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- Perform ance |
(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. ? |
- 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. _______ |
- Did the performance turned in by the investment manager underperform or outperform the S&P 500? By how much? Show your work.
- Which sector turned in the greatest positivecontribution 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.
- Which sector made the greatest negativecontribution 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 |
- Based on beta, which portfolio has the highestlevel of systematic risk? Show your work.
- If the risk-free rate is 5.5 percent, which of these portfolios has the highestreward-to-risk ratio? Show your work.
- 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% |
- 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?
- 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 |
- Also, assume that the risk-free rate was 5.5 percent and the average return on the market portfolio was 8 percent.
- Which of the three portfolios has the highestJensen’s alpha? Show your work.
- Which has the highestTreynor 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 |
- 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 notappropriate.
- 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 notappropriate.
SCORING GUIDELINES
Your project will be graded according to the criteria found in the rubric below.
Rubric
| Securities and Investments Graded Project |
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| Skill/ Grading Criteria |
Excellent | Good | Satisfactory | Poor | Grader Comments |
| Part 1 | |||||
| Question 1 | All answers are correct. 30 |
Many of the answers are correct. 29 |
Some of the answers are correct. 28–26 |
Few or none of the answers are correct. 25–0 |
|
| Question 2 | The answer and explanation are correct, and calculations are shown. 5 |
The answer is correct, but the explanation or calculations are incorrect. 4 |
The answer is correct, but the calculations or explanation is not shown. 3 |
The answer is incorrect, and the explanation and calculations are not shown. 2–0 |
|
| Question 3 | The answer and explanation are correct. 5 |
The answer is correct, but the explanation is incorrect. 4 |
The answer is correct, but the explanation is not shown. 3 |
The answer is incorrect and/or the explanation is not shown. 2–0 |
|
| Question 4 | The answer and explanation are correct. 5 |
The answer is correct, but the explanation is incorrect. 4 |
The answer is correct, but the explanation is not shown. 3 |
The answer is incorrect and/or the explanation is not shown. 2–0 |
|
| Part 2 | |||||
| Question 5 | The answer is correct and the correct calculations are shown. 10 |
The answer is correct and the cal- culations are incorrect, or the answer is incorrect but the calculations are correct. 9 |
The answer is correct, but the calculations are not shown. 8–7 |
The answer is incorrect and/or the calculations are not shown. 6–0 |
|
| Question 6 | The answer is correct, and the correct calculations are shown. 10 |
The answer is correct, and the cal- culations are incorrect, or the answer is incorrect, but the calculations are correct. 9 |
The answer is correct, but the calculations are not shown. 8–7 |
The answer is incorrect and/, or the calculations are not shown. 6–0 |
|
| Question 7 | The answer is correct, and the correct calculations are shown. 5 |
The answer is correct, and the calculations are incorrect, or the answer is incorrect, but the calculations are correct. 4 |
The answer is correct, but the calculations are not shown. 3 |
The answer is incorrect and/, or the calculations are not shown. 2–0 |
|
| Question 8 | The answer is correct and the correct calculations are shown. 10 |
The answer is correct, and the calculations are incorrect, or the answer is incorrect, but the cal- culations are correct. 9 |
The answer is correct, but the calculations are notshown. 8–7 |
The answer is incorrect and/, or the calculations are not shown. 6–0 |
|
| Part 3 | |||||
| Question 9 | The answer and explanation are both correct 10 |
The answer is correct, but the explanation is incorrect. 9 |
The answer is correct, but the explanation is incomplete or not shown. 8–7 |
The answer is incorrect and/, or the explanation is not shown 6–0 |
|
| Question 10 | The answer and explanation are both correct 10 |
The answer is correct but the explanation is incorrect. 9 |
The answer is correct, but the explanation is incomplete or not shown. 8–7 |
The answer is incorrect and/, or the explanation is not shown 6–0 |
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