Question 1

1.  For this question,
assume taxes, depreciation and amortization are always equal to zero. Consider
an all‐equity firm with market capitalization equal to $10,000,
earnings equal $600 per year, and with zero cash.

a.  What are the P/E
and EV/EBITDA of the firm?
The firm then decides to change its capital structure. It takes on $6,000 of
debt and use all debt proceeds to buy back its own stock. The new debt is a
perpetuity with interest rate equal to 3% per year.

b.  What are the P/E
and EV/EBITDA of the firm after the capital structure change?

c. 
Based on your answers to a) and b), explain why, compared to P/E
ratios, EV/EBITDA is a conceptually superior
valuation ratio.

Question 2

1.  When defining the
Russell 3000 Value and the Russell 3000 Growth (or Glamour) indices, Russell
separate stocks according to Price to Book Ratios only. In contrast, when
defining the S&P 1500 Value and S&P 1500 Growth (or Glamour) indices,
S&P uses a combination of P/B, P/E and P/Sales. Discuss which approach is
superior in terms of capturing the outperformance of Value over Growth (or
Glamour).

Question 3

1.  Choose one signal
from each of the following classes of signals: Value, Quality, Risk, Price
Trends, and Information. For each signal, explain:

a.  How is the signal
calculated? Explain precisely what you
calculate in each case

b.  Which direction
does it go? (I.e., high signal means low or high stock returns going forward?)

c. 
Provide one potential explanation
for why the signal is able to forecast relative stock returns.

Question 4

1.  In a meeting of an
investment fund, Andrew is pitching stock ABC, while Ximena is pitching stock
XYZ. 
To support his pitch, Andrew mentions that most sell‐side analysts
covering ABC have “strong buy” recommendations, while most sell‐side analysts
covering XYZ have “hold” recommendations. Both stocks are part of the
S&P1500 index. Does Andrew have a good point? Make sure to support your
answer using output from Portfolio123.

Hint: How would you use Portfolio123 to verify whether analyst
recommendations can forecast relative stock returns?

Question 5

1.  Backtest the
performance of the UM Super Combo ranking system over MAX time period using
three Universes: S&P 500, Russell 3000, and ALL FUNDAMENTALS. Use the
following parameters: All Sectors, Minimum Price=3$, rebalancing every 4 weeks,
10 buckets.

a.  Copy paste the bar
graphs with annualized returns.

b.  Explain as well as
you can the calculations P123 does to generate the graphs above.

c. 
In which of the Universes does the UM Super Combo ranking system
“work” best? TO measure how well it works, consider the spread
between the extreme buckets, and the smoothness (monotonicity) across buckets.

d.  Can you rationalize
the results in c?