September 2021

Discussion in 'SP5' started by 1495_sc, Apr 15, 2022.

  1. 1495_sc

    1495_sc Ton up Member

    Hello,

    Need help with understanding few alternative solutions to examiner's report. Want to check if my understanding is correct.

    Q6. part v)and vi) can we suggest

    • how to value income from assets ; by assuming that income from asset is included in year end value of asset
    • investment return largely affected by cashflows which is the investment amount and beyond the control of fund manager; using time weighted rate of return if sufficient data is available.
     
  2. 1495_sc

    1495_sc Ton up Member

    Q3. part ii) The solution is interesting. Did not think about it when I attempted the questions. Any hint towards core reading? As we have to combine portfolio P with the new portfolio to arrive at Q, I doubt we can consider cash? If a new portfolio would be devised, having cash only would lead to B=0, right?
    Can we actually break down beta as
    x*beta of C+(1-x)*beta of D= desired beta (1.25)
    I understand the logic for expected return as E(X+Y) = E(X)+E(Y) by principles but wouldnt think of treating beta similarly. Any exceptions or assumptions which we are assuming here for the beta equation?

    Can someone suggest an alternative solution as the examiner's report states there are a range of solutions available?

    part iii)

    How is this calculated? Is it expected return of P (long position hence added) -expected return of S(short position hence deducted)?
    I calculated it as 7.5% -(7%*62.5%+9%*37.5%)= -0.25% but the solution is -0.125%. Am I missing something? Also, we cant add return of P+Q because its long v/s short position, right?

    Thank you in advance!
     
  3. 1495_sc

    1495_sc Ton up Member

    Please help. Look forward to hear from anyone who has more clarity.
     
  4. GottaStudyHard

    GottaStudyHard Keen member

    Part (v) explicitly states for the main issue

    The issue of valuing income from the asset isn't an issue, since it is a monetary value in terms of rent received from the infrastructure. The income is quite literally easy to value since it is equal to the rent when the rent is due. Your proposed solution for this problem makes no sense at all since there was no problem, to begin with.

    The second issue you raised, isn't an issue at as well, since we are told exactly when the investments are made and exactly when the income is received. So sufficient data was available to use the time-weighted rate of return. This wouldn't really be an "issue", but your proposed solution for this issue is correct.
     
  5. GottaStudyHard

    GottaStudyHard Keen member

    I agree that having the risk-free asset would result in a beta of 0. If we use the (Ea-r)/(Em-r) to calculate the beta and combine the information we have available, we will produce an inconsistent result for the risk-free rate of return. So I assume this question used the covariance method to calculate the betas.

    That's all well and good, however, Q is supposed to be the risk-free rate of return, which is negative in this case for some reason, that's also well and good I guess, but the risk-free rate is still inconsistent with Ea = r + beta(a)*(Em-r).

    This question is a bit of a confusing one, also yes, you can add the individual betas to get a portfolio beta. If you combine portfolios C, D, and P to get a beta of 0, you would have

    1.25x-1.5y-1.1z = 0, which gives infinite solutions for the holdings in the three portfolios, since we are allowed to short portfolios C and D.

    To calculate the return of the zero beta portfolio you needed to have 1/2*(7.5%) + 1/2[-(7%*62.5%+9%*37.5%)], since the weightings of your portfolios need to sum to 1. It's supposed to be 1/2*(P+Q).
     

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