TUTORIAL 7
Portfolio Management
ELECTRONIC WARNING NOTICE FOR COPYRIGHT
STATUTORY LICENCES
Question 1
A commercial bank has the following assets in its portfolio: $10 million in cash reserves with the Fed, $25 million
in T-bills, and $65 million in mortgage loans.
◦ If the bank has to liquidate the assets today, it will receive only $98 per $100 of face value of the T-bills.
Liquidation at the end of one month (closer to maturity) will produce $100 per $100 of face value of the T-bills .
◦ If the bank has to liquidate the assets today, it will receive only $90 per $100 of face value of the mortgage
loans. Liquidation at the end of one month (closer to maturity) will receive $97 per $100 of face value of the
mortgage.
◦ Calculate the one-month liquidity index for this bank using the above information.
◦ What are the weights of difference assets in the portfolio?
◦ Cash: 10 / (10 + 25 + 65) = 0.1
◦ T-bills: 25 / 100 = 0.25
◦ Mortgage: 65 / 100 = 0.65
◦ I =0.1*(1.00/1.00) + 0.25*(0.98/1.00) + 0.65*(0.90/0.97) = 0.948
Question 2
◦ We have some information about the market depth for ANZ bank shares.
◦ 1). Calculate the bid-ask spread
◦ bid-ask spread = ask – bid = 33.91 - 33.9 = $0.01
◦ 2). What is the best estimation of the “genuine price”?
◦ midpoint = (ask + bid)/2 = (33.91 + 33.9)/2 = 33.905
◦ 3). What is the best price that you could buy one share when placing a market order?
◦ We execute our market buy order against the limit sell orders shown in the limit order book. The lowest price that we
can buy from these sellers is at $33.91, which is the best ‘ask’ or ‘offer’.
◦ Buyer has to initiate at 33.91 in this case to make the transaction happens.
◦ 4). How much money could you sell 10,000 shares for, using a market order? (Note that in this question you are selling,
in the previous question, you are buying).
◦ We can only sell to the buyers, and they are prepared to sell 7,000 shares at
◦ $33.9, and then we’ll have to sell the remaining 3,000 shares at the slightly worse price of $33.89.
◦ Sales = 7,000*33.9+3,000*33.89 = $338,970
◦ 5). What is the implicit cost of selling these 10,000 shares, given your 'true
price' answered above?
◦ The actual sale price less the ‘true’ midpoint price summed across all
stocks will give the total implicit cost.
◦ Implicit Cost = abs(7,000*(33.9-33.905))+abs(3,000*(33.89-33.905))= 80
Question 3
◦ We have some information about the market depth for Heritage Bank Notes (ticker:
HBSHA).
◦ 1). What is the bid-ask spread on these notes?
◦ $0.05
◦ 2). What is your best estimate of the 'true price' of these notes?
◦ $108.575
◦ 3). What is the best price that you could buy one Heritage Note when
placing a market order?
◦ $108.6
◦ 4). How much would it cost to buy 200 notes using a market buy order,
excluding explicit transaction costs?
◦ Expense = 94*108.6 + 106*109 = $21,762.4
Question 4
◦ Do you think a firm’s condition will be better if they hold a significant amount (say, more than 98%) of
liquid asset?
◦ The key of liquidity management is to find the balance point of holding a portion of liquid asset in case
of fire sale and making sure the asset will generate you a reasonable rate of return.
◦ Thus if a firm has 98% of the asset as liquid asset or has a liquidity ratio close to 1, it means the asset
will generate limited returns and it is actually not a good signal for the firm’s long-term development.
◦ Suppose the same firm has the following data. Calculate the firm’s turnover, bid-ask spread and Amihud-
illiquidity spread in millions on Feb 7, 2020, assuming there is no share split.
◦ Date Market Cap Share-outstanding Daily volume Dividend Closed Ask Closed
Bid
◦ 2020.2.6 186,000,000 7,000,000 60,000 0 27.18 26.23
◦ 2020.2.7 185,460,000 7,000,000 57,900 0 26.95 25.37
◦ Turnover in % : 57,900 / 7,000,000 * 100% = 0.827%
◦ Daily closed bid-ask spread: (26.95 – 25.37) / (26.95 +25.37) = 0.0302
◦ Daily closed price on 2020.2.7: Price t = Mkt cap / Share outstanding = 185,460,000 / 7,000,000 = 26.49
◦ Daily closed price on 2020.2.6: Price t-1 = Mkt cap / Share outstanding = 186,000,000 / 7,000,000 =
26.57
◦ Daily return on 2020.2.7 (no dividend and share split) : (26.49 – 26.57) / 26.57 = -0.00306
◦ Amihud on 2020.2.7 = Abs(-0.00306) / ($26.49*57,900) * 1,000,000 = 0.002
Question 5
◦ Download the excel file “Transaction_level_data” from blackboard and finish the following tasks.
◦ 1, identify the difference between trade and quote
◦ 2, initially clean the data by applying the following rules:
◦ 1), trading time should between 9am to 5:30pm;
◦ 2), ask price should be larger than or equal to bid price
◦ 3, calculate the midpoint;
◦ 4, Assign the order sign following the method by Lee and Ready (1991);
◦ 5, Calculate the upgraded version of effective spread
The materials used in these slides are reproduced with the permission of McGraw-Hill Education.