Question 1 USIM Investment Holdings (UIH) is the investment arm of a local university that aims to maximise the endowment funds that has been accumulated over the years. A sum of $200 million has been approved by the university’s Governing Council for UIH to participate in market investment vehicles. The following table shows the investment opportunities and rates of return. Table 1-1: Investment Returns Investment Vehicle Rate of Return Government Bonds 0.055 STI Exchange Traded Fund (ETF) 0.088 Blue Chip Stocks 0.12 Real Estate Investment Trust (REIT) 0.091 The Governing Council’s approval comes with a guideline that UIH should not be overly aggressive in its investment strategy and has recommended the following allocation: at least 50 percent of the $200 million investment consist of government bonds, not more than 20 percent in Blue Chip Stock. Another requirement is that 30 percent of the investment is to be invested in a combination of STI ETF and REIT, of which this combination has to meet at least 40 percent allocation for STI ETF. (a) Develop the portfolio selection case as a linear programming problem. (10 marks) (b) Solve for the optimal solution using Microsoft Excel showing the relevant solution output and sensitivity output. (6 marks) BUS107e Assignment 2 SIM UNIVERSITY Assignment 2 – Page 3 of 5 (c) Interpret the reports and discuss the following decisions: (i) If the rate of return for government bonds increases to 0.06, explain if there will be any changes to the original investment mix? (ii) If the rate of return for REIT decreases to 0.081, explain if there will be any changes to the original investment mix? (4 marks) Question 2 Singapore’s Manufacturing Sector The Census of Manufacturing Activities gathers comprehensive data on the entire industrial sector with establishments engaging in activities of manufacturing and industrial servicing (EDB, 2013). Manufacturing is a key engine of the Singapore economy, accounting for some 20-25% of the GDP. Key industry clusters include electronics, chemicals, biomedical sciences, infocommunications and media, logistics, and transport engineering. The manufacturing sector comprised some 9,300 establishments and employed about 424,500 workers. As Singapore becomes an increasingly competitive location for manufacturing, fixed asset investment (FAI) in manufacturing has risen to new levels. Despite the global economic downturn, FAI remained at significant levels, emerging at the top end of 2009 forecasts at S$11.8 billion. Electronics is the bedrock of the Singapore manufacturing sector, contributing 5.2% to the country’s Gross Domestic Product (GDP) in 2012. From its modest beginning as the only TV assembly plant in Southeast Asia in the 1960s, Singapore's electronics industry has grown to become a vital node in the global electronics market. With the continuous shift of the industry's centre of gravity to Asia, Singapore's strong fundamentals in electronics industry makes it a choice location for companies to create and manage new markets, products and processes, technologies and applications for the region and beyond. (EDB, 2015) The following tables show the relevant index over the years. As an economist at a local bank, you have been tasked to advise the bank’s fund manager on the economic outlook. Table 2-1: Total Manufacturing Index Year Quarter 1 2 3 4 2011 101.3 99.3 99.4 99.9 2012 100.1 103.4 98 99.7 2013 93.8 104.2 103.1 106.8 2014 102.8 105.6 104.9 2015 BUS107e Assignment 2 SIM UNIVERSITY Assignment 2 – Page 4 of 5 Table 2-2: Electronics Cluster Index Year Quarter 1 2 3 4 2011 111.8 101.5 94.8 91.9 2012 92.6 93 87 82.1 2013 82.3 93.3 93.4 98 2014 89.8 87.9 93.4 2015 Source: partially extracted from Department of Statistics (2015) Statistical Tables from Economic Survey of Singapore http://www.singstat.gov.sg/docs/default-source/default-documentlibrary/statistics/browse_by_theme/economy/statistical_tables/essa81.xlsx (Accessed 1st July 2015) (a) Provide an understanding and background discussion on the methodology of forecasting. (10 marks) (b) Determine the seasonality of the data by conducting an in-depth seasonality analysis for Table 2-1 and 2-2. For each quarter, indicate the seasonal indexes, the deseasonalised time series and the trend line that will fit the deseasonalized time series. Adjust the seasonal indexes, if necessary. Provide justification on the appropriateness of seasonality analysis. (20 marks) (c) Employ an appropriate model to forecast the index for Table 2-1 and 2-2, from the 2nd Quarter of 2015 to the 4th Quarter of 2016. (5 marks) (d) Comment on possible forecast errors and the causes of these errors. (10 marks) (e) Develop an overall conclusion of your forecasting findings and recommendations. (10 marks) Question 3 A local property developer has a major office cum retail mall development in the city area. It is in the final stage of completion and the developer is considering the installation of a flood protection system that will help to minimise damages caused by flash flood. In the event of a flash flood, the damages caused to the underground carparks will amount to $600,000. However, the flood protection system cost $120,000 to install and is of a single usage. Furthermore, it does not provide 100% protection against damages due to flash floods. With the flood protection system installed, these are the possible damages if a flash flood were to occur: Table 3-1: Possible Outcomes Probability Damages 0.35 $0 0.25 $20,000 0.10 $35,000 0.30 $50,000 Based on the historical weather data, the probability of a flash flood occurring is 0.25. (a) Determine the decision to be made using the decision tree approach. Show the decision tree and compute the expected values for each node. Interpret the result. (18 marks) (b) Use risk analysis to determine the probability that no additional cost is incurred if the decision to install the flood protection system at a cost of $120,000 is made.