Running Money Professional Portfolio

Management 1st Edition Stewart

Solutions Manual
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Running Money Professional Portfolio Management 1st Edition Stewart Solutions Manual

Problem Set

1. List the most common names in the investment management business. What type of portfolio
manager are they?

The idea is to identify the important aspects of the manager’s investment strategy, some
examples include:
Warren Buffet is president of Berkshire Hathaway, a publicly traded company that invests in
other companies, either wholly or in part, utilizing comprehensive valuation disciplines.
Bill Gross is manager of the largest publicly available bond fund at Pacific Investment
Management Company (PIMCO) and takes bets on interest rates, currencies, credits and
sectors.
Jim Slater became a successful column writer in the Sunday Telegraph, promoting balancing
earnings growth prospects with valuation. His stock picking career followed one in investment
banking.

2. List one manager for each type of portfolio manager listed in Exhibit 1.2.

While the lists can be long, some examples include:

Pension Consultant: Wilshire Associates (California), Cambridge Associates (Massachusetts)
Mutual Fund Firm: Perpetual (Australia), American Funds Investment Co. (California)
Registered Investment Advisor: Edward Jones (Missouri, Financial Advisor), Morgan Stanley
Global Wealth Management Group (New York)
Brokerage House: Charles Schwab (California), UBS (Switzerland)
Separate Account Manager: Barclays Global Investors (California), Goldman Sachs Asset
Management (New York)
Alternatives Manager: AEW (Massachusetts, Real Estate), Man Investments (England, Hedge
Funds)

3. Go online and list the top and worst performing mutual funds for the last 12 months. What
approach do they follow for managing money?

As of 12/31/09:
Top (unleveraged): JP Morgan Russia Fund actively invests primarily in Russian equity
securities and is highly concentrated.
Worst (leveraged): ProFunds Ultra Short Latin America is a portfolio taking a daily 2x
leveraged short position on Latin American securities.

© Copyright 2011 Stewart, Piros & Heisler

Visit TestBankDeal.com to get complete for all chapters

4. List 3 common rules of thumb for investing for retirement. How valid do you think is each
one?

From TIAA CREF, here are four valid rules of thumb:

1. “Take advantage of tax-deferred products”
2. “Create a diversified portfolio”
3. “Don’t try to time the market”
4. “Pay attention to expenses”

Other common rules include:

 For investing retirement savings, setting the equity allocation equal to 100 – age. While
this may lead to reasonable allocations for regular contributions, as we shall see in
Chapter 3, this is often incorrectly motivated.
 Dollar cost averaging into an investment position. While seemingly reasonable advice,
as shown in Chapter 15, this is often motivated by behavioral factors and may not be
consistent with the theory.
 If an investment program offers 10 investment options, diversify and invest 10% in each.
This isn’t good advice. Asset allocation (weight in stocks and bonds) should first be set
and individual options within asset classes selected second.
 Seek to replace 70% of your pre-retirement salary. This may or may not be appropriate
dependent on one’s individual situation. It is very important to recognize that even if
70% is appropriate at retirement, this is in current dollars and the investor should plan
for inflation.
 Save 10 times your final salary in your defined contribution plan. Again, this depends on
each individual—retirement age, life expectancy, level of defined benefit and social
security, etc. Clearly, more is better.

5. Consider the Jean case described in Section 1.1. Explore the following questions:
a. Based on the limited information, does she appear to be a sophisticated investor?

Jean appears somewhat sophisticated, given her asset allocation (high equity exposure), and
relatively high level of savings compared to the average retiree.

b. How much risk (consider one definition) is she willing to assume, both financially and
emotionally?

Assuming risk is measured as losing money, Jean appears to have the financial capacity, she
has modest spending habits and above average savings, and emotional capacity, she is
somewhat sophisticated; she has a part-time job which could take up some slack; all
supporting her capacity to handle short-term draw-downs.

© Copyright 2011 Stewart, Piros & Heisler

c. What is her investment horizon?

