Australian School of Business School of Banking and Finance

FINS2624 PORTFOLIO MANAGEMENT

HOMEWORK - PRESCRIBED TUTORIAL QUESTIONS SESSION 2, 2008

Preface:
This document contains the list of prescribed questions for students to attempt prior to the designated tutorial. Students are expected to hand in a hard copy of the homework to the tutor during the tutorial from week 2 to week 11, a total of 10 pieces of homework. The tutor will retain all copies of homework and use it for grading purpose. The tutor will mark four questions selected from the ten pieces of homework. Be warned that students who plagiarise the work of others or allow other to copy their work will receive zero mark for the entire tutorial component of 11%. Students are advised to bring a second copy of the homework to class. It is your responsibility to be fully prepared, pay full attention and participate actively in tutorial discussion; to take notes of the discussion; and to correct any mistakes made. We do not post solutions to the prescribed questions on the course webpage or in any other form except for week 12 when the team presentation is held. Students who do not attend a tutorial class for any reasons are expected to submit the homework to the tutor by email via their UNSW student email account on or before the tutorial. Late submissions will not be accepted.

Bond Pricing due in week 2

1. The table below is extracted from the Reserve Bank of Australia website, http://www.rba.gov.au/Statistics/indicative.html, on 25th July 2008. It shows the indicative mid rates (i.e., the yields to maturity) of selected Commonwealth Government Securities at 4:30 pm on the previous working day, 24 July 2008.
DAILY STATISTICAL RELEASE

Indicative Mid Rates of Selected Commonwealth Government Securities*

Release date: 24 July 2008 Treasury Fixed Coupon Bonds Coupon 6.25% 6.25% 6.00% 5.25% Maturity Jun 2014 Apr 2015 Feb 2017 Mar 2019 Yield (% p.a.) 6.390 6.395 6.400 6.395 Refer to this bond series if your tutorial is held on Mon Tue Wed Thurs & Fri

The following questions refer to the bond series that is determined by the day of your tutorial as suggested by the last column of the table. i) Draw a timeline of cash flows of the bond. ii) Use the approach as illustrated in the lecture notes and Section 2.3 of Yip (2005) to compute the settlement price and the quoted price of the bond. iii) Is the bond priced below, the same as, or above the face value? Explain the observation. iv) Use the approach as illustrated in the bond pricing worksheet BP-2 and Section 2.4 of Yip (2005), to compute the settlement price and quoted price of the bond. v) Tell us the difference between the settlement price and the quoted price. 2. Generate a time series of settlement and quoted prices as required by Practice Exercise 3 in the bond pricing worksheet BP-2. Yip (2005) Session 2, discussion question (DQ) B to E. You may attempt DQ B to E with the use of a calculator or Excel.

YTM, HPR & Term Structure due in week 3

1. The table below is extracted from the Reserve Bank of Australia website, http://www.rba.gov.au/Statistics/indicative.html, on 25th July 2008. It shows the indicative mid rates (i.e., the yields to maturity) of selected Commonwealth Government Securities at 4:30 pm on the previous working day, 24 July 2008.
DAILY STATISTICAL RELEASE

Indicative Mid Rates of Selected Commonwealth Government Securities*

Release date: 24 July 2008 Treasury Fixed Coupon Bonds Coupon Maturity 6.25% 6.25% 6.00% 5.25% Jun 2014 Apr 2015 Feb 2017 Mar 2019 Yield Refer to this bond (% series if your tutorial p.a.) is held on 6.390 6.395 6.400 6.395 Mon Tue Wed Thurs & Fri Corresponding liquidation date 11/12/2008 13/10/2008 13/8/2008 11/9/2008 Corresponding yield at which the bond is sold 6.000 6.300 6.800 6.850

The following questions refer to the bond series that is determined by the day of your tutorial as suggested by the fourth column of the table. i) Had you bought a bond on the 24th July 2008 and sold the investment on the liquidation date at the suggested yield, compute the holding period return of your investment. ii) Why did you earn a return that is different from the yield?

Yip (2005) Session 4, DQ B to E.

Duration due in week 4

1. The duration equation suggests that duration measures the weighted average time for investors to recover the cost of their bond investment from the cash flows of the bond. How do you arrive at the equation? What is the rationale of the process?

Yip (2005) Session 5, DQ B to G.

Portfolio Theory due in week 5

1. The following questions refer to Potts, Sun Herald, Feb 24, 2008, Where to stash your cash while it grows? i) What are 3 ways in which an investor could gain exposure to gold in their portfolio? ii) Explain the relationship between the recent surge in the gold price and the sub-prime crisis. Yip (2005) Session 6, DQ A to H.

Optimal Portfolios due in week 6

Yip (2005) Session 7, DQ A to F, H.

CAPM due in week 7

1. The following questions refer to Wasiliev, AFR, Dec 8, 2001, Taking the long term view & Index funds a safe way to smooth out the volatility of the sharemarket i) Refer to the table "The Power of 1.0" in "Taking the long view". Is this portfolio diversified? What risk would an investor be exposed to? ii) What is an index fund? What are the typical features and characteristics of an index fund? iii) Discuss the benefits of index funds.

Yip (2005) Session 8, DQ A to D, F to H

SIM due in week 8

Yip (2005) Session 9, DQ A to H, J

Performance measures due in week 9

Yip (2005) Session 10, DQ A to F

EMH due in week 10

Yip (2005) Session 12, DQ A to F

Payoff and P/L Tables and Diagrams due in week 11

1. The following questions refer to Bassanese, AFR, June 24, 2006, How to stop losses: When in doubt, get out i) Describe briefly how a stop-loss works. ii) Explain the 10% stop-loss rule of thumb and provide an example of how such a mechanism could be used. iii) What are the similarities and differences between a stop-loss strategy and a protective put strategy? Yip (2005) Session 13, DQ A to D Ignore the spreadsheet applications and attempt the questions the usual way with the help of a calculator.

Black-Scholes Model
Yip (2005) Session 14, DQ A to F students are not required to submit this piece of homework.