Morning sessio exam 1 shweser book

9 (a) : Incorrect, should be 7%
(b)Correct: higher interest rates would be harmful for stocks and bonds

9B (1) Correct: capital flows are more practical indicator ?
(2) Incorrect: The yields being talked about government bonds yield curve which indicates a normal growth period for the economy. Right time to invest in stocks.
(3) Correct: positive effect of trade to partners of a growth cycle
(4) Incorrect (?): Increased government spending and accomodative monetary policy are both -ves for bonds.


8. (1) Disagree: The focus should be on all phases of life right from the beginning: pre retirment, retirement and post retirement. Single time period focus is incorrect
(2) Disagree: Monte Carlo simulation works best if we are able to describe the risk factors and the probabilities for each risk factor so the simulation can generate scenarios taking that into account.
(3) Disagree: Risks such as superannuation risks should be considered to generate the right outcomes
(4) Agree: Compounding is not directly used in monte carlo simulation as each time period is considered somewhat independent of the preceding or following time period.


7. (A) Interest rate put options should be purchaed by matrix corporation as portfolio insurance. Matrix should purchase out of the money interest rate puts which would be cheaper to buy and kick in when the interest rate falls to levels that will lead to matrix unable to meet its obligations.
Interest rate puts at the right value should be able to provide IRR at the expected rate even with drastic change in interest rates. However as the participants change , assets amount change: constant hedging

(B) Can buy call options on treasury bonds which will go in the money upon fall in interest rates. Again, out of money call options...
The correlation between liabilities and treasury bond options is non linear so a lot more hedge rebalancing will be needed

(c) Treasury bond futures:
Buy treasury bond futures to cover against any fall in interest rates: future prices will increase with interest rate changes.
However this is a risky strategy as the interest rates rise will affect treasuries in negative direction even more than the company's own bond portfolio .
Also require rebalancing.

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6.
A. Agriculture sector added 0.087% to the benchmark return ; the sector allocation effect was 0.142% The higher return in agriculture sector provided diversification and active return as represented by benchmark

b. -((6.45*1.35) + 0.82*10.55 ))
the value added was -ve : the manager selection of equities within agriculture sector was poor compared to the agriculture benchmark. The larger % allocation than benchmark resulted in even bigger -ve return

c. Allocation / selection interaction value:
10.55%x -.82...

explain...

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5.
IR = active return / active risk...

Exp active return = 1.625...


Exp active risk =


B. (1) Incorrect: core should be a higher % : closer to 40-50%
(2) Incrorrect: active return and risk should be lower for utilities and financials...
(3) Incorrect: zero OR
(4) Incorrect: SRI is normally for growth stocks
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C(1) Incorrect: high water mark is to ensure that managers get paid only for excess performance, not to reward in bear markets. The base compensation ensures they are paid in bear or bull markets. Good managers should still beat benchmarks in market downturns ; the high water mark does not solve this issue.

(2) Correct: Capping performance fees will remove the incentive for managers to a certain extent.

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4. (i) Inaccurate: GIPS is supposed to provide level playing field by providing common reporting standards, not to provide competitive advantage in terms of record keeping costs.
(ii) Inaccurate: Need to provide last 10 years or since inception.
(iii) Inaccurate: The system needs to generate return info according to cost basis on every time significant cash transaction happens; other ?
(iv) Incorrect: cannot remove inactive portfolios from past performance measure.

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3. a) Recallability trap: Past situations look too similar to current
b) Status quo bias: not evaluating again..
(c) not updating the forecast fast enough..
(d) Nuisance traders, herding behavior ?

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2.

Short term: meet liquidity needs for policy holders return, claims etc: need sufficient liquidity

Long term bond: Income to Match liability duration and value to cover the expected outflows:

Stock: Provide capital appreciation

Risk tolerance:
Short term: Extremely low
Long term bond: Moderate Low
Long term stock: high


Constraints:

Time horizon: Short term port:< 6 months?
Long term bonds: 10 - 20 years ? :
Stock: Long term

Liquidity: known

Legal/regulatory: State and federal

Taxes: Tax is a concern because of full tax status

Unique considerations: none