9008INMT - Optimal Risky Portfolios - Management Assignment Help

Assignment Task

a. Critically discuss the arbitrage pricing theory (APT), and the Fama-French (FF) three-factor model in terms of rationale for why (or why not) academics and or practitioners use them. Critically discuss any updates (i.e. at least one) to the original FF three-factor model and their purpose.
 

b. Economic indicators are often used to predict the business cycle. Provide an outlook for the economy based on data showing that the index of consumer expectations has risen and the initial claims for unemployment insurance has fallen. Critically discuss the consequences of that from a portfolio management perspective, elaborating on the choice of assets from cyclical and defensive industries.
 

c. Using the Black-Scholes formula and the cumulative normal distribution (i.e. see Table 21.2, p. 719 of the prescribed textbook [p. 717 of the 11th edn.]), compute the call and put option prices using the data from Table 1 of the data file. First, compute d1 and d2, then using Table 21.2 in the textbook, find the N(d)’s and use interpolation if needed to find the exact call and put prices. Critically discuss the uses and limitations of call and put option and the results from Table 1.
 

d. Assume the current futures price for palladium for delivery 10 days from 21 January 2021 is US$2,400.00 per ounce. Suppose that from 22 January 2021 to 4 February 2021, the palladium prices were as in Table 2 of the data file. Also, assume one futures contract consists of 100 ounces of palladium. In addition, assume the maintenance margin is 5% and the initial margin is 10%. Calculate the daily mark-to-market settlements for each contract held by the short position. Critically discuss basis risk (i.e. you can give an example if it makes it easier to discuss) and margins. [Hint: see Chapter 22 and examples 22.1 and 22.2 of the textbook.]
 

e. Evaluate a fund’s portfolio performance in terms of the market (e.g. outperformance or underperformance) using the Sharpe ratio, Treynor measure, Jensen’s alpha and the Information ratio using data from Table 3 of the Capstone Assessment Data File. Assume the risk-free rate is 1.75%. Critically discuss each of the four measures, plus the Morningstar risk-adjusted return model.

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