Need help with the following:

 

Chp.8

 

7. You have recently been appointed chief investment officer of a major charitable foundation. Its large endowment fund is currently invested in a broadly diversified portfolio of stocks (60 percent) and bonds (40 percent). The foundation’s board of trustees is a group of prominent individuals whose knowledge of modern investment theory and practice is superficial. You decide a discussion of basic investment principles would be helpful.

a. Explain the concepts of specific risk, systematic risk, variance, covariance, standard deviation, and beta as they relate to investment management.

You believe that the addition of other asset classes to the endowment portfolio would improve the portfolio by reducing risk and enhancing return. You are aware that depressed conditions in U.S. real estate markets are providing opportunities for property acquisition at levels of expected return that are unusually high by historical standards.

You believe that an investment in U.S. real estate would be both appropriate and timely, and have decided to recommend a 20 percent position be established with funds taken equally from stocks and bonds.

Preliminary discussions revealed that several trustees believe real estate is too risky to include in the portfolio. The board chairman, however, has scheduled a special meeting for further discussion of the matter and has asked you to provide background information that will clarify the risk issue.

To assist you, the following expectational data have been developed:

                                                                                                                               CORRELATION MATRIX

Asset Class         Return        Standard Deviation   U.S. Stocks  U.S. Bonds   U.S. Real Estate   U.S. T-Bills

U.S. Stocks            12.0%                       21.0%                1.00

U.S. Bonds              8.0                          10.5                    0.14              1.00

U.S. Real Estate       12.0                       9.0                   −0.04            −0.03                   1.00

U.S. Treasury Bills  4.0                           0.0                    −0.05            −0.03                   0.25                1.00

 

b. Explain the effect on both portfolio risk and return that would result from the addition

   of U.S. real estate. Include in your answer two reasons for any change you expect

   in portfolio risk. (Note: It is not necessary to compute expected risk and return.)

c. Your understanding of capital market theory causes you to doubt the validity of the

   expected return and risk for U.S. real estate. Justify your skepticism.

 

 

Chp. 9

6. It is widely believed that changes in certain macroeconomic variables may directly affect

performance of an equity portfolio. As the chief investment officer of a hedge fund

employing a global macro-oriented investment strategy, you often consider how various

macroeconomic events might impact your security selection decisions and portfolio

performance. Briefly explain how each of the following economic factors would affect

portfolio risk and return: (a) industrial production, (b) inflation, (c) risk premia, (d) term

structure, (e) aggregate consumption, and (f) oil prices.

 

9. Consider the following questions related to empirical tests of the APT:

a. Briefly discuss one study that does not support the APT. Briefly discuss a study that does

support the APT. Which position seems more plausible?

b. Briefly discuss why Shanken contends that the APT is not testable. What is the

contrary view to Shanken’s position?