She is retired, probably at least 65 years old, so her lifespan could be estimated as 30 years.
Given her modest spending pattern, she should have remaining assets to bequest at her
death. Calculating a target bequest would increase the minimum acceptable return and
potentially increase the target return.
 If she’s interested in a bequest, the investment horizon will exceed 30 years if it
includes the horizon of the beneficiary
 If she’s interested in gifting in the meantime, her current cash flow needs will
increase
Use of an annuity contract can provide minimum real cash flows, and potentially with an
inflation protection feature. However, there are some problems with this approach:
personally experienced inflation may be higher than general inflation and annuities
represent credit risk. Longer horizons before retirement make saving and investing easier
but make planning in post-retirement more complicated.

d. How should these things influence the recommended asset allocation and asset class selection?

The following issues impact the recommended investment program:

 modest spending and high savings means she has risk capacity
 sophisticated so she is risk tolerant
 longer horizon so she needs to earn a higher return to support spending over
the planning horizon

As a result, her assets should be invested for more than current income needs, including risky
securities offering higher expected returns.

e. Propose a mix of stocks, bonds and cash for Jean. What’s a reasonable spending policy?
From where will the cash flow come?

 Spending policy: $15,500 ($26,500 in expenses less the $11,000 in other income). This
represents a required return of 2.8% on the $540,000 in investable assets.
 Tax rates should be low at her income level and we can assume 0.
 Start with a simple 50/50 mix of stocks and bonds. Assuming expected real, after-tax returns
of 5% on stocks and a 2% return on bonds (see chapters 3 and beyond) would provide a
3.5% total expected real return, 0.7% in excess of the required return. The required return
would be earned in spite of a potential occurrence of a permanent 20% decline in expected
returns. As an alternative, the spending level could be increased by $3,400, on an expected
basis, without reducing the real value of the original principal. A lower equity allocation
would yield lower total returns, but would generate less volatile asset values over the short
term.
 Current cash flow from a 77/23% equity/bond allocation is $12,000. At 2009-end levels of a
1.85% equity dividend yield on an S&P500 index ETF, net of fees and 3.75% bond yield on a

© Copyright 2011 Stewart, Piros & Heisler

Another random document with
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English fleete, that they were glad to depart, and in despight of them the
English Nauie did holde their determined course: And The number of the
taking a view of the Spanish fleete the next day, their Spanish Shippes after
the fight.
number was not aboue thirteene Shippes, which did argue
that they were either sunke, or fled to harbour to saue themselues.

Fourthly, The generall saith, that the English fleete fled awaye,
and left their Oares for haste behind them in the Sea.
IT was strange that they shoulde leaue behinde them Oares in the Sea,
being there was not in the English fleete either Gally or This lie was made in
gallyasse, which required the vse of Oares, as for the the Generals owne
forge.
Oares of their ship-boates and other such small vessels,
they had stoed them aboarde their Shippes, and were no impediment vnto
them, but most necessarie for them to vse, and therfore not likely they
would cast them ouerboard: But it is most likely, that the Generall fell
into some pleasant dreame at Sea, wherein hee did see a false apparition
of victorie against the English, & for lacke of matter did set this downe
in his letter for newes to his countrie: It is sinne to belye A commendation of
the Deuill, and therefore the Generall shal haue his right, the Generall
the letter is so well contriued, (and yet with no great eloquence) but with
such art, that ther are not many more lines, then there are lyes, which
sheweth that there are wonderfull and extraordinarie gifts in the
Generall: But I am perswaded if Don Bernaldino had thought that his
letter should haue beene Printed, hee woulde haue omitted many thinges
contained in the letter, for the Doctor did vse him The Generall doth
somwhat hardly in shewing the letter openly, and more in practise to lye, for
recreation.
suffering it to be Printed: for friends may like good
fellowes send lyes one to the other for recreation, and feed their friends
with some small taste thereof, so it be kept close, without danger to
incurre the tytle of a lying Generall: But as the matter is now handled
throgh the simplycitie of the Doctor, I cannot see but the General Don
Bernaldino, is like to carrie the tytle equally twixt both his shoulders.

