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Practice Questions on Portfolio Management and Investment Strategies

Question One

Question One

Phil got very nervous about the stock market at the end of the trading day on 9/17 and decided to take a short position in 5,000 Russell 3000 futures contracts. Phil’s portfolio at the end of the day – close - is shown in Table One.

Table One

Phil’s Portfolio Value at 9/17 close

Position

Amount

(millions)

Russell 3000 ETF

$37.000

Barclays Aggregate ETF

$13.000

Russell 3000 Futures

Short 3000 contracts


Table Two shows the pricing of the Russell 3000 futures contract at the market close on 9/17. 

Table Two

Russell 3000 Futures Contract Pricing

Index

Spot/Cash Price

Futures Price

Time to Expiration

Russell 3000

$1,221.17

$1,219.88

90 days


What is the value of Phil’s portfolio at the end of trading on 9/18 if (1) the return to the Russell 3000 was -1.87% during trading on 9/18 and (2) the return to the Barclay’s Aggregate was 0.23% during trading on 9/18? 

Question Two

A defined benefit pension plan with assets and liabilities shown in Table Three below wants to eliminate the impact of interest rate changes on its “funded status”: the difference between the value of the plan assets and liabilities. 

Table Three

Defined Benefit Pension Plan Assets and Liabilities 

Plan Assets

Asset Class

Market Value

(millions)

Modified Duration

Fixed Income

$51.00

6.31

Equity

$42.00

0.00

Plan Liability

 

$100.00

13.45


What notional value of the interest rate swap shown below do you recommend the plan take? 

Also indicate whether the plan’s interest rate swap position should (1) pay fixed and receive floating or (2) pay floating and receive fixed. If the plan should pay floating and receive fixed, then enter “floating” in the Pay column and “fixed” in the Receive column.

Table Four 

Interest Rate Swap 

Tenor

(Years)

Payment

Frequency

Rate

Notional

Pay  

Receive

10

Annual

4%

 

 

 


Question Three

A hedge fund manager has taken two swap positions shown in Table Four. Both swaps are annual pay. 

Table Four

Hedge Fund Manager Swap Positions

Position

Pay

Receive

Tenor

Rate

Notional

(millions)

1

Fixed

Floating

10

3.5%

4.828

2

Floating

Fixed

5

3.5%

10.000


Under what conditions does this trade make a profit or loss? Insert either “positive” “negative” or “zero” in each row of Table Five and explain your answer. 

Table Five

Swap Position P&L 

Market Conditions

Trade Profit

Interest Rates Rise after trade is made

 

Interest Rates Fall after trade is made

 

Yield Curve Steepens after trade is made

 

Yield Curve Flattens after trade is made

 


Question Four

Two hedge fund managers are betting on a rally in US stocks. Ozzie goes long $1,000,000 notional amount of the Russell 3000 futures and Phil goes long $1,000,000 notional amount of S&P 500 futures. The spot (cash) and futures market conditions when they put their trades on are shown below. 

Table Six

Spot/Cash and Futures Market Data 

 

Spot/Cash

Futures

Index

Price

Annualized Dividend Yield

Price

Expiration

(years)

Russell 3000

$1,220.54

1.30%

$1,209.56

1

S&P 500

$2,068.78

2.00%

$2,037.75

1


(A) Over the next year both equity indexes have a 6.30% total return. What are the dollar returns to Phil’s position and Ozzie’s position? 

Table Seven

Investor Returns

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Investor

Futures Position

Spot Market Total Return  

Dollar Return

Phil

Long $1 million S&P 500

6.30%

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