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. c. Individual stocks and bonds that you choose for yourself. Answer: 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. c. 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. 2. (Bodie, Kane & Marcus 2021, Chapter 4, Problem 9) The composition of the Fingroup Fund portfolio is as follows:Stock Shares Price A 200,000 $35 B 300,000 40 C 400,000 20 D 600,000 25 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 A $ 7,000,000 B 12,000,000 C 8,000,000 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: NominalReal Real11 .451 1.1154 11.54%1 1 .30rrri+++= = = →=++ 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) Small Big Low 2 High Low 2 High Average 0.99% 1.17% 1.48% 0.76% 0.81% 1.19% SD 8.29% 8.38% 10.17% 5.70% 6.72% 8.89% Skew 1.30 1.63 2.35 0.17 1.75 1.77 Kurtosis 9.74 13.10 17.69 7.06 17.80 14.64 (07/1974-12/2018) Small Big Low 2 High Low 2 High Average 1.00% 1.35% 1.45% 0.99% 1.05% 1.13% SD 6.69% 5.28% 5.49% 4.70% 4.35% 4.90% Skew -0.43 -0.55 -0.47 -0.33 -0.43 -0.54 Kurtosis 2.08 3.60 4.30 1.99 2.57 2.96 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