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Question Paper |
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Section D : Case Study (50 Marks) · This section consists of questions with serial number 1 - 5. · Answer all questions. · Marks are indicated against each question. · Do not spend more than 80 - 90 minutes on Section D. Case Study Read the case carefully and answer the following questions: 1. The case mentions that Mr. Shukla is of the opinion that performance measurement with peers is more relevant than comparing the performance with some benchmark. Do you agree? Discuss. (7 marks) < Answer > 2. a. Calculate the ratio of alpha to
residual risk for all the funds. b.
What does this ratio indicate?
Which fund has performed the best on the basis of this ratio? (8 + 2 = 10 marks) < Answer > 3. Estimate
the amount of the excess returns earned by these funds due to inadequate
diversification. (8 marks) < Answer > 4. a. Calculate the amount of the fund to be allocated to each of the bonds so that future liabilities can be met with the coupon and redemption value of the bonds. Also show the total amount invested in the five bonds. b. If bonds P, Q and R are not available, calculate the proportion of fund to be invested in the remaining two bonds so that the portfolio is perfectly immunized. (10 + 5 = 15 marks) < Answer > 5. Does
duration of a bond predict the total interest rate risk exposure of a bond?
Discuss (10 marks) < Answer > Mr.Ashutosh
Shukla has been recently appointed as the portfolio manager of Goldmine
Investment Ltd. His first assignment calls for evaluation of the performance
of some funds managed by his firm and also the funds managed by other
investment companies.Mr. Shukla is of the view that performance measurement
with peers is more relevant than comparing the performance with some
benchmark. He has the following data with him:
Ashutosh
has been asked to monitor the performance of the Hirsch fund and advise one
of the high net-worth clients of Goldmine Investments, Mr. Avinash Agarwal.
Hirsch fund has invested in four types of asset classes: Large cap stocks,
small cap stocks, corporate bonds and money market securities. The weights of
the asset classes in the benchmark index and in the fund and the returns
generated are as follows:
Mr. Avinash Agarwal has to repay the following outstanding debts in near future. The details of the debt obligations are:
The cost of funds for the debt amount is 9% p.a. Mr. Agarwal wants to construct a bond portfolio so
that the future debt obligations can be exactly met with the amount of the
inflows available from this portfolio. Mr. Ashutosh Shukla has chosen the
following bonds for this purpose:
The face value of these bonds is Rs.100. Mr.
Agarwal has informed Mr. Shukla that he is personally interested in investing
in bond T. Mr. Agarwal has asked Mr. Shukla to prepare a plan for dedicated
investments that will meet the forthcoming liabilities. He also wanted some
information on the risk characteristics of the bonds available The
risk free rate of return is 5% and return from the market index is 12%. The
variance of the market return is 20%. END OF SECTION D Section E : Caselets (50 Marks) · This section consists of questions with serial number 6 - 13. · Answer all questions. · Marks are indicated against each question. · Do not spend more than 80 - 90 minutes on Section E. Caselet 1 Read the caselet carefully and
answer the following questions: 6. The caselet describes the good performance of equity funds in India during 2003. However, index funds and technology sector funds have been the laggards of the year. What according to you are the factors of these mutual fund schemes that contributed to their poor performance. (7 marks) < Answer > 7. There are various measures available for evaluating the performance of mutual funds. However, practitioners as well as academicians have time and again criticized these measures on various grounds. Discuss the charges leveled against these risk-adjusted performance measures. (10 marks) < Answer > It has
been a breathtaking year for investors in equity mutual funds. The majority
of equity funds have beaten the market indices by a huge margin. One in every
four equity funds has managed to double its NAV over the past year. And even
the laggards in the equity fund category have notched up returns of 60-65 per
cent over the year. But what makes the equity fund rankings for 2003
particularly interesting is the wide divergence in the portfolios, sector and
stock preferences of the funds, which have made it to the top of the
performance charts. In the previous boom phases, fund managers usually rode
on one sectoral theme to beat the market indices. But over the past year, fund managers have been
