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ASSIGNMENT 02 Due date: 21 September 2016
Unique number: 702431
Aim: To evaluate your knowledge of some of the fundamental aspects of study units 4 to 7,
which deal with fixed-income, equities and alternative investments portfolio management,
and performance management and attribution on investment portfolios.. a) UNISA case study (25) UNISA recently revised the investment policy statement (IPS) for its retirement plan portfolio. The
return objective for equities is to earn 1 percent above the return on a broad market index, relative
to the benchmark.
Matombo Mabwe identifies an enhanced index manager that she expects would satisfy the IPS
objectives for both return and risk. Mabwe believes it is possible to improve the portfolio?s riskadjusted return by also adding active equity managers. He recommends a core-satellite portfolio
strategy for the equity portion of the plan?s portfolio as shown below. Mabwe determines that the
active returns of the selected managers are not correlated.
Recommended Core-satellite Portfolio Equity Managers Allocation Expected
Risk Fees Enhanced index
Core-satellite portfolio 50.0%
0.3% *Returns are net of trading expenses and gross of fees.
(i) Calculate the information ratio of the core-satellite portfolio. Show your calculations. (3) (ii) Determine whether Mabwe?s recommended core-satellite portfolio is appropriate for UNISA.
Justify your response with two reasons specific to UNISA.
(4) Alternative investments are also part of UNISA retirement plan portfolio. Mabwe has a strategy of
rolling forward a long position in platinum futures traded on JSE. Mabwe?s expectations are as
Electricity supply disruptions in South Africa, the world?s dominant platinum producer, will cause
platinum supply to fall and spot prices to rise, interest rates will rise, and the convenience yield on
platinum will increase. Mabwe observes that his expectations are not yet reflected in platinum
futures prices. 2 INV4801/101 Mabwe reviewed the recent performance of the platinum futures and has found that for the last 12
months, the platinum futures had a roll return of 6.4% and a spot return of 10.2%. The collateral
return on the platinum futures over the past 12 months was 7.1%.
Determine, given that Mabwe?s market expectations are correct, whether an increase, a
decrease, or no change in each of the following return components should be expected:
Justify each response with one reason
(9) (iii) a) spot return (price return)
b) collateral return (collateral yield)
c) roll return (roll yield)
(iv) Calculate the total return on the platinum futures. (3) (v) Discuss the potential benefits to UNISA retirement plan of adding commodities as an asset
(6) b) ZB Bank case study (25) Hardlife Shumba is a fixed income portfolio manager for ZB Bank. Shumba is reviewing the
portfolios of several pension clients that have been assigned to him to manage. Two of these
portfolios are Athenaites Spar and UZ pension plan has the following characteristics: Sector Athenaites
Duration Zimbabwe treasury
Non-Zimbabwe governments 14.6%
2.50 Bond index benchmark for Athenaites Spar bond portfolio has an effective duration of 6.73.
(i) Calculate the duration of Athenaites Spar bond portfolio and asses the interest rate risk of
the portfolio versus the benchmark.
(4) (ii) Calculate the spread duration of UZ pension plan portfolio and evaluate the credit risk of the
portfolio versus the Zimbabwe mortgages.
(4) Abigail Mpofu is a pension consultant at ZB Bank and is asked to evaluate the following portfolios: Portfolio A is highly concentrated, with five stocks representing 75% of the total portfolio.
Portfolio B is highly diversified with over 400 stocks, none of which represent more than 1%
of the total portfolio. 3 Portfolio C is a diversified portfolio of 70 stocks, with the top 10 names representing 30% of
the total portfolio The following investment results were recorded during 2015:
ZSE Index* Standard deviation 42%
1.0 *ZSE Index represents the market portfolio.
Risk-free rate: 6%
(iii) Compute the Sharpe, Treynor, and Jensen measures for each portfolio. (iv) Identify which portfolio had the best risk-adjusted performance in 2015. Justify your
selection with two supporting arguments.
(5) Godfrey Marozva, CFA
DEPARTMENT OF FINANCE, RISK MANAGEMENT AND BANKING ©
UNISA 2016 4 (12)