Security & Investment – Nursing Writings
Security & Investment – Nursing Writings
Part 1: Sector Performance
Investment managers strive to outperform both the sector they focus on and broad market indexes such as the S&P 500. The performance of a portfolio is determined by both the weightings given to different types of investments as well as the actual performance of these investments. In addition, the level of risk an investor is willing to take on will impact the design of a portfolio.
To answer the questions in Part 1, you’ll use the information provided about the portfolio in the table below. The portfolio is broken out by sectors and shows the investor’s portfolio’s weighting and performance and the S&P 500’s weighting and performance in each sector. The final column shows the individual investments’ overall contributions to the portfolio. Note that an investment can underperform the S&P and still have a positive contribution to the portfolio based on the difference in weighting.
Portfolio Information
Sector
(1) Portfolio Weighting
(2) S&P Weighting
(3) Differen-ces in Weighting
(4) Portfolio Return
(5) S&P Return
(6) Sector Over-or Under- Performance
(7) = (3) x (6) Sector Allocation Contributions
Telecom- munications Services
3.10%
5.90%
a. ?
2.50%
3.10%
k. ?
u. ?
Utilities
7.50%
3.80%
b. ?
3.10%
1.90%
l. ?
v. ?
Information Technology
14.30%
17.90%
c. ?
4.90%
3.20%
m. ?
w. ?
Materials
6.30%
3.70%
d. ?
4.80%
5.10%
n. ?
x. ?
Financials
13.40%
17.10%
e. ?
6.20%
4.80%
o. ?
y. ?
Consumer Discretionary
12.70%
13.50%
f. ?
2.10%
4.00%
p. ?
z. ?
Industrials
14.10%
11.90%
g. ?
4.90%
3.10%
q. ?
aa. ?
Energy
8.40%
8.00%
h. ?
3.70%
8.60%
r. ?
bb. ?
Healthcare
15.30%
11.70%
i. ?
9.80%
5.70%
s. ?
cc. ?
Consumer Staples
4.90%
6.50%
j. ?
1.50%
13.20%
t. ?
dd. ?
1. Fill in the missing values in the table above for a quarterly comparison of sectors with the S&P 500 Index. Remember when performing calculations that the numbers shown are percentage values. Record your answers as percentage values to two decimal places.
a. _______
k. _______
u. _______
b. _______
l. _______
v. _______
c. _______
m. _______
w. _______
d. _______
n. _______
x. _______
e. _______
o. _______
y. _______
f. _______
p. _______
z. _______
g. _______
q. _______
aa. _______
h. _______
r. _______
bb. _______
i. _______
s. _______
cc. _______
j. _______
t. _______
dd. _______
2. Did the performance turned in by the investment manager underperform or outperform the S&P 500? By how much? Show your work.
3. Which sector turned in the greatest positive contribution to the portfolio’s performance? Explain why this investment made the greatest positive contribution based on the differences in weighting and the sector over- or under- performance.
4. Which sector made the greatest negative contribution to the portfolio’s performance? Explain why this investment made the greatest negative contribution based on the differences in weighting and the sector over- or under- performance.
Part 2: Portfolio Analysis
Use the three portfolios shown below to answer questions 5–8 in Part 2.
Portfolio 1
Security
Amount Invested
Expected Return
Beta
Security A
$ 4,000
9%
.80
Security B
$ 5,000
12%
1.15
Security C
$ 12,000
14%
.95
Security D
$ 8,000
15%
1.23
Portfolio 2
Security
Amount Invested
Expected Return
Beta
Security A
$ 3,000
16%
1.22
Security B
$ 11,000
13%
1.54
Security C
$ 9,000
8%
.87
Security D
$ 6,000
11%
.81
Portfolio 3
Security
Amount Invested
Expected Return
Beta
Security A
$15,000
10%
1.72
Security B
$12,000
9%
.81
Security C
$ 3,000
12%
.72
Security D
$ 2,000
15%
1.54
1. Based on beta, which portfolio has the highest level of systematic risk? Show your work.
2. If the risk-free rate is 5.5 percent, which of these portfolios has the highest reward-to-risk ratio? Show your work.
3. Suppose that the risk-free rate is 5.5 percent, the return over three years for each portfolio matches its expected return, and the portfolios have 3-year annual return standard deviations as follows:
Portfolio 1
22%
Portfolio 2
26%
Portfolio 3
18%
4. If you were restricted to selecting one of the three portfolios to invest all your money in, which should you choose based on that portfolio having the best ratio of excess return per unit of total risk as measured by its Sharpe ratio?
5. Suppose that the actual returns for Portfolios 1, 2, and 3 were as follows:
Portfolio 1
11.3
Portfolio 2
12.5
Portfolio 3
9.4
6. Also, assume that the risk-free rate was 5.5 percent and the average return on the market portfolio was 8 percent.
7. Which of the three portfolios has the highest Jensen’s alpha? Show your work.
8. Which has the highest Treynor ratio? Show your work.
Part 3: Selecting a Portfolio
Use the two portfolios shown in the tables below to answer the questions in Part 3.
Portfolio 1
Asset Category
Percentage of Portfolio
U.S. small-company stocks
5
U.S. large-company stocks
10
International stocks
5
U.S. government bonds
50
U.S. corporate bonds
30
Portfolio 2
Asset Category
Percentage of Portfolio
U.S. small-company stocks
20
U.S. large-company stocks
30
International stocks
25
U.S. government bonds
15
U.S. corporate bonds
10
1. In your role as a financial advisor, you’re advising a client, Sally, a 30-year old computer programmer who makes an above-average salary. She’s investing money in her 401(k) that she doesn’t plan to use until retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you’ve chosen is appropriate and explain why the portfolio you didn’t choose is not appropriate.
2. In your role as a financial advisor, you’re advising a client, Bob, who has just retired and rolled over his 401(k) into a self-directed IRA account. Bob intends to use these funds to provide income to live on in his retirement. In your opinion, which of the two portfolios above would be most appropriate for these funds? In your answer, explain why you believe the portfolio you’ve chosen is appropriate and explain why the portfolio you didn’t choose is not appropriate.
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