Portfolio Management

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‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment-2
FIN 424 – Portfolio Management
Due Date: 11/11/2023 (End of Week-12) @ 23:59
Course Name: Portfolio Management
Student’s Name:
Course Code: FIN 424
Student’s ID Number:
Semester: First
CRN: 12023
Academic Year: 2023-2024
For Instructor’s Use only
Instructor’s Name: Dr Jyoti Agarwal
Students’ Grade: Marks Obtained / Out of 10 Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY








The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented; marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.
Assignment Questions: (Marks- 10)
Q.1. Compare the relative liquidity characteristics of direct versus indirect
investment in real estate. Discuss three factors that affect the liquidity of
both forms of investment. (02)
Q.2 The manager of an investment-grade fixed-income fund is concerned
about the possibility of a rating downgrade of Alpha Motors, Inc. The fund’s
holding in this company consists of 5,000 bonds with a par value of $1,000
each. The fund manager doesn’t want to liquidate the holdings in this bond,
and instead decides to purchase a binary credit put option on the bond of Alpha
Motors. This option expires in six months and pays the option buyer if the
rating of Alpha Motors’ bond on expiration date is below investment grade
(Standard & Poor’s/Moody’s BB/Ba or lower.) The payoff, if any, is the
difference between the strike price and the value of the bond at expiration.
The fund paid a premium of $130,000 to purchase the option on 5,000 bonds.
A. What would be the payoff and the profit if the rating of Alpha Motors’
bond on expiration date is below investment grade and the value of the bond
is $870?
B What would be the payoff and the profit if the rating of Alpha Motors’ bond
on expiration date is investment grade and the value of the bond is $980? (02)
Q.3.Discuss the rationales for passive, active, and semi active (enhanced
index) equity investment approaches and distinguish among those
approaches with respect to expected active return and tracking risk. (02)
Q.4 As CIO of The Annette Hansen Charitable Foundation (TAHCF), a
U.S.-based foundation supporting medical research, Maryann Dunn will
present to the trustees a recommendation that they revise the foundation’s
strategic asset allocation to include direct investment in real estate
• The Foundation’s current portfolio and strategic asset allocation is
allocated 50 percent common stocks/50 percent bonds. Twelve percent of
the common stock allocation (six percent of the total portfolio) is invested in
REITs.
• The risk-free rate of interest is 3.5 percent.
• The forecasted inflation rate is 3 percent.
• TAHCF’s overall investment objective is to preserve the real (inflationadjusted) value of assets after spending. Its spending rate is 5 percent of 12month average asset value.
• TAHCF’s cost of earning investment returns is 20 basis points per year.
• Exhibit -1 shows Dunn’s expectations for the current and proposed asset
allocations. Dunn’s expectations for direct investment are based on
unsmoothed NCREIF historical data adjusted for her current economic
outlook
Forecast Data
Dunn expects opposition to her proposal to come from a trustee, Bob
Enicar. Enicar has stated at a prior board meeting: ‘‘TAHCF’s allocation to
equity includes substantial investment in REITs. REITs typically provide risk
diversification comparable to that of direct equity investments for a
balanced portfolio of stocks and bonds while offering substantially more
liquidity.’’
A. State and explain two financial justifications that Hansen could present
for revising TAHCF’s asset allocation to 45/45/10 stocks/bonds/U.S. direct
real estate investment.
B. State and explain one disadvantage of the proposed revised strategic
asset allocation.
C. Contrast unsmoothed and smoothedNCREIF indices and justify Hansen’s
choice of the unsmoothed NCREIF Index in formulating expectations for
direct real estate investment.
D. Draft a response to Enicar’s critique.

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