Fiftly, The generall doth say in his Printed letter, that

notwithstanding all the diligence he could vse, hee coulde not
cause the English fleete to staie nor come neere them, nor
discharge one Hargebush or peece of Artillerie, but fled away
as fast as they could.
ANd this lie also he doth not receiue by intelligence from any other,
but himselfe was an eye-witnesse in the action, which made him bold to
send this with the rest into his Countrie for currant newes: But herein
Don Bernaldino was more bolde then wise, for the torne and battered
sides of his Gallyons, being compared with her Maiestes The torne sides of the
Shippes; and others that serued in that fight, doe declare, Spanish Shippes doe
condemne Don
that his Ships receiued at least two bullets for one. Bernaldino of lying.
Neither can it be concealed but his owne Countriemen (if any do fauour
truth) may easily see the losse, and late reparations, done vnto the Kings
fleete sithence they did encounter with the English Nauie, whensoeuer
they that remaine shall arriue in Spaine: But the Generall seemeth to bee
a verye good proficient in his profession, and waxeth somewhat bolde,
treading the true steppes of old Barnardino de Mendozza, and yet
Mendozza was somewhat more warie in his lyes, for he had sometime
the colour of intelligence to shadow them, but the Generall growing from
boldnes to impudencie, maketh no scruple to say, that the English Nauie
fled as fast as they could without discharging any Hargebush or peece of
Artillerie, when as the battered sides of his ships do Note the valoure of
returne the lye to his face: For in this conflict Don Don Bernaldino.
Bernaldino did behaue himselfe so valiantly, that he was alwaies farthest
of in the fight, & had so great care of his owne person that he stoode
cleare frõ the danger of Muskat or any smal shot, & durst not approach,
whereas our generall was the foremost, & so held his The order of the
place, vntill by order of fight other ships were to haue English Nauie.
their turnes, according to his former direction, who wisely & pollitickly
had so ordered his vangarde, & reregarde, that as the maner of it was
altogether strange to the Spaniard, so might they haue bene without all
hope of victorie, if their General had beene a man of any iudgement in
Sea fights: I know no reason why the English Nauie The Spaniard cannot
should flye from him, for the Spaniard may put all the bragge of his gaine.
gaine in his eye that euer he did winne from the English: Peraduenture
some siely nouice of our country meeting the general in Spaine, and
hearing a repetition of so many sillables in one name, as Don Bernaldino
Delgadillo de Auellaneda, might thinke them to be words of Coniuration,
& for feare of raysing a Spirit, might flie from him as from the Deuill, or
some simple Indian slaue hearing the like repetition of his long and
tedious name, might suppose it to be an Armie of Spaniards, and for
feare runne awaye: But the commaunders and Captaines of the English
Nauie, were men of such resolution, that no Spanish Spanish bragges are
bragges coulde dismaye them, for they haue often met ofEnglish.
no value with the

them with their Pikes in their Spanish beardes. Nor the

countenaunce of Don Bernaldino quaile them, although he were
acowtred in his gilt Leather buskins, and his Toledo Rapyer.

