FM301 – Portfolio Analysis and Investment (Final Assessment –
Individual Submission)
Issued on: 28th MAY, 2020.
Due on: 8th JUNE, 2020
Type your complete answers and submit via Moodle Submission Box, on or
efore the due date.
100 marks {Weight = 50%}
Question 1: [20 marks]
For a recent 10-year period, a mutual fund company reported performance (average annual
eturn) for two of its funds as follows:
Fund Average Return
Equity-Income Fund 10.50 percent
Personal Strategy Growth Fund 9.50 percent
Assume you invested $10,000 in each fund at the beginning of this 10-year period.
(a) How much difference would there be in the ending wealth (after 10 years) between the
two funds? [10 marks]
(b) For the same two funds, the ending wealth after five years was $1.45 per dollar invested
for the Equity-Income Fund and $1.25 per dollar invested for the Personal Strategy
Growth Fund. What were that annual average returns for each fund for this five-year
period? [10 marks]
Question 2: [15 marks]
An analyst gathered the following data about stocks J. K. L which together form a value
weighted index:
December 31, Year 1 December 31, Year 2
Stock Price Shares
outstanding
Price Shares
Outstanding
J 50 10,000 $60 10,000
K 40 8,000 $30 16,000
L 50 12,000 $40 12,000
Calculate the ending value-weighted index (base index = 100), and
iefly explain what it means.
Provide your answer up to 2 decimal points.
Question 3: [20 marks]
You open a margin account at Chas Pigeon, a discount
oker. You subsequently short 100
shares of Exciting.com at $300 per share, believing it to be overpriced. This transaction is done
on margin, which has an annual interest rate of 6 percent. Exactly one year later, Exciting has
declined to $60 a share, at which point you cover your short position. You pay
okerage costs of
$25 on each transaction you make. The margin requirement is 50 percent.
(a) Calculate your dollar gross and net gain or loss on this position, taking into account both
the margin interest and the transaction cost to sell. Round your answers to nearest whole
number [10 marks]
(b) Calculate the percentage return on your investment (the amount of money you put up
initially, including the
okerage costs to buy). Round your answers to nearest whole
number [10 marks]
Question 4: [15 marks]
Suppose a risk-free asset has a 3 percent return and a second risky asset has a 15 percent
expected return with a standard deviation of 25 percent. Calculate the expected return and
standard deviation of a portfolio consisting of 15 percent of the risk-free asset and 85 percent of
the second asset. Provide your final answers up to two decimal points
Question 5: [15 marks]
Evaluate the following investments, and explain the “best” choice among Portfolios A, B, and C,
assuming that bo
owing and lending at a risk-free rate of ?? = 3 percent is possible.
Portfolio A: ?(??) = 13% , ?(??) = 15%
Portfolio B: ?(??) = 10% , ?(??) = 8%
Portfolio C: ?(??) = 11% , ?(??) = 14%
Question 6: [15 marks]
Suppose that the risk-free rate is 6 percent and the expected return on the market portfolio is 15
percent. An investor with $1.5 million to invest wants to achieve a 25 percent return on a
portfolio combining the risk-free asset and the market portfolio. Calculate how much this
investor would need to bo
ow at the risk-free rate in order to establish this target expected
eturn. Provide your final answers up to two decimal points.
~END~
For all relevant formulas – refer to your text book and/or lecture notes.