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Organizational Behavior 1st Edition OpenStax - Solutions
22. What is the difference between a repo transaction and a reverse repo transaction?
21. Suppose that an investor has $477,300 to invest and is considering the purchase of a 7%coupon 15.5-year Treasury security. The price is 95.46, there is no accrued interest, and the yield to maturity is 7.5%.a. How much in par value can this investor purchase?b. If the investor purchases this
20. The trustees of the Order.com pension fund are reviewing with a consultant the annual performance of the fund’s three external bondmanagers (Rollins Group,M&MCompany,and Beta Associates). The benchmark for the external managers is the Lehman U.S.Aggregate Bond Index. The consultant provided a
19. A trustee of a pension fund discussed with the fund’s consultant various ways to evaluate the performance of the fund’s external managers. The trustee indicated that he knew of various measures such as the Sharpe measure, Jensen measure, and Treynor measure. The trustee asked the consultant
18. A bond portfolio manager whose benchmark is a broad-based bond market index believes that he can enhance return by using credit analysis to identify corporate bond issues that will be upgraded. How can this portfolio manager use a multi-factor risk model in conjunction with credit analysis to
17. Jason Lang is a portfolio manager for Asset Optimizers, a firm specializing in the management of fixed income portfolios. The firm uses a multi-factor risk model in constructing and rebalancing portfolios under its management. The firm has received a $400 million fixed income portfolio from a
16. Kathy Radner, a portfolio manager at Asset Protector Management, made a presentation to a client. The purpose of the presentation was to provide an overview of the firm’s approach to managing fixed income portfolios against a client designated bond market index. In the presentation she
15. George Owens is responsible for marketing for an asset management company. In a meeting with a potential pension client, Linda Regan of the Marshall Furniture Company, Mr. Owens distributed a brochure describing the philosophy of the firm’s fixed-income portfolio management team and the
14. Mr. Lenox is a portfolio manager who owns $15 million par value of bond ABC. The market value of the bond is $13 million and the effective dollar duration for a 100 basis point change in rates is $1.2 million. Mr. Lenox is considering a swap out of bond ABC and into bond XYZ. The market price
13. In order to neutralize two positions against a small parallel shift in interest rates, the effective dollar durations of the two positions in a trade must be matched. It is not sufficient to match the effective durations of the two positions. Explain.
12. Suppose that, in June 1998, a portfolio manager was considering the purchase of either a 3-year average life nonagency mortgage-backed security or a home equity loan (HEL)issue. The nonagency MBS was a RAST 1998-A5 and the HEL issue was an Amresco 1998-2. Summary information about these two
11. Typically, in the collateralized mortgage obligation market, the option-adjusted spread(OAS) on planned amortization class tranches (PACs) increases with the average life of the tranche. That is, the OAS for short average life PACs trades tighter (i.e., with a lower spread) to the collateral
10. ‘‘The problem with total return analysis is (1) that it assumes the option-adjusted spread does not change and (2) that the yield curve is flat.’’ Explain why you agree or disagree with this statement.
9. Explain why a good valuation model is essential in order to perform total return analysis?
8. An investor is considering the purchase of an option-free high-yield corporate bond with a coupon rate of 10% and 9 years remaining to maturity. The price of the bond is 95.7420 and the yield to maturity is 10.75%. Assume that the Treasury yield curve is flat at 7.5%and that the credit spread
7. An investor is considering the purchase of an option-free corporate bond with a coupon rate of 7.25% and 15 years remaining to maturity. The price of the bond is 106.1301 and the yield to maturity is 6.6%. Assume that the Treasury yield curve is flat at 6% and that the credit spread for this
6. Comment on the following statement: ‘‘Interest rate forecasting is important only for helping a manager decide on the duration of a portfolio relative to that of a benchmark index.’’
5.a. What is an inter-sector allocation strategy?b. What is an intra-sector allocation strategy?c. Why would a manager employ an inter-sector or an intra-sector allocation strategy?
4. What are the logistical problems associated with implementing a pure bond indexing strategy?
3. TheCar Washer National LaborUnion has assets of $300 million.Currently, $200 million is allocated to bonds and $100 million to equities. The funds allocated to equities are indexed to the S&P 500 but the funds allocated to bonds are actively managed. You have been retained as a consultant to the
2. Why is the minor risk factor mismatches approach to portfolio management considered an enhanced indexing strategy?
1. What are the characteristics that distinguish bond indexmanagement (pure and enhanced)from active bond management?
• calculate the duration of a leveraged portfolio.