Sixtly, The generall saith in his letter, that notwithstanding their

flying away so fast, the English left them one good Shippe well
manned, who told him that the Drake dyed in Nombre de
Dios, in which Shippe were one hundred and fourtie men, and
fifteene noble Captaines of the best sorte.
THe Generall Don Bernaldino, like a resolute Don Bernaldino very
Spaniarde hauing alreadye gonne ouer his shoes, maketh resolute.
no dannger to wade ouer his Boates also: and as hee hath begun so he
doth conclude, I maruaile that hee did not in writing his discourse
remember this olde saying; that is, A lyar ought to haue a good memorie:
It were much better for him in mine opinion to reuoke the testimonie
which hee saith he had from the Englishmen, concerning Sir Fraunces
Drake his death at Nombre de Dios, and stande to the intelligence
receiued from the siely Indian slaue, as it appeareth in his The Indian slaue, is
first lye, for without al doubt, there is no Englishman that the best shadow, to the
Generals lye.
wil say (if he haue his right sences) that he dyed at
Nombre de Dios, for they all knowe the contrarie: Neither can the
Generall avouch that he receiued intelligence from any English man, that
after the death of Sir Fraunces Drake they did elect for Don Bernaldino his
Generall Colonell Quebraran, as he doth most falsly rare gift in coyning a
new and straunge
affirme in the latter end of his vaine and friuolous letter, name.
being that the name was straunge, and vnknowne to any in the English
Nauie. Neither doe I imagine that any of those which the General saith
he hath taken were so forgetfull as not to remember their generals name.
But without all doubt this addition of so new, and straunge a name to the
English Generall, doth proue that Don Bernaldino is not vnfurnished of a
forge & storehouse of lyes, from whence as from an The Generals
euerflowing fountaine, he sendeth forth lyes of al sorts storehouse of lyes.
sufficient for his owne store, and greate plentie to furnish his friends:
The General was much beholding to his godfathers who gaue him the
name Barnaldino, which we in English do take to be plaine Barnard,
which name hath as it were a kind of priueledge from being sharply
reprehended when the party is thought to erre: for it is a The schoolemen of
common saying amongst the Schoolemen that Barnardus modestie do vse this
kinde of reprehension,
non videt omnia, viz. Barnard seeth not all thinges, (when when they doe thinke
the Author to erre.
he doth dissent from their opinions) the which fauour wee
coulde bee content to yeelde to Bernaldino for the name sake, if he were
not taken with so many manifest and impudent lies, neither doe I thinke
that Signior Bernaldino will say that he saw all that he hath written, be it
spoken in councell for shaming the General, for is there any man so
voide of reason as to thinke? That any Englishman being demaunded of
his Generals name, would write or speake Quebraran for The difference twixt
Baskeruile, so much difference there is in the sound of the Quebraran
Baskeruile.
and

sillables, as there is no affinitie at all, or likelihoode of

truth: But such are the Generals rare gifts, (be it spoken to his small
praise) that we Englishmen must of force confesse that the Generall hath
giuen a proude onset to carrie the whetstone from Signior Barnardino de
Mendozza: Neither will the 140. men & 15. noble Captaines (which hee
saith hee did take, of whome he might haue beene rightly The Generall
informed of their generals name) acquit him of lying conuicted
forgery.
of lying and

forgerie, for giuing the name of Quebraran to the English

Generall: as for the good Shippe well manned, which he saith the
English left them after the fight, I am perswaded hee hath no man to
witnesse that lye, for the ship was seperated by weather from the English
fleete in the night thirteene daies before the fight, with the Spanish
Nauie, & neuer to anye mans knowledge came more in The Generall maketh
sight of the English fleete, if the Spanish Shippes by great brags in taking
a distressed Ship,
chaunce did take the said wel manned Shippe (as they cal which is supposed not
to strike one blow.
her) I doubt not but they haue the Shippe, the 140. men,
and the 15. noble Captaines to shew: But euermore I gesse the Spanish
reckoning will fall short when it is examined, for the fifteene noble
Captaines will proue (as I take it) but three, whose losse I The fifteene noble
grieue to thinke on: Neither did the Spaniards gaine them Captaines according
the generals lying
by valour, or we loose or leaue them for cowardise, as occupation,
but three.
will proue

