Posted: August 18th, 2015

Portfolio Management.

a. Explain the Piotrowski F-Sore and how it can be used in Portfolio Management.

b. Choose three companies quoted on the London Stock Exchange and calculate their
Piotroski F-Scores. Show your workings.

c. Choose two of the companies from answer (b) and carry out a fundamental valuation
of the fair value of their share price using a Dividend Discount Model of your choice.
Justify your choice of the parameters you use in your Model. Compare your valuation
with the market share price and discuss any difference. State and justify all your
assumptions.

You are Chief Investment Officer at Aldgate Investments. You are concerned that global
stockmarkets are close to record highs, but that the world could face a number of shocks,
including continued uncertainty over Greece’s membership of the Euro and possible
instability in many oil producing countries, that could cause financial markets to fall.
Write a memo to your investment team advising them of steps you want them to take in
managing your UK client discretionary portfolios to protect them as much as possible from
any potential short term instability in equity and bond markets.
You are aware than some of your investment managers are relatively junior and have only
experienced rising asset prices. Include in your report an explanation of your concerns and
why you want them to take the steps you suggest.

Explain the difference to an investor between holding a long European Call on an equity and
holding a long position on the same company’s shares.

Illustrate your answer with labelled payoff diagrams using information on a company of your
choice available at the link below:
http://markets.ft.com/Research/markets/DataArchiveFetchReport?Category=EQ&Type=UKOPT&Date=09/11/2014

Using the Total Return data provided for the UK, German and Swedish equity markets
produce a spreadsheet that contains:
a. The monthly total returns for each country, the mean annual return over the period,
and the standard deviation of those annual returns.

b. Construct the Correlation Matrix for the three country indices:
Germany Sweden UK
Germany
Sweden
UK

c. Create charts showing the possible risk and return combinations for each of the 3
different combinations of investing in 2 countries

d. Calculate the minimum possible risk attainable for a portfolio investing in just the
German and Sweden equity markets. How much of the portfolio should be invested in
the German equity market, and how much in the Swedish equity market? What is the
expected risk and return of this portfolio?

e. Calculate Sharpe ratios for each of the 4 indices in the spreadsheet (Europe, Germany,
Sweden and the UK), and also for the minimum risk portfolio calculated in part (d).
Assume a risk free rate of 2% per annum.

Bond A has maturity of 20 years, a coupon rate of 6% (paid annually) and a yield to maturity
of 5.5%. Bond B has a maturity of 10 years, and an annual coupon rate of 4% and yield to
maturity of 4.5%. Both bonds are redeemable at par of100.
a. Calculate the price of each bond

b. Calculate the duration and modified duration of each bonds.

c. Which bond would you prefer if you thought interest rates were going to rise? Which
would you prefer if you thought they were going to fall? Give reasons for your
choices.

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