Consider an US-based foundation with spending rate of 3 percent and cost of earning investment returns has averaged 50 basis points annually. The asset allocation and the set of capital market expectations are shown below.  The expected long-term inflation rate is 2.5 percent. Table 3 Capital Market Expectations Asset class E(ri) si Correlations A B C D A US equities 9% 18% 1       B Ex-US equities 8 14 0.60 1     C US bonds 4 8 0.30 0.20 1   D Real estate 1 7 0.50 0.40 0.10 1    Table 4 Corner portfolios Portfolio E(rp) sp Sp wi A B C D 1 9.0% 18.0% 0.39 100% 0% 0% 0% 2 7.9 16.7 0.35 65 35 0 0 3 7.5 15.4 0.38 37 53 0 10 4 5.0 12.4 0.36 0 25 43 32 5 4.6 10.1 0.32 0 11 55 34 What is the relative weight, w, of the two corner portfolios identified in the previous question in the desired SAA?

Consider the following end of year prices, rounded to a dollar of  DGT (SPDR Global Dow) – 150 multinational blue-chip companies, and IWO (iShares Russell 2000 Growth) – small-capitalization growth sector of the U.S. equity market.Answer the questions below using the log-returns. Whenever appropriate, assume that the degree of integration of US market is 0.70, the correlation of US market with the global market is 0.45, there is no liquidity premium, and the Sharpe ratio of the global market is 0.30. Risk free rate is 2%. Year DGT IWO 2010 60   87 2011 54   91 2012 59 102 2013 69 139  What is the expected return on IWO?

Which is not a psychological trap in setting the capital market expectations?

Referring to the the Q-IPS Stephenson’s tax and liquidity constraints can be best characterized as

Consider the following end of year prices, rounded to a dollar of  DGT (SPDR Global Dow) – 150 multinational blue-chip companies, and IWO (iShares Russell 2000 Growth) – small-capitalization growth sector of the U.S. equity market.Answer the questions below using the log-returns. Whenever appropriate, assume that the degree of integration of US market is 0.70, the correlation of US market with the global market is 0.45, there is no liquidity premium, and the Sharpe ratio of the global market is 0.30. Risk free rate is 2%. Year DGT IWO 2010 60   87 2011 54   91 2012 59 102 2013 69 139 What is the sample covariance between the returns on DGT and IWO?

Quantitative Equity Design (QED) is a quantitative equity fund manager. QED forecasts monthly alphas for stocks in its 3,000 stock universe. The number of independent forecasts made on a monthly basis is 25. If the model employed by QED has an information coefficient of 0.15, the information ratio for QED is closest to:

Harold and Kumar are employees with White Castle Advisors. White Castle offers independent investment advice to institutional clients throughout the U.S and Canada. Harold’s and Kumar’s primary responsibility is evaluating the performance of portfolio managers that White Castle’s clients are considering. When necessary, they create customized benchmarks and use the Sharpe, Treynor, ex-post alpha, and M2 measures. These measures adjust a manager’s return for the risk undertaken, where risk is defined as total using the standard deviation or as systematic using beta. Harold and Kumar are preparing an analysis of the performance of the Alpha and Omega Mutual funds. Alpha and Omega are being considered by the endowment of Citi University as an addition to its portfolio. Chuck Prince is the portfolio manager for the Citi endowment. Citi’s current endowment is well diversified, consisting of U.S. and international stocks and bonds, hedge funds, real estate investment trusts, and a small cash position necessary to meet next Quarter’s expenses. In  addition  to  the  Alpha  and  Omega Mutual funds under consideration, Prince is also considering adding  individual  bonds  to  Citi’s  portfolio because individual bonds have become  increasingly  more  liquid.  Harold  believes  that  municipal  bonds would be a good consideration because their  after-tax  return  is  often  higher  than  that  available  from corporate bonds. Prince informs them that Citi  is  also  considering  adding  BBB  rated  bonds  as  a  small portion of their portfolio, but Kumar  believes  that  this  is  probably  not  a  good  idea  because,  although  he has not reviewed Citi’s  investment  policy  statement,  endowments  typically  have  a  low  ability  and willingness to take risk because the endowment must meet the  spending  needs  created  by  university operating budgets, student scholarships, and faculty salaries. The most recent risk and return measures for both Alpha and Omega are shown below. The minimum acceptable return (MAR) for Citi is the 5.0% spending rate on the endowment, which the endowment has determined using a geometric spending rule. The T-bill return over the same fiscal year was 4.5%. The return on the Wilshire-5000 was used as the market index. The Wilshire 5000 index had a return of 10% with a standard deviation of 21% and a beta of 1.0. Analyzing the results of their performance evaluation, Harold notices that the results demonstrate that the Alpha portfolio is less diversified than the Omega portfolio. Kumar adds that the Omega portfolio would be a better addition to the Citi portfolio than the Alpha fund.                                                                                                  Alpha                Omega                                                   Return                                     16.5%                15.9%                                                   Std. Deviation                         38.1%                35.6%                                                   Beta                                          0.8                    1.25                                                   Downside Deviation               14.9%                14.0%Using the values of the performance measures calculated above to evaluate the statements of Harold and Kumar concerning the diversification and addition of the Alpha and Omega funds to Citi’s portfolio.