most vntruely this bragging lyer hath certified. But the

Generall like a prouident man, to make his fame and credite the greater
with his Prince and country, doth take vpon him (amongst other his
miracles perfourmed before the English fleet) by way of amplification to
make small matters seeme great, as a little shoe to serue a great foote,
and finding that it can hardly be brought to passe, he doth stretch the
Leather with his teeth that it is ready to breake, and notwithstanding, all
this will not serue his purpose, for the Printing of the The Printing of the
letter doth marr the play, and bringeth such matter in letter doth shame the
Generall.
question, as the Generall doth wish might be concealed,
and were he not of so dry and cholericke complexion, as Don Bernaldino of an
commonly Spaniards are, he would blush for very shame excellent complexion.
in publishing so impudently such manifest vntruthes. For sithence his
meeting with the English fleet at the Isle of Pinas, there hath beene by
the worthie English Generals, an honourable expedition from England
into the Continent of Spaine, where amongst other The first discouery of
exploits hauing taken the Cittie of Cales, in the sacke the Generals Printed
letter.
thereof was found some of Don Bernaldino his Printed
letters: & comming to the hands of a Captaine that serued in the voyage
to the west Indies, he hath thought very fit (in regard of the slaunders to
the English Nauie contained in the saide letter) to quote the errors, that
the truth onely may appeare, to all such as haue a desire to bee rightly
informed of such accidents, as befell thẽ in this late voyage to the west
Indies: and this may suffice to shew Don Bernaldino Delgadillo de
Avellaneda his greate iudgement in amplyfying small The Generals great
matters, or of nothing to make in shewe seeme somewhat. skill in amplifying.
And now hauing thus farre informed you of the truth in reproofe of the
slaunderous, false, and vntrue reports of this glorious lying Generall,
with a true disproofe to some of the grossest of his lyes, I will leaue him
with the rest of his lying letter, and the circumstances therein contained
to your censures: who in discretion may easily discerne the same. And
haue heere following plainely and truely set downe the course and order
of our whole fight after we met.
 T H E ME E T I N G
Of our English Nauie and the
Spanish fleete, and the order
of our encounter.
MVnday the first of March, according to our computation, wee scryed
the Iland of Pinas, wher haling in for the westerne parte thereof, thinking
there to haue watered, being within fower leagues of it The first discouerie of
Southerly, we sent in three of our Pinnasses to discouer the Spanish fleete.
the harbour, and to sounde afore vs, about one of the clocke in the
afternoone; the same day we discouered a fleete of twentie sayles, and
deeming them to bee the Spanish fleete, wee kept our loofe to get the
winde, but their Viceadmiral with diuers other ships went about to cut off
our Pinnasses, so that our Generall with some other of our Shippes, was
forced to tacke about vpon the larbour tacke, and so ranne in towards the
land keeping the winde, so as we recouered our Pinnasses, which forced
the enemies Shippes to tacke about, and to take the aide of their fleete,
and being come neere vnto them they shot at vs, wee still approched,
hauing our close fights vp, our flagges, ensignes and streamers
displayed, our men orderly placed in each quarter, but forbare our fight
vntill our Generall began, and gaue vs warning to come in and fight, by
shooting off a great peece, according to his former The incounter twixt
directions, so being within Muskat shot, the Viceadmirall the English and the
Spanish Ships.
of the Spanish fleete came neerest vnto vs, to whom our
Viceadmirall Iohn Traughton Captaine of the Elizabeth Bonaduenture
gaue fight, betwixt whome there was the greatest volee of small shot
changed that lightly hath bene heard at Sea, which cõtinued a long halfe
hower. In which time the Spanish fleete came into fight, our Generall Sir
Thomas Baskeruile being in the Garland, whereof Humphrey Reignolds
was Captaine, being the next Shippe vnto the Elizabeth Bonaduenture,
bare vp to the enemie, playing with her great Ordinance hotly vntill she
came within Muskat shot: Ionas Bodenham Captaine of the Defiance,
and Henrie Sauile Captaine of the Aduenture, came likewise into fight
with thẽ: After the Garland (being within Muskat shot) played her part
and made good fight for the space of an hower. The Defiance bare vp
likewise and had her turne, after came the Aduenture again within
Muskat shot, who hauing chaunged many a great Bullet, with them
before, renewed his fight, and continued it an hower with small shot.
Then came Thomas Drake Captaine of the Hope, who last of all had his
turne. Thus had all the Queenes Shippes their course: The Marchants
Shippes with other small vessels being without the Queenes Shippes shot
when they saw opportunitie: After the enemie finding no good to be
done, (being well beaten) fell from vs, the Aduenture, The Spanish
playing vppon them with her great Ordinaunce, made Viceadmiral
witnesse, what
can

