ASSIGNMENT 4

MGF 633
Investment Management
Fall 2010

You may work in a group of up to 4 on this Assignment. Please indicate clearly on your
Assignment who the members of the group are. Please note, all assignments submitted with
more than 4 group members will automatically receive a 0 grade.
This Assignment is due on Tuesday, November 16th at the beginning of class. You may also
submit the assignment by email to dmohr@buffalo.edu before the deadline. No late
assignments will be accepted.
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For all questions below, show your work and/or explain your answer:

1. Find the initial announcement of public information made within a month from today (i.e.,
earnings announcement, merger, etc.) for any publicly traded stock that moves the stock price at
least 1% (other than those we discussed in class).

(a) Print out or draw a chart that shows at least 2 days before the event and at least one
day after.

(b) Is the evidence consistent with the semi-strong form market efficiency. Explain.

(c) Is the market reaction consistent with the strong form of market efficiency? Explain.

2. Using one of the 60 month return series from the last assignment (or you can create a new
series of returns for a stock from July 2005 through June 2010), calculate how much money you
would have made if you had predicted the direction the stock price would move in the next
month. Assume you have $10,000 to start with and that there are no transaction costs. You
should then buy the stock with all your money if you expect it to go up and sell the stock short if
you think it is going down (assume you have to post 100% margin selling short).

Example: if the return is 3% the first month, your strategy with perfect foresight would have
been to buy $10,000 in stock before the period which would result in 10,000 x 1.03 = 10300 at
the end of the period. If the next period is a decrease, you would want to sell your stock leaving
10300 in cash and then sell 10,300 short (using the 10,300 in cash as margin). You would then
buy to cover the short position when the stock was expected to go up (note: you will have to buy
twice - once to cover the short and then buy again to establish a long position.

(a) What is the total amount in your account after 60 months?

(b) Would this strategy be profitable even if there were transaction costs? Explain
3. You are choosing between the following investments that all have the same risk. All have the
same expected return (before fees) except for the Star fund which is run by an investment advisor
who regularly beats the market and earns a higher return than expected. Calculate the amount of
cash you will have if you invest $10,000 today and hold your investment for (a) 1 year, (b) 5
years, (c) 10 years and (d) 20 years before you close out the position. (Note: be sure to deduct
expenses as appropriate and to close out the position at the end).
Investment Fees E(r)(before fees)
A Star Fund 5% front-end load; 1.5% annual fee 11% annually

B Mutual Fund no load; 1% annual fee 9% annually

C ETF $10 per trade; .15% annual fee 9% annually

D 20 stock portfolio $10 for each trade; no other fees 9% annually

4. Consider the following data for portfolios A, B & C:

(a) Calculate the following performance measures for A, B & C:

(i) Sharpe
(ii) Treynor
(iii) Jensen
(iv) M2

(b) Compare A, B & C using the different measures. How do you determine which portfolio had
the superior return? What other information do you need to decide?

5. (a) Each member of your group should complete the risk questionnaire on pages 952 and
report the result.

(b) Assume you have received $300,000 from your uncle’s estate after his death. Select an
appropriate investment policy for investing this inheritance that is consistent with your risk
tolerance in part (a) in each scenario: (Explain your answer.)

(i) you plan on enrolling in a top ranked MBA program in two years and
you expect to pay approximately $75,000 from your inheritance to get your MBA
(ii) you plan on working for 30 years after graduating before retiring
(iii) you plan to retire immediately and live off the inheritance for the
rest of your life.