The market value of one of your client's investment portfolios has increased by 1.0% over the past 12 months when the inflation rate was 1.8%. The portfolio is weighted 90% to equities via an actively managed investment trust and 10% to corporate bonds via a passively managed open ended investment company. It is benchmarked against a model portfolio which is weighted 70% to an equity index which has fallen by 1% over the past 12 months and 30% to a corporate bond index which has risen by 3% over the past 12 months.

Required: a) Calculate the real return of your client's investment portfolio and its performance relative to the model portfolio over the past 12 months. b) Calculate and explain to the client how the performance of their portfolio was attributable to asset allocation and to investment allocation.

c) Explain the primary differences between the two investment holdings in the portfolio to the client.

2. Mrs Starling manages a diversified UK equity portfolio which has a current market value of 4 million and a beta value of 0.9. The current level of the FTSE-100 index is 7200 but she thinks that it may fall over the coming weeks. The FTSE-100 index future which expires in September 2020 is currently trading at 7180 and the current premium of the FTSE-100 index at-the-money put options (European style) which expire on the same day as the future is 60 index points. The tick value of the future and the options is 10 per index point.

Required: a)

Calculate the number of derivatives contracts that Mrs Starling needs to hedge the exposure of the portfolio that she manages, stating clearly whether she should be going long or short.

) b) Calculate the net gain or loss if the portfolio had been hedged using futures and the index is 6900 at expiry. Recalculate the net gain or loss if the index is 7300 at expiry and comment upon your results.

c) Calculate the net gain or loss if the portfolio had been hedged using put options and the index is 6900 at expiry. Recalculate the net gain or loss if the index is 7300 at expiry and comment upon your results.

d) Explain to Mrs Starling the factors that she should take into account when deciding whether to hedge the portfolio that she manages using either futures or put options.