• distinguish between special (or hot) collateral and general collateral.
• explain the factors that affect the repo rate.
• discuss the credit risks associated with a repurchase agreement.
• compute the dollar interest of a repurchase agreement.
• explain a repurchase agreement.
• identify the advantages and disadvantages of leverage.
• explain leverage.
• explain the limitations of single-index performance evaluation measures.
• explain the objectives of performance attribution analysis.
• explain how multi-factor risk models can be used to construct a portfolio that is managed against a benchmark index.
• show how to use scenario analysis to evaluate the potential performance of a portfolio versus a benchmark index.
• explain why total return analysis and scenario analysis should be used to assess the potential performance of a trade before the trade is implemented.
• explain how interest rate risk is controlled in a trade.
• describe scenario analysis.
• compute the total return for a bond over a specified investment horizon.
• describe interest rate expectations strategies, yield curve strategies, and inter- and intra-sector allocation strategies.
• describe the methodologies used to replicate a benchmark index.
• discuss the logistical problems with indexing.
• explain the reasons for indexing.
23.a. What are the components of non-systematic risk in a multi-factor risk model?b. Why does non-systematic risk occur?• describe the general principles for each of the following strategies: pure bond index matching, enhanced indexing/matching risk factors, enhanced indexing/minor risk factor
22. Suppose that the predicted tracking error for a portfolio due to non-term structure risk is as follows:Tracking error due to Predicted tracking error sector risk 40 basis points quality risk 15 basis points optionality risk 3 basis points coupon risk 2 basis points MBS sector risk 12 basis
21. In a multi-factor risk model, what is term structure risk?
20. Luke Zavin, a pension fund trustee, reviewed a multi-factor risk report of the fund’s portfolio provided by a pension consultant. The report states:‘‘Our analysis of your fund, managed by ABC AssetManagers, indicates that the predicted (forward looking) tracking error is 94.87 basis
19. What is residual risk in a multi-factor risk model?
18. In a multi-factor risk model, the predicted tracking error is classified into two general risks. What are these two general risks?
17. When assessing the risk exposure of a portfolio relative to a benchmark index why is it important to analyze the allocation within the MBS subsectors in terms of coupon?
16. Tom Swensen reviewed information about his portfolio and a benchmark index provided in a report. The information was provided by a new analytical system that Mr. Swensen’s firm has purchased to assist the firm’s portfolio managers. Unfortunately, some of the reports produced by the
15. What is optionality risk?
14. Alfred Leone, an assistant portfolio manager at Alpha Performers Asset Management, is preparing a memo for a corporate pension sponsor, Code Breakers Inc. The senior portfolio manager for the account is James Ingram. On January 4, 2002, Mr. Leone drafts the following memo on behalf of Mr.
13. Suppose that a portfolio manager uses as his benchmark the bond market indexwhose characteristics were described in the previous question. Assume further that the characteristics of the portfolio are as follows:Sector Weight (%) Effective duration Spread duration Treasury 15.00 4.60 —Agencies
12. Suppose that a bond market index consists of five sectors and that the effective duration and spread duration (where spread is based on OAS) for each sector are as shown below:Sector Weight (%) Effective duration Spread duration Treasury 38.00 4.60 —Agencies 7.00 4.10 3.90 Mortgages 31.00
11.a. What is spread duration?b. Why are there different types of spread duration measures?c. Suppose that, using an analytical system from a commercial vendor, a portfolio manager finds that the spread duration of bond K is 2. Further suppose that the portfolio manager asks a dealer for the spread
10.a. What is the duration for the following portfolio?Bond Market value Duration 1 $10 million 7.2 2 8 million 6.1 3 4 million 1.1 4 12 million 4.8b. What is the contribution of bond 1 to portfolio duration?
9. In assessing historical performance of a portfolio, a portfolio manager should use forward looking tracking error. Comment.
8. What is the problem with using the actual tracking error of a portfolio relative to a benchmark index to assess the potential future tracking error of the portfolio.
7. Suppose that the actual returns for a portfolio and the returns on the benchmark index, the Salomon Smith Barney Broad Investment Grade Index, are as shown below. Calculate the actual tracking error for this portfolio.Month in 2001 Portfolio return (%) Benchmark SSB BIG return (%)Jan 0.75 1.65
6.a. What are the computational difficulties encountered when using the standard deviation as a measure of risk for a bond portfolio?b. How does a multi-factor risk model attempt to overcome the computational difficulties discussed in part (a).
