portfolio

.1. Compare the relative liquidity characteristics of direct versus indirect investment in real estate. Discuss three factors that affect the liquidity of both forms of investment.

Q.2. Ian Parkinson, as chief pension officer of a large defined-benefit plan, is considering presenting a recommendation that the pension plan make its first investments in three different types of hedge funds: 1) market neutral, 2) convertible arbitrage, and 3) global macro.

An analyst who works for Parkinson comes by with the table given below and makes the following comment: “The returns for global macro are very impressive. In fact, there are other strategies that have significantly outperformed the S&P 500, equity market-neutral, and convertible arbitrage over the past 15 years. I think that, based on their returns, we should focus specifically on the other strategies.”

A. Describe the three alternative strategies that Parkinson is considering, and evaluate each with respect to their level of market risk and credit risk. Interpret their correlations with the S&P 500 and the Lehman Government/Corporate Bond indices as presented in the table above.

B. Critique the analyst’s statement.

Q.3. Discuss the construction and interpretation of benchmarks, including biases, in alternative investment groups.

Q.4. Roger Guidry, CIO of a university endowment fund, is reviewing investment data related to the endowment’s investment in energy commodities.

A. Calculate the roll yield for Year 1.
B. Calculate the collateral yield for Year 2.

Guidry notes that the collateral yield is positive in both scenarios, although the GSCI total annual return for Year 2 is -30.5 percent. He asks for an explanation with regard to the positive collateral yield.

C. Justify the positive collateral yield by discussing the concepts of margin and implied yield.

A consultant tells Guidry: “Commodities exhibit positive event risk.”

D. Justify the consultant’s statement by discussing the relationship between commodity prices and event risk.