quite venturesome, packing their portfolios with mid-cap stocks and stocks
from unconventional sectors such as chemicals, fertilisers and capital goods,
outside of the conventional basket of large-cap, growth stocks. Equity fund performance in 2003 once again makes a
strong case for active investing. In 2003, equity funds notched up an average
return of 85 per cent, outpacing the narrow market indices, the S&P CNX
Nifty and the BSE Sensex, by a whopping 21 and 19 per cent respectively. What is more, as an investor, you had a fairly
good chance of picking an equity fund that outpaced these indices. About 98
of the total of 137 equity funds, or seven in every 10 funds, outpaced the
Nifty and the Sensex. Equity funds also set straight their track record vis-à-vis
the S&P 500 index. In the preceding four years, few equity funds managed
to outpace the broader market index. But in 2003, with fund managers actively
seeking opportunities outside the basket of frontline stocks, 66 of the 137
funds managed to beat the S&P 500 index. In what is a promising trend for investors, many
of the new entrants to the equity fund arena have made it to the top of the
rankings in 2003. Funds such as HSBC Equity Fund, HDFC Tax Plan 2000 and
Sundaram Select Midcap, with a relatively recent debut, have made it to the
top quartile of performers in 2003. Given that these funds have delivered good
performance in just one market cycle, it may be early days yet to judge the
performance of these funds. But they certainly deserve to be watched closely
by investors for investments at a later date. Investors who stayed with the tried-and-tested
funds would not have been disappointed in 2003. Diversified equity funds with
a good five-year track record, such as HDFC Equity Fund, HDFC Taxsaver, Franklin
India Bluechip and Templeton India Growth Fund, made it to the top quartile
of the return rankings, with over 100 per cent returns, even if they didn't
figure among the top five. Though the returns on these funds have been
significantly lower than that of the top five (which managed between 147 per
cent and 165 per cent), investors should not contemplate a switch to the top
five funds. While investing in equity funds, consistency is definitely a more
valuable asset than high absolute returns over a short period. While diversified equity funds as a class have
acquitted themselves well, index funds and technology sector funds have been
the laggards of the year. With returns of 65-70 per cent, index funds
tracking the Nifty and the Sensex are piled up at the bottom quartile in the
performance rankings for 2003. With technology stocks slow to participate in the
rally, sector funds focussed on IT and software stocks, with returns of 30-40
per cent in the year, make up the tail end of the rankings. Caselet 2 Read the caselet carefully and
answer the following questions: 8. What are Exchange
Traded Funds (ETFs)? How do you think that though ETFs involve paying
commissions still they cost less than the normal funds? Discuss. (7 marks) < Answer > 9. The caselet argues that
ETFs gel well with traditional asset
allocation models. Do you agree? Discuss (8 marks) < Answer > The
Exchange Traded Funds (ETFs) have become immensely popular among the investor
community. They provide the much-needed diversification to the portfolio. By
providing the correlation of assets to the minimum levels, the ETFs have
passed a big hurdle on the road towards popularity. Even
the ETFs have several advantages to tell; they are mainly picked up for the
benefits of diversification that they provide. ETFs can combine assets in a
judicious proportion to introduce the much-needed diversifying effect to the
portfolio. Exchange Traded Funds tend to capture the performance of the
entire basket therefore it becomes handy for the investor to have the benefit
of a diversified portfolio by including few ETFs in the portfolio. Mutual
funds also offer diversification, but they are always prone to the temptation
of shifting in style by the manager. ETFs, in these times promise the purity
of asset class with a totally transparent holding of the assets with a daily
disclosure. Time
and again, the contribution of the asset allocation towards the final outcome
of a portfolio has been stressed upon several times. Thus, asset allocation
models have been designed to produce efficient portfolios with an expected
rate of return and a pre-targeted variability of returns; all with the
assumption that long-term returns are approximated with long-term historical
returns. It has been seen that ETFs are appropriate tools with which asset
allocation models get a good compliment. Another
great advantage that the ETFs bring to the table is the cost advantage.