How much does a client need to save each year if the client currently has $50,000 in his RRSP, expects to earn a compound annual return of 5%, and  needs  to have  a RRSP value of $600,000  in 20 years?

A life insurance company has a stock portfolio with a current market value of $80 million and a price change standard deviation of 15% per year. Assuming that the price change follows a normal distribution with zero expected value, what is the 95% value at risk during the next year?Table 1 Critical values for VaR calculations. α zα 10% 1.282 5 1.645 1 2.326

Harold and Kumar are employees with White Castle Advisors. White Castle offers independent investment advice to institutional clients throughout the U.S and Canada. Harold’s and Kumar’s primary responsibility is evaluating the performance of portfolio managers that White Castle’s clients are considering. When necessary, they create customized benchmarks and use the Sharpe, Treynor, ex-post alpha, and M2 measures. These measures adjust a manager’s return for the risk undertaken, where risk is defined as total using the standard deviation or as systematic using beta. Harold and Kumar are preparing an analysis of the performance of the Alpha and Omega Mutual funds. Alpha and Omega are being considered by the endowment of Citi University as an addition to its portfolio. Chuck Prince is the portfolio manager for the Citi endowment. Citi’s current endowment is well diversified, consisting of U.S. and international stocks and bonds, hedge funds, real estate investment trusts, and a small cash position necessary to meet next Quarter’s expenses. In  addition  to  the  Alpha  and  Omega Mutual funds under consideration, Prince is also considering adding  individual  bonds  to  Citi’s  portfolio because individual bonds have become  increasingly  more  liquid.  Harold  believes  that  municipal  bonds would be a good consideration because their  after-tax  return  is  often  higher  than  that  available  from corporate bonds. Prince informs them that Citi  is  also  considering  adding  BBB  rated  bonds  as  a  small portion of their portfolio, but Kumar  believes  that  this  is  probably  not  a  good  idea  because,  although  he has not reviewed Citi’s  investment  policy  statement,  endowments  typically  have  a  low  ability  and willingness to take risk because the endowment must meet the  spending  needs  created  by  university operating budgets, student scholarships, and faculty salaries. The most recent risk and return measures for both Alpha and Omega are shown below. The minimum acceptable return (MAR) for Citi is the 5.0% spending rate on the endowment, which the endowment has determined using a geometric spending rule. The T-bill return over the same fiscal year was 4.5%. The return on the Wilshire-5000 was used as the market index. The Wilshire 5000 index had a return of 10% with a standard deviation of 21% and a beta of 1.0. Analyzing the results of their performance evaluation, Harold notices that the results demonstrate that the Alpha portfolio is less diversified than the Omega portfolio. Kumar adds that the Omega portfolio would be a better addition to the Citi portfolio than the Alpha fund.                                                                                                  Alpha                Omega                                                   Return                                     16.5%                15.9%                                                   Std. Deviation                         38.1%                35.6%                                                   Beta                                          0.8                    1.25                                                   Downside Deviation               14.9%                14.0%Which of the two funds is showing a better performance using M-squared measure?