SECTION A
Q1 Answer TWO of the following three questions. Your answer includes a synthesis of recent and seminal academic literature, fully referenced, that relates to the specifics of the question. Clearly indicate what you consider to be the importance of each reference and provide a clear summary and conclusion.
Q (i)
Benjamin Graham articulated in The Intelligent Investors in 1949 that some stocks which are traded below the intrinsic value might continue to do so for an “inconveniently long time.” Critically assess whether investors with a longish timeframe could and should, just buy cheap stocks with low price/earnings (P/E) ratio and wait. Your answer should be supported by theoretically and empirical underpinnings.
(30 marks)
Q (ii)
Critically discuss how international investment impacts upon risk and return, contrasting the relative impacts upon international bond investment and international equity investment.
(30 marks)
Q (iii)
“Beta is dead! Long live alpha” Critically assess whether absolute returns are now more important than relative performance in investment management.
(30 marks)
(60 marks)
SECTION B Answer all TWO questions in this section
Q2
Using the resources available in your domestic investment environment select any 4 bonds issued by Government and corporations relevant to you.
a). Determine the current yield and yield-to-maturity for each bond. (8 marks)
b). Assuming that you put an equal amount of money into each of 4 bonds selected, estimate the duration for the 4 bonds portfolio. (3 marks)
c). What would happen to this bond portfolio if (i) market interest rates increase by 1%; (ii) market interest rates decrease by 1%. (4 marks)
(15 marks)
Q3
1. Given a current flat yield curve for AAA bonds at 6% and the following bonds:
|
Bond |
Quality |
Maturity |
Annual Coupon (Coupons paid annually) |
Current Price |
YTM |
Macaulay Duration |
|
A B C |
AAA AAA AAA |
5 years 11 years 20 years
|
6% 6% 6% |
100 100 100 |
6% 6% 6% |
4.46 8.36 12.16 |
- What is the portfolio duration of a barbell portfolio formed with an equal allocation in Bonds A and C? How does the barbell portfolio’s duration compare with a bullet portfolio consisting of Bond B?
(2 marks)
- In the table below, calculate (Excel recommended) each bond’s and the Barbell Portfolio’s values and dollar returns one year later given the parallel shifts in the yield curve shown in the table. What differences do you observe between the Barbell Portfolio and the Bullet Portfolio formed with Bond B? What bond or portfolio would you select if you expected a significant downward shift in the yield curve? What bond or portfolio would give you the greatest protection in value if you expected a significant upward shift in the yield curve? Comment on your findings.
|
Yield Curve Change in BP |
Value A B C |
Return A B C |
Return Barbell Bullet |
Difference |
|
200 150 100 50 25 0 -25 -50 -100 -150 -200 |
|
|
|
|
(10 marks)
- Suppose yield curve shifts are characterized by a flattening where for each change in Bond B (intermediate bond), Bond A increases 25 BP more and Bond C decreases by 25 BP less:
DyA = DyB + 25BP
DyC = DyB – 25BP
In the table below, calculate (Excel recommended) each bond’s and the Barbell Portfolio’s values and dollar returns one year later given the yield changes in bond B shown in the table. What differences do you observe between the Barbell Portfolio and Bullet Portfolio formed with Bond B? How do the differences with the twist compare to the differences with the parallel shifts?
|
Yield Change For B in BP |
Value A B C |
Return A B C |
Return Barbell Bullet |
Difference |
|
200 150 100 50 25 0 -25 -50 -100 -150 -200 |
|
|
|
|
(13 marks)
(25 marks)
(40 marks)
(Total 100 marks)
Grading
These are not tablets of stone but a marking guide. Students are often original and so something not covered here can still be awarded a grade appropriate to the academic content.
|
Mark |
Content |
|
70+ |
Excellent Excellent work which demonstrates authoritative grasp of the concepts, methodology and content appropriate to the subject discipline. Using credible financial and academic sources, it is superbly presented and coherent, indication of originality in the application of ideas, in synthesis of material or in performance; personal insights reflecting depth and confidence of understanding and real critical analysis. There is evidence of extensive research beyond the immediately relevant literature, and financial knowledge with superb research evidence based content throughout. Work is well structured and presented with full referencing. |
|
60-69 |
Very Good Very good work which demonstrates sound level of understanding based on a grasp of relevant concepts, methodology and content; displays skill in interpreting and analysing complex material. There is consistent evidence of independent inquiry and judgement in selecting, ordering, analyzing and evaluation. The material is well organised and referenced using the Harvard style of referencing. |
|
50-59 |
Good Work that demonstrates a coherent response to the requirements of the coursework and has a clear expression of ideas. It uses relevant source material and demonstrates some understanding of the concepts. There is some evidence of independent inquiry and judgement in selecting, ordering, analyzing and evaluation. The student draws relevant conclusions, the work organised and some referencing. |
|
40-49 |
Unacceptable Marginal fail. Recognisable if limited awareness of the requirements of the coursework. There is limited application of some appropriate theory, limited attempt at analysis, but with a reliance on descriptive superficial evidence based content. There is some evidence of some understanding. There is some attempt to draw relevant conclusions. May be condonable is stronger performance on one aspect of the work compensates for weaker work elsewhere. |
|
35-39 |
Unacceptable Unsatisfactory but showing some understanding. |
|
0-34 |
Unacceptable A poor attempt Little evidence of understanding or application. |
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