three of the last shot at them: Their Viceadmiral with success they had in
this fight.
diuers others of their Ships, were so beaten, that they left
off the fight, and were forced to lye in the winde, for that they durst not
lye of either board by reason of their many and great Leakes, which they
had receiued by our greate shot. The Generall with the rest of their fleete,
tacking about fell in our wake, thinking to get the winde, The English Admirall
which in the beginning we sought to hinder. But our carried his Creset
light, notwithstanding
General seeing that in holding the winde we should the enemie was vppon
his brode side.
shoote our selues into the Bay, gaue them the winde. All
that night they kept themselues vppon our broade side, notwithstanding
our Admirall carryed his Cresset light all night: hauing greate care of our
smallest Shippes: This fight continued about fower howers til it was
neere night, in the which fight, thanks be to God, there was slaine so
fewe persons of our English fleete as I thinke the like conflict hath not
beene performed with so little losse of men: What harme The English receiued
befell the Spaniards in their fleete I leaue to your little losse in this
conflict.
iudgements. Yet our eyes can witnesse their Shippes were
sore beaten and raked thorough, whereby there was such falling backe
and lying by the Lee to stoppe their leakes, as some of them were driuen
to haste awaye, and rather to runne on shore to saue themselues then
sincke in the Sea: Besides within two howers after our fight with them,
wee saw one of their great Shippes on fire which burnt into the Sea, and
all the Sterne of another of their Shippes blowen vp: And in the morning
a Shippe of our fleete was runne so neere the land, that to double the
Cape current hee must of necessitie tacke about & fall in the wake of the
enemie, which caused our Generall in the Garland and the Defiance to
tacke about, which two ships forced the three Shippes of the enemies
which were put forth to take our Shipp, (or else to cause her runne on
grounde) to returne to their fleete to saue themselues, hoysing all their
sayles for haste: This morning they were faire by vs hauing the winde of
vs, being but thirteene sayle of their twentie to be seene, The remainder of the
then we stroke our toppe sayles thinking to haue fought Spanish fleete were
but thirteene sayles.
with them again, which they perceiuing tacked about
from vs, & after that neuer durst nor would come neere vs: What became
of the rest of their fleet we know not, but true it was that they were in
great distresse mightily beaten and torne, by hauing receiued many
Bullets from vs. All this day wee had sight of them, but they shewed
little will to fight or come neere vs, so we keeping our course west, and
by North, about sixe of the clocke at night lost the sight of them. And
this is a true discourse of our fight with the Spanish fleete. The which the
Author heereof will iustifie with the aduentrue of his life, against any
Spaniard seruing in that action, that shal contradict the same.

FINIS.

Henrie Sauile.
 T H O MA S B A S -
K E RV I L E K N I G H T,
His approbation to this Booke.
I Thomas Baskeruile Knight, Generall of her Maiesties late Indian
armado in the late conflict had betweene the Spanish fleete and vs,
hauing perused the Spanish letter written by Don Bernaldino Delgadillo
de Auellaneda, General of the King of Spaines Nauie, and also hauing
perused Captaine Henry Sauile his answeres vnto the six exceptions in
the Generals letter with his discourse of the manner of our fight with the
Spanish fleete, do say, that the said Henrie Sauile hath answered the
letter, and set downe the order of the fight sincerely according to truth,
for testimonie of which I haue hereunto set my hand.
And if Don Bernaldino Delgadillo de Auellaneda the General shal take
any exceptions to this my approbation, or stand in the iustification of his
lying letter written to Doctor Peter Flores, President of the Contraction
house for the Indies, and by him for Bernaldinoes glorie lately put in
Printe: I then saye that hee falsely lyed, and that I will maintaine against
him with whatsoeuer Armes he shall make choyce of. And because the
kingdomes wherein we abide are enemies, by reason of which there is no
meanes in either of them, to maintaine that I haue written. Let him make
choice of any indifferent kingdome, of equall distance from either
Realme, and I will there be ready to maintaine as much as I haue
written: But if by my imployments into Fraunce, I be so stayed by her
Maiesties Commaundementes, that I cannot out of that Realme meete
him in anye other, I cannot see why hee shoulde take anye exception to
that, considering the equalitie of the place, and that the Armies of both
our Princes be there resident.

FINIS.

Tho. B.

[LONDON: F. SHOBERL, PRINTER, 51, RUPERT STREET, HAYMARKET.]

 *** END OF THE PROJECT GUTENBERG EBOOK A LIBELL OF
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