Department of Finance Olin Business School Washington University in St Louis Spring 2022 FIN 441 Investments Textbook Assignment 3 Due Feb 9th 2022 1 Bodie Kane Marcus 2021 Chapter 4 Problem 2 What are some comparative advantages of investing in the following a Unit investment trusts b Open end mutual funds Answer c Individual stocks and bonds that you choose for yourself a Unit investment trusts Diversification from large scale investing lower transaction costs associated with large scale trading low management fees predictable portfolio composition guaranteed low portfolio turnover rate b Open end mutual funds Diversification from large scale investing lower transaction costs associated with large scale trading professional management that may be able to take advantage of buy or sell opportunities as they arise record keeping Individual stocks and bonds No management fee ability to coordinate realization of capital gains or losses with investors personal tax situations capability of designing portfolio to investor s specific risk and return profile c 2 Bodie Kane Marcus 2021 Chapter 4 Problem 9 The composition of the Fingroup Fund portfolio is as follows Price 35 40 20 25 Shares 200 000 300 000 400 000 600 000 Stock A B C D The fund has not borrowed any funds but its accrued management fee with the portfolio manager currently totals 30 000 There are 4 million shares outstanding What is the net asset value of the fund Answer Stock Value Held by Fund 7 000 000 A 12 000 000 B 8 000 000 C D 15 000 000 Total 42 000 000 Net asset value 42 000 000 30 000 4 000 000 10 49 3 Bodie Kane Marcus 2021 Chapter 4 Problem 9 Reconsider the Fingroup Fund in the previous problem If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200 000 shares of stock E at 50 per share and 200 000 shares of stock F at 25 per share what is the portfolio turnover rate Answer Value of stocks sold and replaced 15 000 000 Turnover rate 15 000 000 42 000 000 0 357 or 35 7 4 Bodie Kane Marcus 2021 Chapter 5 Problem 3 The Narnian stock market had a rate of return of 45 last year but the inflation rate was 30 What was the real rate of return to Narnian investors Answer 1 1 1154 r Real 11 54 1 r Real r Nominal i 1 1 45 1 30 5 Bodie Kane Marcus 2021 Chapter 5 Problem 12 Visit Professor Kenneth French s data library Web site Kenneth French s data and download the monthly returns of 6 portfolios formed on size and book to market 2 3 Choose the value weighted series for the period from January 1930 December 2018 Split the sample in half and compute the average SD sharpe ration skew and kurtosis for each of the six portfolios for the two halves Do the six split halves statistics suggest to you that returns come from the same distribution over the entire period Answer 01 1930 6 1974 Average SD Skew Kurtosis Average SD Skew Kurtosis Low 0 99 8 29 1 30 9 74 Low 1 00 6 69 0 43 2 08 Small 2 1 17 8 38 1 63 13 10 Small 2 1 35 5 28 0 55 3 60 High 1 48 10 17 2 35 17 69 High 1 45 5 49 0 47 4 30 Low 0 76 5 70 0 17 7 06 Low 0 99 4 70 0 33 1 99 Big 2 0 81 6 72 1 75 17 80 Big 2 1 05 4 35 0 43 2 57 High 1 19 8 89 1 77 14 64 High 1 13 4 90 0 54 2 96 07 1974 12 2018 No The distributions from 01 1930 06 1974 and 07 1974 12 2018 periods have distinct characteristics due to systematic shocks to the economy and subsequent government intervention While the returns from the two periods do not differ greatly their respective distributions tell a different story The standard deviation for all six portfolios is larger in the first period Skew is also positive but negative in the second showing a greater likelihood of higher than normal returns in the right tail Kurtosis is also markedly larger in the first period