Q7) (i) Discuss the three theories of the term structure of interest rates

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Q7) (i) Discuss the three theories of the term structure of interest rates. Include in your discussion the differences in the theories, and the advantages/disadvantages of each.

(ii) Discuss the M2 measure of performance by answering the following questions. Why is M2 better than the Sharpe measure? What measure of risk does M2 use? How do you construct a managed portfolio, P, to use in computing the M2 measure? What is the formula for M2 ? Draw a graph that shows how M2 would be measured. Be sure to label the axes and all relevant points.

(iii) Discuss some of the factors that might be included in a multifactor model of security returns in an international application of arbitrage pricing theory (APT).

(iv) Why are many bonds callable? What is the disadvantage to the investor of a callable bond? What does the investor receive in exchange for a bond being callable? How are bond valuation calculations affected if bonds are callable?

(v) Discuss some of the accounting comparability problems involved in international investing.

Q8. (i) Discuss performance evaluation of international portfolio managers in terms of potential sources of abnormal returns.

(ii) Aunt Gunda holds her portfolio 100% in U.S. securities. She tells you that she believes foreign investing can be extremely hazardous to her portfolio. She's not sure about the details, but has "heard some things". Discuss this idea with Aunt Gunda by listing three objections you have heard from your clients who have similar fears. Explain each of the objections is subject to faulty reasoning.

(iii) Define and discuss the Sharpe, Treynor, and Jensen measures of portfolio

performance evaluation, and the situations in which each measure is the most appropriate measure.

 (iv) Explain why mean-variance analysis is inadequate for valuing market timing.

(v) What is an Exchange-traded fund? Give two examples of specific ETFs. What are some advantages they have over ordinary open-end mutual funds? What are some disadvantages?