FINC 3008: Investment Management

Presentation Questions
Week 2
1. If risk and return are related, provide a detailed explanation as to why unlisted property assets
offer higher returns than equivalent property assets that are listed on the stock market?
2. If property prices rarely change, why is property regarded as a risky growth asset?
3. What compound rate of return is required to grow $100bn into $297.8bn over 15 years and 165
days?
4. What continuously compound rate of return is required to turn $100bn into $297.8bn in 17
years and 2 months?
5. What are the compound rates of return for the three series below?

Period (years) Series 1 (%) Series 2 (%) Series 3 (%)

1 12.50 11.50 10.50
2 -2.45 -3.56 -4.56
3 -7.11 -8.94 -6.33
4 38.01 43.65 52.10
5 15.46 22.12 17.84
6 -5.99 -1.04 -5.88
7 2.66 -0.26 -1.07
8 19.88 23.66 20.00
9 -3.08 1.10 2.22
10 15.41 14.54 13.64

Week 3
1. Explain why, if the investment objective is to generate the highest return possible, any investor
would hold a diversified portfolio of assets which held losers as well as winners.
2. Explain why an Australian, saving for their retirement, would hold shares in European and Asian
companies when their expenses in retirement are going to be sourced within Australia
3. Explain how a security would migrate between the primary and secondary markets
4. Determine the after-tax dividend for a superannuation fund that pays 15% tax on its income on
its 110,500 shareholding in a company that earned $12.64, has a franking credit of 68%, pays tax
at 30% and has a dividend payout ratio of 71%.
5. Determine the correlation between two assets that, according to scenario analysis, are predicted
to have the outcomes provided in the table below.
 Scenario Asset A Asset B Probability
A 7.25% -17.50% 22%
B -5.25% 8.97% 13%
C 16.11% 12.85% 40%
D 25.95% 25.77% 25%

Week 4 Chap 6

1. Why isn’t it possible for a market to be perfectly efficient? What efficiency conditions are
unrealistic?
2. Describe an experiment that would be conducted to determine if the market was semi-strong
efficient p.188
3. Summarise three studies (covered in class) that explore the performance of retail investors
4. What biases do the following quotes represent. Justify your answers. 178
a. The trend is your friend confirmation bias
b. I predicted the corona recession and the ensuing rally hindsight bias
c. I always say that BHP is the best performing stock on the market because it never
disappoints belief perseverance
d. I never lose overconfidence or
e. It’s fallen 90%, time to double up escalation bias
5. Explain the joint test problem in layman’s terms

Week 5
1. Outline the 6-step investment process. Which step is the most important in the process? Justify
your answer.
2. Calculate the expected return and standard deviation of the following portfolio.

Assets A B C D E F
Weights (%) 15 17 18 15 18 17
Return (%) 8 12 15 18 22 35
St Dev (%) 12 21 27 36 45 57
Correlation
A 1.00 -0.22 0.52 0.12 0.87 0.92
B -0.22 1.00 0.75 0.34 -0.04 0.77
C 0.52 0.75 1.00 0.88 0.97 0.99
D 0.12 0.34 0.88 1.00 0.89 0.94
E 0.87 -0.04 0.97 0.89 1.00 0.99
F 0.92 0.77 0.99 0.94 0.99 1.00

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Week 6
1. Explain the shape of the yield curve if the cash rate is 3.15%, the 1 year bond has a yield of
3.45%. the 7 year bond has a yield of 4.13% and the 20 year bond has a yield of 4.98%.
2. If there is to be a parallel increase in yields of 0.25%, what would you recommend investors
should do to capitalise on this move. Justify your answer
3. On 13 February 2024, price the $25.75m face value 2.65% coupon bond maturing on 12 June
2027 which currently is trading at a yield of 3.78%pa
4. On 4 January 2024, price the 2 November 2048 bond which has a face value of $12.47m, a
coupon of 2.450% that is trading at a yield of 3.925%pa
5. Determine the annualised return, including all its components, from the following bond
transaction:
a. on 27 April 2023 you purchase $12.35m face value bond maturing on 11 May 2030
which has a 2.70% coupon that is trading at a yield of 3.025%
b. You sell this bond on 16 May 2023 at a yield of 3.195%

Week 7
1. Explain the revolutionary change that Modern Portfolio Theory brought to investment
management
2. Explain what is meant by, and the shortcomings of, the efficient frontier
3. Calculate the amount of Jensen’s alpha from the following portfolio:
a. the market has a standard deviation of 18.76% and a return of 9.35%
b. The risk free rate is 3.65%
c. The standard deviation of the portfolio is 20.24%, its correlation with the market is 0.81,
and its performance over the last 12 months was 9.04%
4. Calculate the amount of Carhart’s alpha for the portfolio in question 3 which has exposure to the
additional factors of:
a. 27.03% exposure to the value risk factor
b. The value risk factor has a premium of 4.87%
c. -39.02% exposure to the size risk factor
d. The size risk factor has a premium of 2.15%
e. 4.91% exposure to the momentum risk factor
f. The momentum risk factor has a premium of 42.77%
5. For several years leading up to 2019, Magellan’s High Conviction Fund was a stellar performer,
holding fast growing mega-cap technology stocks of Meta, Tesla, Apple, and Alphabet (the
holding company of Google). Yet between 2020 and 2022 this fund underperformed the market
significantly with many clients terminating their relationship with Magellan. From the
perspectives of the material covered in this class - week 6 of FINC3008, Investment
Management (ie do not copy anything published on the internet about the performance of this
fund because it is incorrect) - explain the performance of the Magellan High Conviction Fund.

