Chapter P5, Problem 1Q

A member of a firm’s investment committee is very interested in learning about the management of fixed-income portfolios. He would like to know how fixed-income managers position portfolios to capitalize on their expectations concerning three factors which influence interest rates:a. Changes in the level of interest rates.b. Changes in yield spreads across/between sectors.c. Changes in yield spreads as to a particular instrument.Formulate and describe a fixed-income portfolio management strategy for each of these factors that could be used to exploit a portfolio manager’s expectations about that factor. (Note: Three strategies are required, one for each of the listed factors.)

A portfolio manager applies a combination of value and low-volatility investment strategies and uses a custom benchmark to measure its performance. Which of the following is least likely to be a source of alpha for this portfolio manager? Select one: a. Static exposure to the value factor and low-volatility factor consistent with those of the benchmark b. Top-down macro and industry selection c. Time-varying exposures to value and low-volatility factors based on forecasted performance of the factors d. Bottom-up security selection looking for high-quality value stock

Which of the following statements is correct?   a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio.   b. The IRR method correctly ranks mutually exclusive projects.   c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis.   d. The payback period criterion properly considers the time value of money.   e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.