900128 Non-Alpha calculator UNIVERSITY. BIRMINGHAM BIRMINGHAM BUSINESS SCHOOL Degree of Masters of Science in Investments FUND MANAGEMENT 07 02868 ‘MayiJune 2011 Exaunvarion PAPER we town: $ Hours [Answer THREE questions In total, including at least one from Section A ‘and atleast one from Section B. CALCULATORS MAY BE USED IN THIS EXAMINATION PROVIDED THEY ARE NOT CAPABLE (OF BEING USED TO STORE ALPHABETICAL INFORMATION OTHER THAN HEXADECIMAL NUMBERS 07 02868 1 Tur over00128 Non-Alpha Caleulator SECTION A: 1. Markowits’s mean-variance optimisation procedure sufers from a numberof Well documented drawbacks. As a consequence, some alternative portfolio construction models have been proposed and applied in practice Discuss the key features ofthe following two approaches: (2) The Treynor Black model 135%) (©) The Black-Utterman model 135%) ‘Also (© Comment on the relative merits ofthe aforementioned two modes and explain why they should be viewed as complements rather than substtues. 0%) Total (100%) 2. (@) Discuss in detail THREE well-documented examples of stock market “anomalies that apparently contradict the efficient market hypothesis. (0% (©) ceitically discuss the main arguments put forward by proponents of Behavioural finance in explaining market anomalies. (0%) Total (100%) 3. (a) Hedge fund strategies can be divided into two general categories: dliectional and nondireclonal. Discuss and give examples of hedge fund styles that fll into each category. 150%) (©) Hedge funds are often advertised as outperforming the broad market Indices, However, their superior performance may be more apparent ‘than real. Discuss the major factors that make hedge fund performance difiult to evaluate (0% Total [100% 0702868 2 Turn over,00128 SECTIONS. 4 @ ©) (0) ) 07 02868, NonAlpha Calculator Discuss the types and uses of bond swapping strategies. 50%) You area fixed-income fund manager and would like to establish ‘an immunised bond portfolio soas to meet the following labios: €3m, £4m and £5m a 2 years, & years and S years from ‘now respectively. Assume the current veld curve Isat a the interest rate of 8. ‘Two bonds are used to construct the portfolio. Bond Ais a 7% ‘coupon bond with two years remaining to maturity. Coupons are paid sem-annually. Bond Bisa zero-coupon bond with sx years Femaining to maturity. Explain in detail how the immunised bond portfolio should be constructed and comment on any reservations you might have about the immunisation approach you have used, 150%) Total (100%) ‘The average returns, total risks and betas fr three investment funds X,Y and 2 together with the benchmark portfolio are provided below: Ruerage | Total isk Bata against Return | (Standard Deviation) | benchmark x oe 16% 07, ¥ 12K [32% 45 z 11% [25% ra ‘Benchmark | 10% | 20% 10) “The rik tree rate is Crticaly evaluate the performance for each fund based on Shap, Teor anderen measresand comment pon Yeur gy {xpain what the “information rato” sand dics why It may be ier prot thn recs mars aig sox Total [100%] 3 Turn over900128 6 @ CO) © 07 02868 Non-Alpha Calculator “FTSE 100 stockindex futures contracts canbe used by active portfollo mangers to isolate a bet ona large UK stock and at the same timeto neutralise the exposure to market risk” Discuss, with a numerical calculation, using the following information, ‘Assume the FTSE 100 Index stands at 5,850. The multiplier ofthe FTSE 1200 index futures contracts is £10. The stock holding is worth £10m and the stock's betas 0.75. 140% Describe the main motivation for hedging interest rate isk and give at least two examples of derivatives contracts that can be used as hedge vehicles (30%) Describe the potential uses of ered default swaps by bondholders to enhance the credit quality of thelr portfolio, Ld! Total [100%] End of Examination Paper 4 End of exam