Week 10
1. Calculate the price of a share where the dividend just paid was $7.93, the historical growth rate
of the stock is 1.98% and the cost of capital for the stock is 16.08%

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2. Determine the cost of capital for a stock currently trading at $45.97, when the dividend it paid
per share three months ago was $3.99 and the dividend it paid nine months ago per share was
$3.92
3. Calculate the fair price for a stock which has the following characteristics:
a. Shares on issue: 498,500,000
b. Earnings per share: $8.812
c. Dividend per share: $6.985
d. Value of equity in its accounts: $23,450,000,000
e. Standard deviation of the stock is 20.19%
f. Standard deviation and return of the market are 17.94%, 14.65% respectively
g. Correlation of the stock with the market is 0.96
h. Risk free rate is 5.25%
4. Of the three projects listed below, which one should the Finance Director recommend, and why,
given the company has a discount rate of 18.15% (show working)

Year Project A Project B Project C

0 -16,000,000 -16,500,000 -10,800,000
1 1,957,000 1,024,000 28,000
2 2,672,000 5,236,000 2,091,000
3 4,872,000 7,007,000 4,396,000
4 8,901,000 8,229,000 6,555,000
5 12,259,000 8,777,000 8,368,000

Week 11

Download the Bega Cheese annual report for your respective group and complete the table below

Item 2022 (groups 1,3) 2021 (groups 2,4)

Using 2022 annual Using 2021 annual
report report
Current ratio
Quick ratio
Cash ratio
Debt to equity
Debt to assets
Leverage ratio
Interest coverage ratio
Gross profit margin
Operating profit
margin
Net profit margin
Return on assets
Return on equity
Return in invested
capital
Total Asset Turnover

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 Fixed asset turnover
Tangible fixed asset
turnover
Equity turnover
Receivable turnover
Days Receivable
Inventory turnover
Payables turnover
Days payable

Week 12
1. A company’s most recent earnings per share was $12.84 and it paid a dividend of $7.02 per
share. You expect the company to increase its earnings per share over the next year by 1.34%
and to maintain its payout ratio. Your target price for this share in 12 months is $97.35. If your
required rate of return is 12.50%, how much would you be willing to pay for them today?

2. If, however, rather than planning to hold onto you position in the above company for 12
months, you have an indefinite holding period. What price would you be willing to purchase this
share?

3. Shareholders in a company enjoy a payout ratio of 72.50% and a return on equity of 10.25%.
Over the next 12 months this company is expected to generate $4.869bn of earnings on its 745m
shares. If your required return on investment is 14.25%, what price would you be willing to pay
for this share today?

4. A company yesterday paid its annual dividend of $3.75 and maintained its historic 2.45 per cent
annual rate of growth. You plan to purchase the shares today because you believe that the
dividend growth rate will increase to 3.25 per cent for the next three years and the share price
will be $63 per share at that point in time:

(a) How much should you be willing to pay for these shares if you require a 13.25 per cent
return?

(b) What is the maximum price you should be willing to pay for these shares if you believe
that a 2.75 per cent growth rate can be maintained indefinitely and you require a 11.25
per cent return?

5. Using Friday night’s closing share price (available on ASX.com.au), what are the following trailing
ratios for Bega Cheese using historical values from the 2022 financial statements for the
company NOT THE ASX website:

(a) Price / Book ratio

(b) Price / Earnings

(c) Price / Sales

(d) Price / cash flow

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Week 13
Determine the alpha and information ratio for the portfolios in the table below.

Period (years) Portfolio A Portfolio B Portfolio C Portfolio D Benchmark

(%) (%) (%) (%) (%)
0
1 22.82 21.91 24.89 26.98 20.12
2 -23.15 -22.03 -20.52 -29.66 -23.89
3 2.52 2.86 -2.53 12.00 4.46
4 -14.40 -13.11 -13.19 -9.50 -13.62
5 -29.04 -31.47 -27.44 -37.53 -31.48
6 8.48 9.01 12.66 11.63 6.03
7 26.17 24.02 26.96 29.05 25.40
8 -31.65 -35.11 -37.55 -38.62 -34.04
9 21.47 23.12 22.12 25.41 21.85
10 64.69 64.04 66.39 70.32 63.02

Week 14
1. Determine the swap, showing the cashflows, and the resultant benefit for each party from the
situation described below:
a. Party A can borrow fixed at 15.65% and floating at BBSW + 4.55%
b. Party B can borrow fixed at 12.25% and floating at BBSW + 2.85%
c. An investment bank which facilitates the swap is paid 0.125% for each leg
2. Determine the swap, showing the cashflows, and the resultant benefit for each party from the
situation described below:
a. Party A can borrow fixed at 13.69% and floating at BBSW + 1.25%
b. Party B can borrow fixed at 15.45% and floating at BBSW + 1.25%
c. An investment bank which facilitates the swap is paid 0.085% for each leg

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