Traditionally, the Exchange Traded Funds have found to be the ones with the
lowest expense ratios of as compared to any other competitor. They definitely
have a cost advantage over the actively managed mutual funds. Costs
associated with the portfolio can reduce the returns generated by the
portfolio significantly over a longer investment horizon of one to two
decades. But it may also be noted that a transaction in ETF involves paying
of commissions on the part of the investor. It is generally observed that the investors tend to be more observant towards the cost of investment when the returns generated by their portfolios are low or negative. Nevertheless, despite of their magnitude, costs associated with the investments are to be kept in mind. In this case, the ETFs can provide an opportunity to register higher returns by reducing investment expenses incurred. Caselet 3 Read the caselet carefully and
answer the following questions: 10. The
caselet mentions that though hedge funds are perfectly legal, there have been
allegations that they increase volatility in the markets and may lead to an
economic crisis. Given the role of hedge funds in the recent boom in the
Indian stock market, do you think that the days of hedge funds are numbered?
Discuss. (10 marks) < Answer > 11. What are participatory notes?
How can these notes be used by hedge funds/FIIs to manipulate the market?
Discuss. (8 marks) < Answer > The
year 2003 ended on a sound note in India as the Indian Stock Exchange in
Bombay closed up 1.88 percent at 6,026.59 points. The intra day high was
6034.38 points, about 100 points away from its life intra day high of 6150
points reached in the month of February 2000. The market capitalization of
Indian stocks has doubled to US$280 billion during 2003. Such performance comes
as investors expect good earning figures, the earning season being just
around the corner. The rally was broad- based; however, the oil and gas
sector led the way. The
growth in the Indian Stock markets undoubtedly helped boost the Indian
economy to one of the fastest growing markets in the world. During 2003, the
Bombay benchmark rose by an incredible 72%, pushing the Indian market to the
number two position as the best performing market in Asia Of the
total FII inflow till date in the Indian stock market about 23% has been
through PNs. About 25% of this, or 5.7% of the total inflow, has come from
entities unregulated by overseas financial regulators. And,
hedge funds account for a major part of the 5.7% inflow. Most US hedge funds
enjoy exemptions from the Securities & Exchange Commission, as they have
been formed via private placements by a handful of wealthy investors. These
funds have very little disclosure requirements and are restrained by US
authorities from advertising or reaching out to the public as investment
advisors. Hedge
funds, which have traditionally followed the money trail and market action,
are not very far behind. During the 2003 session, total hedge fund assets
flowing into the Indian market was about US$ 2 billion. Unlike traditional
mutual funds, which rely on a “buy and hold” strategy, hedge funds move in
and out of markets in anticipation of changes and market imperfections,
hoping to take advantage of such opportunities. It may
be mentioned that the original concern over PNs was the possibility of a
surrogate entry by Indian investors, routing back their undisclosed money
parked abroad. From the information submitted by FIIs, Sebi had found that a
number of PN beneficiaries were entities with Indian names. This reverse
hawala operations seemed plausible, as the stock market boomed and the dollar
recorded a sustained fall against the rupee. It
should be noted here that hedge fund strategies are perfectly legal, but
emerging markets such as India or Malaysia have always viewed them
suspiciously. During the previous Asian financial crisis, the former
Malaysian leader, Dr. Mahatier Mohammed charged that George Soros and other
hedge funds were responsible for the financial crisis facing his country, as
well as other Asian countries There
is a widely shared perception that since hedge funds take both long and short
positions, use derivatives, leveraging, build high return expectations and
take exposures in multiple markets, they could lend volatility through quick
exits. However, several market participants strongly feel that this is a
misconception! END OF QUESTION PAPER |
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)
= 12,99,801
= 7,38,132
= 6,11,833
= Rs.4,64,984 
=3.31 years
4
