JAN24 2022 FI4000 Spring2022 Exercises In class Exercises for Breakout rooms 1 1 A fund begins with 10 million and reports the following monthly results MONTH 1 3 2 3 2 5 8 0 4 Net inflows end million HPR Compute the i Arithmetic ii Time weighted and iii weighted average monthly returns 2 Sharpe ratio and capital allocation a To estimate the Sharpe ratio of a portfolio from a history of asset returns we use the difference between the simple arithmetic average rate of return and the T bill rate Why not use the geometric average b When estimating a Sharpe ratio would it make sense to use the average excess real returns that accounts for inflation c You have jus decided upon your capital allocation for the next year when you realize that you have underestimated both the expected return and the standard deviation of your risky portfolio by 4 Will you increase decrease or leave unchanged your allocation to risk free T bills 3 XYZ stock price and dividend history are as follows Year Beginning of Year Price Dividend paid at Year end 2010 2011 2012 2013 100 110 90 95 4 4 4 4 An investor buys three shares of XYZ at the beginning of 2010 buys another two shares at the beginning of 2011 sells one share at the beginning of 2012 and sells four remaining shares at the beginning of 2013 a What are the arithmetic and geometric average time weighted rates of return for the investor b What is the weighted rate of return Hint Carefully prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1 2010 to January 1 2013 Calculate internal rate of return IRR using either your calculator excel spreadsheet or trial and error
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