show your work Part 3 Selecting a Portfolio Use the two portfolios shown in the tables below to answer the questions in Part 3 Portfolio 1 Asset Category Percentage of Portfolio U S small company stocks 5 U S large company stocks 10 International stocks 5 U S government bonds 50 U S corporate bonds 30 Portfolio 2 Asset Category Percentage of Portfolio U S small company stocks 20 U S large company stocks 30 International stocks 25 U S government bonds 15 U S corporate bonds 10 In your role as a financial advisor, youre advising a client, Sally, a 30 year old computer programmer who makes an above average salary Shes investing money in her 401(k) that she doesnt plan to use until retirement In your opinion, which of the two portfolios above would be most appropriate for these funds In your answer, explain why you believe the portfolio youve chosen is appropriate and explain why the portfolio you didnt choose is not appropriate In your role as a financial advisor, youre advising a client, Bob, who has just retired and rolled over his 401(k) into a self directed IRA account Bob intends to use these funds to provide income to live on in his retirement In your opinion, which of the two portfolios above would be most appropriate for these funds In your answer, explain why you believe the portfolio youve chosen is appropriate and explain why the portfolio you didnt choose is not appropriate

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 30, 2024

Part 1: Sector Performance Investment managers strive to outperform both the sector they focus on and broad market indexes such as the S&P 500. The

Part 1: Sector Performance

Investment managers strive to outperform both the sector they focus on and broad market indexes such as the S&P 500. The performance of a portfolio is determined by both the weightings given to different types of investments as well as the actual performance of these investments. In addition, the level of risk an investor is willing to take on will impact the design of a portfolio.

To answer the questions in Part 1, youll use the information provided about the portfolio in the table below. The portfolio is broken out by sectors and shows the investors portfolios weighting and performance and the S&P 500s weighting and performance in each sector. The final column shows the individual investments overall contributions to the portfolio. Note that an investment can underperform the S&P and still have a positive contribution to the portfolio based on the difference in weighting.

Portfolio Information
Sector	(1) Portfolio Weighting	(2) S&P Weighting	(3) Differen-ces in Weighting	(4) Portfolio Return	(5) S&P Return	(6) Sector Over-or Under- Perform ance	(7) = (3) x (6) Sector Allocation Contributions
Telecom- munications Services	3.10%	5.90%	a. ?	2.50%	3.10%	k. ?	u. ?
Utilities	7.50%	3.80%	b. ?	3.10%	1.90%	l. ?	v. ?
Information Technology	14.30%	17.90%	c. ?	4.90%	3.20%	m. ?	w. ?
Materials	6.30%	3.70%	d. ?	4.80%	5.10%	n. ?	x. ?
Financials	13.40%	17.10%	e. ?	6.20%	4.80%	o. ?	y. ?
Consumer Discretionary	12.70%	13.50%	f. ?	2.10%	4.00%	p. ?	z. ?
Industrials	14.10%	11.90%	g. ?	4.90%	3.10%	q. ?	aa. ?
Energy	8.40%	8.00%	h. ?	3.70%	8.60%	r. ?	bb. ?
Healthcare	15.30%	11.70%	i. ?	9.80%	5.70%	s. ?	cc. ?
Consumer Staples	4.90%	6.50%	j. ?	1.50%	13.20%	t. ?	dd. ?

Fill in the missing values in the table above for a quarterly comparison of sectors with the S&P 500 Index. Remember when performing calculations that the numbers shown are percentage values. Record your answers as percentage values to two decimal places.

a. _______	k. _______	u. _______
b. _______	l. _______	v. _______
c. _______	m. _______	w. _______
d. _______	n. _______	x. _______
e. _______	o. _______	y. _______
f. _______	p. _______	z. _______
g. _______	q. _______	aa. _______
h. _______	r. _______	bb. _______
i. _______	s. _______	cc. _______
j. _______	t. _______	dd. _______

Did the performance turned in by the investment manager underperform or outperform the S&P 500? By how much? Show your work.
Which sector turned in the greatest positive contribution to the portfolios performance? Explain why this investment made the greatest positive contribution based on the differences in weighting and the sector over- or under- performance.
Which sector made the greatest negative contribution to the portfolios performance? Explain why this investment made the greatest negative contribution based on the differences in weighting and the sector over- or under- performance.

Part 2: Portfolio Analysis

Use the three portfolios shown below to answer questions 58 in Part 2.

Portfolio 1
Security	Amount Invested	Expected Return	Beta
Security A	$ 4,000	9%	.80
Security B	$ 5,000	12%	1.15
Security C	$ 12,000	14%	.95
Security D	$ 8,000	15%	1.23

Portfolio 2
Security	Amount Invested	Expected Return	Beta
Security A	$ 3,000	16%	1.22
Security B	$ 11,000	13%	1.54
Security C	$ 9,000	8%	.87
Security D	$ 6,000	11%	.81

Portfolio 3
Security	Amount Invested	Expected Return	Beta
Security A	$15,000	10%	1.72
Security B	$12,000	9%	.81
Security C	$ 3,000	12%	.72
Security D	$ 2,000	15%	1.54

Based on beta, which portfolio has the highest level of systematic risk? Show your work.
If the risk-free rate is 5.5 percent, which of these portfolios has the highest reward-to-risk ratio? Show your work.
Suppose that the risk-free rate is 5.5 percent, the return over three years for each portfolio matches its expected return, and the portfolios have 3-year annual return standard deviations as follows:

Portfolio 1 22%

Portfolio 2 26%

Portfolio 3 18%

If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having the best ratio of excess return per unit of total risk as measured by its Sharpe ratio?
Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows:

Portfolio 1 11.3

Portfolio 2 12.5

Portfolio 3 9.4

Also, assume that the risk-free rate was 5.5 percent and the average return on the market portfolio was 8 percent.
1. Which of the three portfolios has the highest Jensens alpha? Show your work.
2. Which has the highest Treynor ratio? Show your work.

Part 3: Selecting a Portfolio

Use the two portfolios shown in the tables below to answer the questions in Part 3.

Portfolio 1
Asset Category	Percentage of Portfolio
U.S. small-company stocks	5
U.S. large-company stocks	10
International stocks	5
U.S. government bonds	50
U.S. corporate bonds	30

Portfolio 2
Asset Category	Percentage of Portfolio
U.S. small-company stocks	20
U.S. large-company stocks	30
International stocks	25
U.S. government bonds	15
U.S. corporate bonds	10

In your role as a financial advisor, youre advising a client, Sally, a 30-year old computer programmer who makes an above-average salary. Shes investing money in her 401(k) that she doesnt plan to use until retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio youve chosen is appropriate and explain why the portfolio you didnt choose is not appropriate.
In your role as a financial advisor, youre advising a client, Bob, who has just retired and rolled over his 401(k) into a self-directed IRA account. Bob intends to use these funds to provide income to live on in his retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio youve chosen is appropriate and explain why the portfolio you didnt choose is not appropriate.