School of Professional Education and Executive Development

Additional Assignment in place of mid-term Test

Subject Code : BHMS4220

Subject Title : Investments & Portfolio Management

Subject Lecturer's Name Bosco Yu
Semester & Academic Year : Semester Two, 2019/20
Submission Deadline to : 24 April 2020 23:59 PM
Moodle You can submit your work anytime before the deadline but
only ONE submission will be allowed.

Turnitin Submission is Required:

This assignment question paper has a total of THREE pages (including this covering page).

Declaration of Original Work

Plagiarism is a serious misconduct. No part of students’ assignment should be taken from other
people’s work without giving them credit. All references must be clearly cited. Any plagiarism
found in students’ completed assignments can lead to disciplinary actions such as mark deduction,
disqualification or even expulsion by the School.

Prior to your submission, you MUST sign the “Declaration of Original Work” on the covering
page of your completed assignment indicating that the work you have completed is your original
work. The signed declaration must be submitted with your assignment.

Requirement
1. Answer ALL the questions in this question paper in the Answer sheet document provided.
You can either type or handwrite your answers in the Answer sheet document. Save and submit
your Answer sheet document in PDF format.

2. Start each question in a NEW page and write your answers in your own words as detail as
possible. However, the answer of each sub-question of the questions is NOT expected to be
longer than one page by typing or two pages by handwriting.

Format
You MUST include (a) full student name, (b) student number, (c) subject code, (d) subject group
(e) page number and (f) total number of pages on EVERY answer sheet.

Page 1 of 3
Question 1 (30 marks)
Suppose a person is invited to pay $100 for a coin tossing game in which if head is tossed, the person
will get back $200 while if tail is tossed, the person will get nothing. The coin is assured to be fair.
What will be the decision on playing the game or not of i) a risk averse person, ii) a risk neutral person,
and iii) a risk lover person? Explain your answer in detail.

Question 2 (total 30 marks)

Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an
expected return of 10% with a standard deviation of 30%.

i. In light of the apparent inferiority of gold with respect to both mean return and volatility,
would anyone hold gold? If so, demonstrate graphically why one would do so. (10 marks)

ii. Given the data above, re-answer question (i) with the additional assumption that the
correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one
would or would not hold gold in one’s portfolio. Could this set of assumptions for expected
returns, standard deviations, and correlation represent an equilibrium for the security market?

(10 marks)

iii. Suppose that there are many stocks in the security market and that the characteristics of stocks
A and B are given as follows:

Stock Expected Return Standard Deviation

A 10% 5%
B 15% 10%
Correlation = -1

Suppose that it is possible to borrow at the risk-free rate. What must be the value of the risk-free rate?
(10 marks)

Page 2 of 3
Question 3 (40 marks)
Lot of empirical evidence show that securities markets are efficient. However, market participants
showed you that the Legg Mason’s Value Trust, managed by Bill Miller, outperformed the S & P
500 in each of the 15 years ending in 2005. Is Miller’s performance sufficient to dissuade you
from a belief in efficient markets? As a fund manager, will you try to employ strategies in ‘beating
the market’ and put it as your highest priority in managing the investment fund for investors?
Support your answer with reference to the efficient market theory and the Code of Ethics of the
CFA Institute.

-THE END-

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