DescriptionFINM7403 Portfolio Management S1 2023
Problem 2 (12 marks)
ArK-Invest, an active fund manager who focuses mainly on growth and high-risk investments, has
attracted the attention of retail investors. Over the last year, while the return on the broad market index
was 5%, Ark-Invest delivered an impressive performance of 10%. Your friend Bob decides to study the
fund over the 10-year period since the fund’s inception to the present. Bob uses a multi-factor regression
model and his model estimates are based on annual excess returns, as shown below:
ArK-Invest
Standard
deviation of
excess returns
Residual
standard
deviation
Multi-factor
model regression
2
8%
7%
−0.01 + 1.5 × + 0.33 × − 0.8 ×
10%
Further information about the factor returns over the last 10 years:
Factor
Market excess return (MRP)
Small minus big (SMB)
High minus low (HML)
Average Return (%)
6%
3.5%
6%
Over the last year, the return on SMB was 3% and the HML factor return was -2%.
A. Calculate the fund’s annual average excess return, Sharpe ratio, Jensen’s alpha, and
information ratio. (4 marks)
B. Has the fund achieved its objective in terms of pursuing growth and high-risk investments?
Explain your answer. (4 marks)
C. Should Bob invest in Ark-Invest if his goals are to invest in a skilled portfolio manager who
also holds a diversified portfolio (i.e., persistently deliver superior returns)? Explain your
answer. (4 marks)
5
FINM7403 Portfolio Management S1 2023
Problem 3 (8 marks)
EMIL operates in a highly competitive payments industry. Recently, it was subject to a rumour spread
by a short seller SS Capital regarding an antitrust investigation on 13th Feb 2023. The following table
provides trading data on EMIL and the broad market index around the event.
Date
Price ($)
Shares (in mil)
Market Index
10/02/2023
2.33
492.37
6856.904
13/02/2023
2.16
492.37
6500.22
14/02/2023
2.02
492.37
6200.916
15/02/2023
2
492.37
6200.274
16/02/2023
2.03
492.37
6182.221
Other market information about the firm is shown below:
Beta
Price/Earnings ratio
Price/Book ratio
1.5
35
15
The EMIL management threatens to sue the short seller and claims that the rumor has caused the stock
price to lose significantly. To what extent is the management’s claim supported/not supported by the
above evidence? Explain your answer using an event study. (8 marks)
6

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