Ag217 Tutorial 9

Front 1

Market timinghas tremendous potential value. Would it therefore be wise to shift resourcesto timing at the expense of security selection?

Back 1

Not necessarily,as security selection can be very profitable as well. The decision to shiftinto market timing should be determined by the fund’s specialisation inmacro-driven events.

Front 2

Recall Jensen's Alpha

Back 2

αp=Rp-[rf+βp (RM-rf )

Front 3

a) If instead youcould only invest in UK gilts and one of these portfolios, which would youchoose?

If you will holdonly one of the two portfolios, then the Sharpe measure is the appropriatecriterion. This indicates that A isthe preferred portfolio.

Back 3

Sp=(Rp-rf)/σp

Front 4

Jensen's alpha

Back 4

= Intercept

first value in equation

Front 5

Information ratio

Back 5

Intercept/residual s.d

Front 6

Sharpe ratio

Back 6

(Intercept+Beta(rm-rf))/s.d excess returns

Front 7

Treynor Ratio

Back 7

(Intercept+residual s.d(rm-rf))/beta

Front 8

Suppose you arechoosing between the two stocks in the table shown in question 3. Which stockis the best choice if it will be the only asset to be held by the investor?What if the stock is one of many stocks that the investor is analysing to forman actively managed portfolio?

Back 8

If it is theonly asset to be held by the investor, use the Sharpe measure (since itaccounts for overall risk). Since it is higher for stock A, pick stock A. Ifthe stock is one of many stocks, use Treynor (since it accounts for systematicrisk). Since it is higher for stock B, pick stock B.

Front 9

CANT DO Q5 (B)

Back 9

B

Front 10

Give an overviewof the main challenges facing the fund management industry today.

Back 10

-Risk challenges

-Cost challenges

-Growthchallenges.

Front 11

What is meant byPESTEC factors? Give a risk and opportunity example for each factor.

Back 11

Risk Opportunity
P Political More onerous regulations Follow trends in the political environment to inform trading decisions E Economic Low interest rates, low economic growth Low interest rates, low economic growth S Social Demand for firms to be more socially responsible may consume corporate resources Follow social trends and invest in companies with exposure to this T Technological Expensive to use new technology Using new technology can provide firms with a competitive advantage E Environmental More expensive to be more environmentally friendly Invest in ‘green’ companies C Competitive Underperformance relative to competitors If performance is superior to competitors the fund can attract more clients

Front 12

In your opinion,do ethics matter in business? Explain.

Back 12

Ethics domatter. Trust goes to the heart of any relationship, whether that be businessor personal, and having a solid knowledge of ethics and a firm belief of whatyou consider to be ‘right’ or ‘wrong’ helps people know where they stand withyou and what they can expect of you.

Front 13

Many peopleargue that the financial system pre-financial crisis created an economicproblem referred to as ‘moral hazard’, where one party can take risks knowingthat the other party will bear the cost (i.e. the banking sector could takesignificant risks knowing that the government would bail them out if the highrisks did not pay off).

In your opinion, are bank bailouts ethical? As aportfolio manager holding banking stocks, do you think the ‘moral hazard’problem matters? Explain.

Back 13

Moral hazard isclearly unfair on the taxpayer. In effect, is socialises losses whileprivatising profits.

Clearly this must be avoided as it is an unsustainablesystem.

However, some argue that banks are a special case and have a derivativeright to be saved during a financial crisis.

This derivative right is derivedfrom citizens’ fundamental right to an adequate standard of living, which inturn depends on the robustness of three empirical claims:

Awell-functioning economy is needed to uphold a decent standard of living.

Banks supply anecessary and even essential function in an economic system.

Bailouts areneeded to prevent a systematic breakdown of the financial system.As a portfolio manager, moral hazardmatters. If you believe the system encourages moral hazard, then banks may beriskier than optimal. If you hold shares in this company, remember that yourshares will be worthless if the bank is bailed out. If you believe that enoughhas been done to prevent ‘too big to fail’, then banks should behave much moreresponsibly, indicating that banking stocks may prove to be a profitableinvestment.

Front 14

Consider the following scenarios. Explainwhether you include these companies in your socially responsible investmentportfolio.

a)A companyaccused of tax avoidance.

(b) A stateowned banking institution whose hasrecently announced a loss but paid out £millions in bonuses to its staff

Back 14

a) This representsa trade-off between a company’s responsibility to provide maximum value for itsshareholders, and its citizenship role in the country.

b) As above.Competitive salaries and remuneration schemes are needed to attract and retainthe best staff which will help return the bank to the private sector as quicklyas possible. However, whether the bank is fulfilling its citizenship role is amore controversial issue.

Front 15

a) A football clubwho continues to play a footballer accused of sexual assault.

b) A company whomanufacturers its products offshore in an emerging economy to save money,despite the relatively harsher working conditions in the country.

Back 15

a) A clubcontinuing to employ the player may be opening itself up to criticism that theclub is ignoring the serious accusations as well as forgoing its socialresponsibility of ensuring its players are good role models for society.However, we must remember in a democracy we are all innocent until provenguilty. So until these claims are proven we have to assume the player isinnocent. Surely those questioning that are themselves unethical?

b) A company has aresponsibility to provide the best value for its shareholders. However, it alsohas a responsibility to provide safe working conditions for staff. Exploitationof labour is a serious accusation and further details would need to be sought.

Front 16

a)A company whoseChief Executive signed a public letter favouring one side over the other in areferendum.

Back 16

a)A company has aduty under their citizenship role to inform the debate over such an importantissue, especially when it employs thousands of people throughout the country.However, is it a company’s role to involve itself in politically-sensitiveevents? Is the Chief Executive offering his or her opinion on what is best forthe country, or what is best for their company?