Reference no: EM133491610

Case: Universal Insurance Company is an insurance mega-store selling life, property, and casualty insurance policies in all forty-eight counties of England. The life insurance subsidiary sells products under the UniLife label, and the property and casualty subsidiary sell policies under the UniPC label.

UniLife's total assets are approximately £10 billion, which results in a surplus of £I billion. As with most life insurance companies, UniLife's asset portfolio is segmented to cover the products sold and to achieve surplus growth to expand business. The segmentation of portfolio assets is a direct result of the increased competition in the life insurance industry and represents an attempt by UniLife to maintain an acceptable spread over their crediting rate of 5% and to more effectively price its products. Total expenses associated with business operations average 2% of assets. UniLifesegments its asset base into three main asset classes: short-term/cash-like, long-term fixed-income, and equity instruments. The continued low interest rate environment, as well as improvement in equity markets, has strengthened the quality of UniLife's asset base. The following are statements made during a recent conversation by UniLife'smanagement regarding the portfolio segments:

"The main purpose of the short-term portfolio is to meet the liquidity requirements of our life insurance and annuity products. Hence, we expect this segment to be invested in assets exceeding or equivalent in safety to 90-day high-grade corporate commercial instruments. The improvement in overall quality of corporate paper has been encouraging."

"The purpose of our long-term, fixed-income portfolio is to generate sufficient total returns that not only cover the crediting rate, but add to our net interest margin. Investment grade corporates (i.e., rated at least Al) with maturities ranging from 10-20 years are representative assets for this portfolio segment. Again, the improvement of corporate issues is encouraging".

"The stock portfolio segment exists to provide longer-term growth in company surplus in the hopes of not only improving our financial condition, but also to better meet competitive pricing objectives, The majority of state regulations allow for ample investments in mid- to large-cap domestic equities, but only a small proportion (less than 5%) in international securities, Hence; the equity portfolio should generate returns exceeding the appropriate mid-to-large cap equity indexes such as the S&P MidCap or S&P 500 indexes. The equity market trend has also been positive."

Required:

A. Construct the risk and return objectives portion of an investment policy statement for UniLife is portfolio segments.

B. Construct the constraints portion of the investment policy statement for UniLife. Address the time horizon, liquidity, legal/regulatory, tax, and unique circumstances constraints. Address the time horizon and liquidity constraints for each of UniLife'sportfolio segments.

Question : 2

Rachel, CFA, is convinced that reporting portfolio performance according to the Global Investment Performance Standards (GIPS@) will provide her firm a competitive edge in the marketplace. After reading the latest information on the Standards, Rachel formulates the following statements as a guide for how she will approach implementation of GIPS at her firm.

• "All Composites will have the same beginning and ending annual dates. We will apply accrual accounting to all interest generated by the bonds in our portfolios. Starting 2010 we will calculate time-weighted portfolio returns on the date of all large external cash flows. All discretionary, fee-paying portfolios will be included in at least one composite and composites will be defined according to investment strategy, mandate, and/or objectives."

• "My firm is approximately seven years old. Since GIPS only requires five years of annual investment performance, I can easily meet that requirement. Since my reporting systems are So effective, I also will have no problem maintaining the 5-year reporting requirement into the future."

• "My effective electronic systems will have no trouble capturing and maintaining cost and market values for portfolio valuations. My system automatically generates return information every quarter and, for my international composites, uses the same exchange rate sources for the portfolios and the benchmark."

• "All of my fee-paying portfolios will be included in at least one composite. When clients decide they no longer need my services, my system automatically recalculates previous portfolio performance to reflect the removal of the portfolios from relevant historical performance presentations."

Required:

A. Indicate whether each of Rachel's statements is an accurate representation of

GIPS. If you find these statements to be inaccurate, explain the reason(s) for the inaccuracies.

Question - 3:

Peter Shoemaker, CFA, is the director of equity trading for a large mutual fund group. Shoemaker oversees the execution of roughly 5 million shares of daily trading volume. Over the past several years, it has become more difficult to efficiently handle the mutual fund group's large trade volume because the average trade size on the London Stock Exchange has fallen so dramatically. Based on a recent conference attended by Shoemaker, he believes the solution to the mutual fund group's problem is algorithmic trading. Shoemaker has told a colleague that, in the future, traders will become irrelevant and the job of the trader will be eliminated. Figure 1 provides a partial trade blotter for Shoemaker's mutual fund group.

Figure 1: Trade blotter

Stock?Trade? Size? Avg. Daily Volume?Last? Bid? Ask? Urgency

??(shares)???Price? Price? Price

Star?Sell?700,000?11,500,000?£39.75? £39.74? £39.76? High

Moon?Buy?500,000?22,00,000?£150.00 £149.62 £150.37? Low

Sun?Buy?500,000?6,000,000?£80.00? £79.98? £80.02? Low

Required:

A. Describe two primary characteristics of algorithmic trading.

B. State the appropriate trading strategy for each stock listed in the trade blotter in figure 1 and justify your selection.

C. Shoemaker has expressed concern about the role of traders in the future. State whether Shoemaker's statement regarding the future of the trader functions is correct or incorrect and support your decision with one reason.