A00128

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Calculators may be used in this examination but must not be used to store text.
Calculators with the ability to store text should have their memories deleted prior
to the start of the examination.

Birmingham Business School

M Sc Investments
Fund Management
07 02868
Summer 2014
Time Allowed: 2 hours
Answer THREE questions, including ONE question from EACH SECTION
All questions carry equal marks. The allocation of marks within each question
is stated in the right-hand margin.

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Part A
You must answer at least one question
from this section
1.

(a)

(b)

Economic models can explain a lot about the performance in financial

markets but a gap remains between the predictions of standard
economic theory and the behaviour of real markets. Emotional and
psychology factors have been shown to influence investor decisions and
which have led to the development of Behavioural finance.
Critically discuss the contribution behavioural finance has made to
investor decision-making.

[50]

Discuss the strengths and weaknesses of the simple Markowitz portfolio

optimisation.

[50]

Total marks [100]

2.

(a)

(b)

Stock screening is the ranking of stocks within the investment universe

such that they are separated easily into those that are more favourable
and those that are less favourable according to the views of the portfolio
manager.
Quantitative Equity Portfolio Management, Chincarini and Kim, McGrawHill 2006

(i) Discuss the approaches that might be taken to stock screening.

[20]

(ii) Provide an example of the steps involved in a well-known

screening strategy.

[20]

Compare and contrast active and passive management investment

strategies. How might both strategies be employed by a fund manager?
[60]
Total marks [100]

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3.

Discuss the strengths and weaknesses of the various approaches that

have used to evaluate the performance of a fund manager.
[100]
Total marks [100]

A00128

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Part B
You must answer at least one question
From this section

4.

Assume you are a fund manager holding a $50 million portfolio of large
company stocks that are listed on the New York Stock Exchange.
Assume further your portfolio has a beta value of 1.2. You are
concerned that the troubles in the Ukraine might result in a sharp, but
temporary fall in the value of your portfolio. You decide not to sell any
stocks because of transaction costs, loss of dividends and low interest
rates on safe assets. Instead you plan to hedge your portfolio using S&P
stock index futures contracts with a maturity of three months.
The current S&P 500 index is 1900. The annualised index dividend yield
is 2 per cent and the annualised 3-month interest rate is 1 per cent.
Assume at the end of the three months the S&P 500 index has fallen to
1710 on the day the futures contracts expire.

(i) What is the result of your hedge? (Each S&P index point change is
worth $250).

[50]

(ii) Discuss the assumptions that underlie the hedging strategy

used in (i) above
[30]
(iii) Explain how you would you temporarily change an equity/bond
allocation from a 75/25 per cent weighting to one of 60 per cent
equity and 40 per cent bonds without selling stocks or bonds.

[20]

Total marks [100]

5.
(a)

You are required to immunise a bond portfolio using the bond information given
below so as to meet the following liabilities: 3m, 5m and 8m at times 2, 3
and 4 years from now respectively. The current yield curve can be assumed to
be flat at an interest rate of 4 per cent.
Bond X matures in 2 year and pays interest of 6 per cent annually. Bond B pays
interest of 5 per cent annually and matures in six years. The market price of
bond B is 96.69 and its duration is 4.40. Comment on any reservations you
might have about the immunisation approach you have used.

(b)

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(b)

Assume at the end of year 2, immediately after paying the first liability of
3m,the interest rate rises to 5 per cent. Does the bond portfolio still meet
Redingtons immunisation conditions? If not, why not? Explain.
Total

[40]

Marks

[100]

In August, 2013 Jenny Jones, a US fund manager, invested $20million in a well

diversified portfolio of German equities that essentially tracks the DAX Index in
the belief that the German stock market would increase significantly over the
year to August 2014. At the time she invested the spot market bid ask
exchange rates were $0.752 and $0.754 per Euro respectively and the DAX
was 8400. It is now the mid-March 2014 and the DAX has risen to 9300, and
bid ask exchange rates are $ 0.734 and $0.736 per Euro respectively.

6.

Jenny is concerned that the Ukraine development could have an adverse impact
particularly on the DAX more so than on the Euro-Sterling exchange rate and
plans to hedge she has decided to hedge her DAX exposure using DAX stock
index futures contracts with an expiry date the coincides with her plans to
terminate her investment in Germany and return the money to the UK. Assume
the futures contract price is 9315 and that the dividend yield on the portfolio and
DAX is zero, and the index multiplier is 25 Euros respectively.
Assume further that the size of her hedge is based on 15 million euros, that the
DAX Index when she terminates her investment will be 9000 and the bid ask
exchanges are $0.738 and $0.740 per euro respectively

(i)

What is the return on investment to mid-March in terms of the

German market and exchange rate?

(ii)

What will be the total return on Jennys hedged position on

investment in terms of Market and currency returns?

[40]

[60]
Total Marks [100]

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End of exam