Question

Based on the following selected financial information for NORG Limited, calculate the firm’s number of days in payables.

• Revenues: $178,000
• Cost of Goods Sold: $145,000
• Receivables: $ 25,000
• Payables: $ 23,000
• Inventory: $ 40,061

Consider the multifactor APT with two factors. Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. If no arbitrage opportunities exist, calculate the expected return (in %) on portfolio A.

A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because:

	a.	portfolio returns may not be calculated in the same way.
	b.	if managers follow a particular style or subgroup, portfolios may not be comparable.
	c.	portfolio durations can vary across managers.
	d.	portfolio durations can vary across managers and if managers follow a particular style or subgroup, portfolios may not be comparable.

An investor buys 185 Amazon shares for $2,400 each. She holds the investment for 2.5 years, collects $175 in dividends per share over this period, then sells the shares for a profit of $475 each. What is her total return (in %)?

Answer 1

1). Number of days payable = (accounts payable*365)/cost of goods sold

= (23,000*365)/145,000 = 57.90 days

2). Portfolio expected return (using 2-factor APT) = risk-free rate + beta of factor1 *risk premium of factor1 beta of factor2*risk premium of factor2

= 7% + (0.5*1%) + (1.25*7%) = 16.25%

3). Option D is correct. Ranking may not be a good measure of a portfolio manager's performance as portfolio duration can vary across managers and the style of handling the portfolio (or a sub group) may also not be the same across portfolios.

4). Amount invested per share = 2,400

Total return = profit per share + dividend per share = 475 + 175 = 650

Holding period return = total return/amount invested = 650/2,400 = 27.08%