9-206-005 REV: MAY 22, 2007 JOSHUA COVAL Partners Healthcare In May 2005, Michael Manning, the deputy treasurer of Partners Healthcare System, was formulating a recommendation to the Partners Investment Committee. He had been asked to analyze the role that different “real assets” could play in Partners’ $2.4 billion long-term pool (LTP) of financial assets. He was then expected, on the basis of that analysis, to recommend both a size and a composition for the real-asset portfolio segment
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Answer to Essay Question #1: Idiosyncratic risk is a firm-specific risk that affects the price change of a security. It is also known as unsystematic risk. This risk is unique to the specific security and affects a single asset or small group of assets. In contrast to systematic risk, which is the market risk that affects the larger number of assets. Unsystematic risk of a portfolio can be brought down to zero through diversification whereas systematic risk cannot be diversified. This can be further
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Finance quiz The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on: (Points : 3) the largest 20 percent of the stocks traded on the NYSE. the stocks of the largest 10 percent of the publicly traded firms in the U.S. all of the stocks listed on the NYSE. the stocks of the 500 companies included in the S&P 500 index. 2. (TCO 8) Which of the following is true regarding the efficient market hypothesis? (Points : 3) It argues that efficient markets
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1990, he along with Merton Miller and William Sharpe won the Nobel Prize in Economic Sciences for the Theory. The theory suggests a hypothesis on the basis of which, expected return on a portfolio for a given amount of portfolio risk is attempted to be maximized or alternately the risk on a given level of expected return is attempted to be minimized. This is done so by choosing the quantities of various securities cautiously taking mainly into consideration the way in which the price of each security
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Chapter 1 A Brief History of Risk and Return Concept Questions 1. For both risk and return, increasing order is b, c, a, d. On average, the higher the risk of an investment, the higher is its expected return. 2. Since the price didn’t change, the capital gains yield was zero. If the total return was four percent, then the dividend yield must be four percent. 3. It is impossible to lose more than –100 percent of your investment. Therefore, return distributions are cut off on the
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10-20. Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which
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Required Rate of Return on Equity 3 3. Beta 3 4. Capital Asset Pricing Model 4 5.1 Limitations of CAPM 4 5.2 The APT Model 4 5.3 The Three-Factor Model 4 5.4 Required Rate of Return using APT or Three-Factor 5 Model 5. Bonds 5 6.5 How bond prices are determined 5 6.6 The Rate of Return on the bonds 6 6. Conclusion 7. Appendices 6.1 Appendix 1 – after tax rate of return on bonds 7
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series of future dividends. Where: D = Expected dividend per share one year from now k = required rate of return for equity investor G = Growth rate in dividends (in perpetuity) Gordon Dividend Growth Discount Model The Gordon Growth Model requires 3 inputs: * Expected dividends one year from now (D1) * Assumed Dividend Growth Rate (GR) * Your required Rate of Return (RR) D1 The Value of Stock = ————– (RR – GR) Illustration
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market line (SML) equation is the Capital Asset Pricing Model. It is used to price risk, i.e., it is used to specify the risk/return relationship of a particular asset or portfolio, regardless of the level of diversification. The SML equation (provided with the CFP Board Exam) is: ri = rf + (rm - rf) βi The SML equation states that the return of a specific investment is equal to the risk-free rate plus a market risk premium multiplied by the investment’s beta (βi). By definition, the beta of the
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Chapter 8 Risk and Rates of Return Answers to End-of-Chapter Questions 8-1 a. No, it is not riskless. The portfolio would be free of default risk and liquidity risk, but inflation could erode the portfolio’s purchasing power. If the actual inflation rate is greater than that expected, interest rates in general will rise to incorporate a larger inflation premium (IP) and—as we saw in Chapter 6—the value of the portfolio would decline. b. No, you would be subject to reinvestment risk. You might
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