5.a. What is the relationship between shortfall risk and risk of loss?b. What are the limitations of the shortfall risk measure?
4.a. Why is the semivariance a better measure of risk when the return distribution is not normally distributed?b. Why is the semivariance not commonly used in bond portfolio management even when a return distribution is not normally distributed?
3. The board of directors of a bank has retained you to advise the board regarding the risk of the strategies pursued by its portfolio managers. At the current time, the board is using the standard deviation of the return of the portfolio as a measure of risk. Several board members do not feel that
2. A trustee of a pension fund is discussing with one of the fund’s portfolio managers a consultant’s report regarding the probabilities that the fund will realize various returns for its bond portfolio. The trustee questions the portfolio manager as to the continual emphasis in the report on
1. Mr. Felder is a consultant to the Hole Punchers pension fund. Suppose that the bond market index selected by the trustees is a customized index, which the trustees refer to as the ‘‘HP Index.’’ On January 1, the trustees asked Mr. Felder to assess the likelihood that, if its bond
• explain the role of tracking error in a multifactor risk model.
• discuss the different types of risk in a multifactor risk model.
• describe a multi-factor risk model and how it is used to quantify the risk exposure of a portfolio and a benchmark index.
• describe the types of prepayment risk associated with investing inmortgage-backed securities and how these risks can be measured.
• explain how call and prepayment risk can be measured.
• describe sector risk and how it can be quantified.
• compare the spread duration exposure of a portfolio with the spread duration of a benchmark index.
• identify the different types of spread duration measures.
• define spread duration.
• describe yield curve risk and how it can be quantified.
• compute the contribution to portfolio duration and the contribution to benchmark index duration.
• compute the duration of a portfolio and a bond market index.
• explain the difference between actual and predicted tracking error.
• describe tracking error.
• explain why it is important to compare the risk profile of a portfolio to the risk profile of a bond market index.
• discuss the alternative measures of risk that focus on downside risk—target semivariance and shortfall risk—and the difficulties that arise when using these risk measures for bonds.
• explain why the standard deviation is used as a measure of risk and explain its limitations as a measure of risk for bonds.
16.a. What is the difference between performancemeasurement and performance evaluation?b. What are the two issues that performance evaluation seeks to address?
15. In a publication by the ICFA Continuing Education, Managing Asset/Liability Portfolios, the following appeared in an article by Martin L. Leibowitz (‘‘Setting the Stage’’):The importance of surplus [management] differs for each type of financial intermediary. . . . [and] can range from
14. Why do you think a debt instrument whose interest rate is changed periodically based on a specified market interest rate (i.e., a floater) would be more suitable for a depository institution than a long-term debt instrument with a fixed interest rate?
13. You and a friend are discussing the savings and loan (S&L) crisis in the United States. She states that ‘‘the whole mess started in the early 1980s. When short-term rates increased dramatically, S&Ls were adversely affected—their spread income went from positive to negative. They were
12. Suppose that the present value of the liabilities of a British financial institution is £6 billion and the surplus is £8 billion. The duration of the liabilities is equal to 5. Suppose further that the portfolio of this financial institution includes only British government bonds and that the
11.a. Explain why a liability may expose an institution to call risk?b. Why might a funded investor be exposed to cap risk?
10. A client retained the Conservative Management Company tomanage funds on an indexed basis. The benchmark selected was the Lehman Brothers U.S. Aggregate index. In each of the first four quarters, the management company outperformed the benchmark by a minimum of 70 basis points. In its annual
9.a. What is tracking error?b. Explain why tracking error occurs?
8. What is the difference between an active and a passive bond portfolio strategy?
7. Why are tax considerations important in developing an investment policy?
6. The Reliable Performance Management firm was retained by a client. The investment objective specified by the client was to outperform a broad-based bond market index by at least 50 basis points. In the first year, Reliable was able to earn more than 80 basis points over the benchmark index.
5. Some specialized bond indexes are based on the characteristics of liabilities of typical defined benefit pension funds. Explain why such indexes have been developed?
4. What are the risks when a defined benefit pension plan uses as its benchmark the performance of a broad-based bond market index?
3.a. What is a funded investor?b. What is the investment objective of a funded investor?
2. What is the economic surplus of an institution?
1.a. What are the two dimensions of a liability?b. Why is it not always simple to estimate the liability of an institution?
• distinguish between performance measurement and performance evaluation.
• explain what is involved in the monitoring activity phase of the investment management process.
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