MN50322_Exam_answers_2009-10

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1、MN503222009/0AnswersQuestion1a)Theyhavetocommenton2empiricalstudieswhichshowthatstrategicassetallocationisthedominantforceindeterminingaportfolio’slong-termperformance.The2othermaindecisions(securityselectionandmarkettiming)arenotasimportant.Theoriginalpaper,fromBrinson,HoodandBeebower

2、(1986),showsthat94%ofthevariabilityoftotalportfolioreturnsisexplainedbythestrategicassetallocation.Amorerecentstudy(fromtheVanguardGroup,2003),showsthat,onaverage,77%ofthevariabilityofafund’sreturnswasexplainedbyitsstrategicassetallocationpolicy,withmarkettimingandstockselectionplaying

3、minorroles.Studentscansupporttheirargumentationwiththefollowinggraph(thethreecurvesreflectsampleassetallocationstrategies:aggressive,balancedandconservative,whereasthestraightverticallinesrepresenttherangeofreturnsbyusinganactivemanagementstockselectionstrategy):b)Thentheyhavetodiscuss

4、therelevanceofthisstatementbasedonthelimitationsofpreviousstudies(appliesonlytohighlydiversifiedpensionfunds)andtheabilityofinvestorstodotacticalassetallocationandstockselection…Question2a)Theyhavetodefineefficientmarket,valuestocks,growthstocks,theCAPM,marketrisk…"EfficientMarketsHypo

5、thesis"(EMH)statesthatstockpricesreflectinformation.3of3MN50322Ifmarketsareefficientthennewinformationisreflectedquicklyintomarketprices.Conversely,ifmarketsareinefficientinformationisreflectedonlyslowlyintomarketprices,ifatall.a)Thentheyhavetodiscussthe“value”anomalyrelativetotheCAPM:

6、Whydotheyoutperform?Whydoesn’teverybodyholdvaluestocks?Etc.b)Thentheycantalkaboutothermarketanomalies,asthesizeeffect…Question3Investmentpolicystatement:BeforeAfterReturnobjectiveOutperformthebenchmarkreturnMatchthebenchmarkreturnRisktoleranceModerate–becauseofmediumtermnatureofliabili

7、tiesLow–becauseoflimitedabilitytoassumemoreriskTimehorizonMediumShorterbecauseofplandemographicsLiquidityModerate–tofundmonthlybenefitpaymentsHighliquidityneedExampleofnewassetallocation:AssetclassAllocationU.K.largecapitalizationequities20%U.K.smallcapitalizationequities8%Internatio