BUSI 4405-Smimou-Winter 2021 XXXXXXXXXXPage 1 of 6 University of Ontario Institute of Technology Faculty of Business & IT Finance Area Portfolio & Investment Strategies: BUSI XXXXXXXXXX/70427 ***...

BUSI 4405-Smimou-Winter 2021 XXXXXXXXXXPage 1 of 6

University of Ontario Institute of Technology
Faculty of Business & IT
Finance Area
Portfolio & Investment Strategies: BUSI XXXXXXXXXX/70427
***
Individual Assignment II—out of 100 points
Due date: Friday March 26, 2021 (before 10:00 p.m.)

Administrative instructions
 Please do not write your student number anywhere on the submitted assignment.
 Number all pages consecutively except the title page.
 Title page: The title page should contain the assignment number, full name, and your e-mail address.
 All assignments must be typed. Hand written assignments will not be accepted under any circumstances.
 Academic integrity must be upheld.
 Text format:
o Line Spacing: Single space.
o Paper: Letter size (8.5 inch width and 11 inch height).
o Font: Times New Roman (12 pts)
o Margins: 1 inch left and right; 1-inch top and bottom.
o Page numbering: Bottom center
Assignment Submission
 Late submission will not be accepted.
 You are required to submit your assignment as an attached PDF file via Canvas. The name of your file,
must be in the following format: LASTNAME_FIRSTNAME_ASSIGN_1.PDF

Problem 1. [8 pts].
Mr. Ota is an analyst for a large pension fund and he has been assigned the task of evaluating two
different external portfolio managers (K and C). He considers the following historical average return,
standard deviation, and CAPM beta estimates for these two managers over the past five years:
Portfolio Actual Average
Return
Standard deviation Beta
Manager K 7.80% 10.05% 0.75
Manager C 12.0% 15.50% 1.45
Additionally, Mr. Ota estimate for the risk premium for the market portfolio is 5.40% and the risk-free
ate is cu
ently 2.50%.
a. For both Managers K and C, calculate the expected return using the CAPM. Express your answers
to the nearest basis point (i.e., xx.xx%)
. Calculate each fund manager’s average “alphas” (i.e., actual return minus expected return) over the
five-year holding period. How graphically where these alpha statistics would plot on the security
market line (SML).
c. Explain whether you can conclude from the information in Part b. if (i) either manager outperformed
the other on a risk-adjusted basis, and (ii) either manager outperformed market expectations in
general.
Problem 2. [10 pts].
Consider the following data for two risk factors (1 and 2) and two securities (X and Y):
0=0.03 XXXXXXXXXXbX1=0.80
1=0.02 XXXXXXXXXXbX2=1.45
2=0.07 XXXXXXXXXXbY1=1.65
XXXXXXXXXXbY2=2.35
BUSI 4405-Smimou-Winter 2021 XXXXXXXXXXPage 2 of 6
a. Compute the expected returns for both securities.
. Suppose that security Y is cu
ently priced at $23.50, while the price of security X is prices at $15.50.
Further, it is expected that both securities will pay a dividend of $1.20 during the coming year. What is
the expected price for each security one year from now? (hint: you need to compute dividend yield for
each asset and then you can compute expected price based on the expected capital gain)

Problem 3. [10 pts].
Raphael has been assigned the task of estimating the expected returns for three different stocks: Ma,
Na, and Qu. His preliminary analysis has established the historical risk premiums associated with three
isk factors that could potentially be included in your calculations: the excess return on proxy for the
market portfolio (MKT), and two variables capturing general macro-economic exposures (MAC1 and
MAC1). These values are: MKT= 7.5%, MAC1=−0.4%, and MAC2=0.8%. You have also estimated
the following factor betas (i.e., loadings) for all three stocks with respect to each of these potential risk
factors:
Stock MKT MAC1 MAC2
Ma XXXXXXXXXX
Na XXXXXXXXXX
Qu XXXXXXXXXX
a. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free
ate of 2.5%
. Calculate the expected returns for the three stocks using all three risk factors and the same 2.5%
isk-free rate.
c. Discuss the differences between the expected return estimates from the single-factor model and
those from the multifactor model. Which estimates are most likely to be more useful in practice?
d. What sort of exposure might MAC2 represent? Given the estimated factors betas, is it reasonable
to consider it a common (i.e., systematic) risk factor?

Problem 4. [5 pts]
During the period XXXXXXXXXX, earnings of the Russell 2000 index companies have increased at an
average rate of 8.18% per year and the dividends paid have increased at an average rate of 8.9% per
year. If you assume that:
 Dividends will continue to grow at the XXXXXXXXXXrate and the required return on the index
is 8%.
 You estimate that companies in the Russell 2000 index collectively paid $27.73 billion in
dividends in 2010,
Estimate the aggregate value of the Russell 2000 index component companies at the beginning of
2011 using the Gordon growth model.

Problem 5. [4 pts]
Here is some return information from Capital IQ on firms of various sizes and their price-to-book
(value) ratios. Based on this information, what can you tell about the size and value style factors? Do
you think that both (or just one) factor(s) are (is) significant? Explain.
Stock Size P/BV Return (%)
Ya Large High 3.5
Ne Large Low 7
Di Medium High 9
Zo Small Low 19
Te Medium Low 13
Gi Small High 14


BUSI 4405-Smimou-Winter 2021 XXXXXXXXXXPage 3 of 6


Problem 6. [4 pts]
The cu
ent rate of inflation is 2%, and long-term Treasury bonds are yielding 5%. You estimate that
the rate of inflation will increase to 3.5%. What do you expect to happen to long-term bond yields?
(Explain your answer). Compute the effect of this change in inflation on the price of a 15-year, 12%
coupon bond with a cu
ent yield to maturity of 8.0%.

Problem 7. [4 pts]
Because of inflationary expectations, you expect natural resource stocks, such as mining companies
and oil firms, to perform well over the next three to six months. As an active portfolio manager, describe
the various methods available to take advantage of this forecast—in addition to chapter 15 you may
also include some of the concepts or techniques discussed in the previous chapters (or past courses).

Problem 8. [11 pts]
Consider the following trading and performance data for four different equity mutual funds:
Funds Asset under
management
avg. for the
past 12 months
(mil)
Security Sales,
past 12 months
(mil)
Expense
Ratio
Pretax
Return, 3-
yr. avg.
Tax-
adjusted
Return,
3-yr. Avg.
D $298.4 $ XXXXXXXXXX% 9.90% 9.34%
K $665.7 $ XXXXXXXXXX% 11.65% 8.89%
P $1,298.4 $1, XXXXXXXXXX% 10.46% 9.24%
C $6,567.8 $ XXXXXXXXXX% 9.80% 9.45%
a. Calculate the portfolio turnover ratio for each fund
. Which two funds are most likely to be actively managed and which two are most likely passive
funds? Explain.
c. Calculate the tax cost ratio for each fund.
d. Which funds were the most and least tax efficient in the operations? Why?

Problem 9. [8 pts]
You are evaluating the performance of two portfolio managers and you have gathered annual return for
the past decade:
Year Mgr P. Return
(%)
Mgr C. Return
(%)
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX