Banking and Finance

Tutorial Exercises

BFF5220
Applied Investments
Semester 2, 2023

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https://www.monash.edu/business/banking-and-finance
 BFF5220 Applied Investments
WEEK Starting LECTURE TOPIC ASSIGNED TUTORIAL TOPIC
READING
1 24 Jul Financial Markets, BKM, Ch. 3, 5 Self-study on Pre-Semester
Securities Trading and Test, Accounting and
Performance Statistics. Group Formation.
Measurement Free-Style Discussion of
Articles on Fin Mkt News.
2 31 Jul Portfolio Theory BKM, Ch. 6, 7 Financial Markets, Securities
Trading and Performance
Measurement
3 07 Aug Asset Pricing Models BKM, Ch. 9, 10 Portfolio Theory
4 14 Aug Asset Pricing Models BKM, Ch. 9, 10, 17 Asset Pricing Models
(cont.)
Fundamental Analysis I Other reading on
Moodle In-tutorial Group Assignment
Instruction Discussion, Q&A
5 21 Aug Fundamental Analysis II BKM Ch. 18 Formative task: Online
submission of literature review
of return patterns

Fundamental Analysis I

6 28 Aug Fundamental Analysis III BKM Ch. 18 Fundamental Analysis II &

Advanced/Practical Topics in
Other reading on Fundamental Analysis
Moodle
7 04 Sep Market Efficiency BKM Ch. 11 Formative task: Submission
of first attempt on R
programming code for one
return pattern.

Review of Mid Semester Test

& Advanced/Practical Topics
in Fundmanetal
8 11 Sep Behavioural Finance BKM Ch. 12 Market Efficiency

9 18 Sep Options Trading BKM Ch. 20 Behavioural Finance

Strategies
Mid-Semester Break starting on 25 Sep
10 02 Oct Option Valuation BKM Ch. 21 Options Trading Strategies

11 09 Oct Futures, Forwards and BKM Ch. 22, 23 Option Valuation

Swaps

12 16 Oct Fixed Income Securities BKM, Ch. 15, 16 Futures, Forwards and Swaps

SWOT/VAC 23 Oct SELF STUDY, Fixed Income Securities

Mid-Semester Test Mid-Semester Break Asset Pricing Group Assignment

Students are required to prepare answers for all questions. Due to time constraints, students are
encouraged to nominate the questions/problems for discussion at the commencement of each
tutorial. Solutions for all questions will be available in the form of video recordings by the end of
each week.
Topic 2 Week 3 – Portfolio Theory

For questions 1 to 7, assume that you manage a risky portfolio with the expected
rate of return of 18% p.a. and standard deviation of 28% p.a. The T-bill rate is 8%
p.a.

Q.1.

Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money
market fund. What is the expected value and standard deviation of the rate of return on
his portfolio?

Q.2.

Suppose your risky portfolio includes the following investments in the given proportions:

Stock A 25%
Stock B 32%
Stock C 43%

What are the investment proportions of your client’s overall portfolio, including the
position in T-bill?

Q.3.

What is the reward-to-volatility ratio (i.e. Excess Return above risk free rate / Standard
Deviation of the portfolio) of your risky portfolio and your client’s overall portfolio?

Q.4.

Draw the Capital Allocation Line (CAL) of your portfolio on an expected return /
standard deviation diagram. What is the slope of the CAL? Show the position of your
client on your fund’s CAL.

Q.5.

Suppose that your client decides to invest in your portfolio a proportion y of the total
investment budget so that the overall portfolio will have an expected rate of return of
16% p.a.
a. What is the proportion y?
b. What are your client’s investment proportions in your three stocks and the T-bill
fund?
c. What is the standard deviation of the rate of return on your client’s portfolio?

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Q.6.

Suppose that your client prefers to invest in your fund a proportion y that maximises the
expected return on the complete portfolio subject to the constraint that the complete
portfolio’s standard deviation will not exceed 18% p.a.
a. What is the investment proportion y?
b. What is the expected rate of return on the complete portfolio?

Q.7.

Your client’s degree of risk aversion is A = 3.5.

a. What proportion y, of the total investment should be invested in your fund?
b. What is the expected value and standard deviation of the rate of return on your client’s
optimized portfolio?

For questions 8 and 9, you estimate that a passive portfolio, that is, one invested in a
risky portfolio that mimics the S&P500 stock index, yields an expected rate of
return of 13% p.a. with a standard deviation of 25% p.a. You manage an active
portfolio with expected return 18% p.a. and standard deviation 28% p.a. The risk-
free rate is 8% p.a.

Q.8.

Draw the Capital Market Line (CML) and your fund’s CAL on an expected return –
standard deviation diagram.
a. What is the slope of the CML?
b. Characterise in one short paragraph the advantage of your fund over the passive
fund.

Q.9.

Your client ponders whether to switch the 70% that is invested in your fund to the
passive portfolio.
a. Explain to your client the disadvantage of the switch.
b. Show him the maximum fee you could charge (as a % of the investment in your
fund, deducted at the end of the year) that would leave him at least as well off
investing in your fund as in the passive one.

Hint: The fee will lower the slope of your client’s CAL by reducing the expected return
net of the fee.