~ Investment Management ~ Final Assessment Webinar Damian Bridge

Overview: Questions Measures of return (arithmetic and geometric mean) and risk (standard deviation) for the five assets; Efficient portfolio: minimising risk and maximising return (Excel webinar already available); Black-Scholes formula: application; Futures contract: daily mark-to-market settlements and basis risk; Evaluation of funds performance: different metrics.

Question #1 (Chapter 5) What’s the difference between the arithmetic and the geometric mean? Dollar-weighted vs time-weighted: what are the implications? (pg. 836 as well) What’s the rationale for past rates of return to be taken as expected rates of return in the future? Why the standard deviation captures risk? Are there any aspects that could represent risk and that yet are not captured by the standard deviation? Based on the risk-return characteristics of the 5 assets, would you be able to guess what the optimal portfolio would look like?

Question #2 (Chapter 7) Optimal risky portfolios: what are they? Explain how portfolio risk is calculated and the role of diversification What’s the Sharpe ratio, and what is it its role in determining the optimal portfolio? What’s the separation property, and what’s nice about it? Caveats of the analysis: any?

Question #3 (Chapter 17) Assume that you are presented data portraying good indicators for the economy Based on that, what would be the economy’s outlook (i.e., how do you believe it will perform in the future)? The outlook envisioned will give some hints in terms of the type of stocks to invest in (business cycle and industry analysis) Touch briefly on fiscal and monetary policies, mainly in terms of how they would be implemented by the government / central bank as a reaction to the anticipated stage of the business cycle

Question #4 (Chapters 20 and 21) Black-Scholes option valuation: what it represents? What’s an option and which variables characterize it? What types of option exist? What’s the relationship between the price of an option and the variables that determine its prices – interest rate, strike price, maturity, volatility, and stock price? Could you think of a simple example where you would recommend the use of options? Why options can be thought of as insurance tools? Could options be thought as representing real investments?

Question #5 (Chapters 22) Futures markets: what’s the role it plays in the economy? What’s a future contract? How can it be used as an insurance device? What’s the main difference compared to an option? What’s mark to market? What’s the reason for margins to be imposed on futures contracts? What’s basis risk? Could you think of a situation where an investor in the futures market would be concerned with it?

Question #6 (Chapters 24) Assume that you are presented a menu of portfolio managers to look after your money If you are to make a decision based on the past performance of them, how would you measure it? Calculate and discuss the Sharpe ratio, Treynor measure, Jensen’s alpha, and the information ratio. For the Morningstar risk-adjusted return, only the discussion is necessary (not enough data provided) The main point to emphasize is the limitations of each measure (which aspects of performance that the metrics above fail to capture) Can these measures be manipulated and, if so, how that could be overcome?

Structure of the Report (3,000 words, 6-12 refs) Executive summary: brief overview of the topics covered Table of contents Introduction: explain that the purpose of the report is to touch on some of the canonical theories in investment management, e.g. optimal portfolio theory and option valuation Create one section for each question (e.g., Risk and Return, Efficient Frontier and Optimal Portfolios, Economic Indicators and Fundamental Analysis, Option Valuation, Futures Markets, Portfolio Performance Evaluation) Conclusions: brief review of the contents of the report – no recommendations are necessary List of References Appendix

Thank you!