Portfolio Management – FIN 4438

  Questions: 1. (Chapter 12) You are a portfolio manager for an active mutual fund. Suppose you think that the Federal Reserve will reduce the Federal Funds target rate at the next FOMC meeting, but the consensus opinion is that the Federal Reserve will leave interest rates unchanged. How would you change the relative proportion of consumer discretionary stocks and consumer staples stocks in your portfolio to reflect your outlook and why?

2. (Chapter 2) Consider the liquidity spread, defined as the yield on 30-year US Treasury bonds minus the yield on one-month US Treasury bills. Suppose that one evening, Donald Trump and Kim Jong-Un send a series of alternating tweets threatening the possibility of nuclear war. What would you expect to see happen to the liquidity spread the following day when the market opens and why?

3. (Chapter 4) Two mutual funds have the same manager and hold identical portfolios. The Flagship Fund charges a 1% front-end load and no other fees. The Starboard Fund charges a 1% expense ratio and no other fees. Luke thinks the portfolio of assets in these funds will go up and he wants to purchase one of the funds now and sell that fund in one month to profit from his outlook. Which fund should he purchase and why?

4. (Chapter 21) Consider the savings plan described in slide 21.3 and in the Savings Plan Excel Worksheet. Suppose you want to increase the annual payment from your retirement annuity by 50%. Since you don’t want to work harder or save more, you decided to take more investment risk to reach your goal. Do you have to increase your investment rate of return (ROR) by less than 50%, exactly 50%, or more than 50%? Why?

5. (Chapter 22) Your retirement savings includes one tax-exempt account and one taxable account. You would like to follow a passive investment strategy and hold a portfolio that includes two asset classes. The first asset class is non-dividend-paying growth stocks and the second asset class is BBB-rated corporate bonds. Would your tax-deferred and taxable accounts include the same proportions of the two asset classes? Why or why not.