Get premium membership and access revision papers, questions with answers as well as video lessons.

Got a question or eager to learn? Discover limitless learning on WhatsApp now - Start Now!

Investment Analysis And Portfolio Management Question Paper

Investment Analysis And Portfolio Management

Course:Bachelor Of Commerce

Institution: University Of Nairobi question papers

Exam Year:2013

UNIVERSITY OF NAIROBI
MODULE II DEGREE PROGRAMME 2012/2013 (NAIROBI EVENING)
FOURTH YEAR EXAMINATIONS FOR THE DEGREE OF BACHELOR OF COMMERCE
DFI 403: INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

DATE: MAY 3, 2013 TIME: 6:00 P.M. – 8:00 P.M.

INSTRUCTIONS:
1. Attempt ALL questions
2. Marks allocated are shown at the end of each question
3. Be neat and concise: show necessary working

QUESTION ONE
a) The initial margin rate is 50% and the maintenance margin rate is 30%. Hilda uses the full amount of the margin an sells short 7,500 shares of IAPM stock currently trading at Sh. 100 per share.

i. What is Hilda’s return if the stock price drops to Sh. 90 per share? (4 marks)
ii. At what price would Hilda get a margin call from her broker? (6 marks)

b) Yusuf buys 10,000 shares of TQM on margin using an initial margin of 60% at the current market price of Sh. 175 per share. Assume a call money rate of 10% and service charge of 1%.

Required:
i. What will be the return on Yusuf’s investment if the stock price increases to Sh. 180 per share? (Assume he holds them for a year) (4 marks)
ii. Suppose the maintenance margin is 40%, at what price will Yusuf’s broker issue a margin call? (4 marks)

c) Distinguish the following possible states of a margin accounts and the action (if necessary) that would be taken by the broker/investor.
Over-margined (2 marks)
Restricted (2 marks)
Under-margined (3 marks)
[Total: 25 marks]

QUESTION TWO
a) Otieno currently owns shares in Machopevu Mutual Fund (MMF). He has received a call from his broker who recommends buying shares in a small capitalization fund managed by Timamu Investment Group (TIG). The broker says that this fund will provide significant diversification benefits for Otieno’s existing holdings. She gives Otieno the following statistics based on the performance of the two funds over the last year.

Portfolio Expected Return Standard Deviation
MMF 20% 14%
TIG 12% 11%

Required:
i. Assume the risk free rate of return is 8%, which of these funds would be optimal to combine with the risk free security? Why? (3 marks)
ii. Using the fund you selected in part (i) above, how much portfolio weights in the fund and the risk-free security would be required to earn a target return of 22%? Describe this position. (6 marks)
iii. Assume the co-varience between MMF and TIG funds is 0.00154, what would have been Otieno’s return and standard deviation over the last year if he had placed 60% of his investment in MMF and the remainder of his investment in TIG? (6 marks)

b) You are provided with the following information for investment M, RF, X,Y,Z. Portfolio M represents the market portfolio and RF is the risk-free security. X,Y and Z are individual securities.

Investment Expected Return Standard Deviation Beta
M 10% 20% ?
RF 4% 0% ?
X 6% 30% ?
Y 8% 40% ?
Z 14% 40% ?

Required:
i. Determine the betas of the five investments (Assume CAPM holds). (3 marks)
ii. Draw the Capital Market Line (CML) and the Security Market Line (SML) for the data described above. Be sure to place values and labels on the axes and indicate the location of M, RF, X, Y and Z. (3 marks)
iii. Investments Y and Z are equally risky since they have the same standard deviation; ‘True’ or ‘False’? Discuss. (2 marks)
[Total: 23 marks]

QUESTION THREE
a) Amina is considering investing in two bonds with the following characteristics (par value of both bonds is Sh. 1,000)
Bond A 10% coupon (annual), 5 years to maturity
Bond B Zero coupon bond, 10 years to maturity

Required:
i. Assuming the market yield on both bonds is currently 8%, calculate the prices of these two bonds. (4 marks)
ii. Assuming the market yield of 8% calculate the durations of each of these bonds.
(4 marks)
i. Suppose you manage fixed investment for Tana River Fund; you know that the fund has commitment to pay out Sh. 10,000,000 seven years from today. Based on your answers to parts (i) and (ii) above, calculate the positions you would take today in bonds A and B that would immunize the fund against interest rate risk during the next seven years. (4 marks)
iii. How many of each of these bonds would you need to buy today to hedge your Sh. 10,000,000 liability against interest rate risk? (4 marks)

b) Select any four money market investment vehicles and briefly explain the main features of the selected vehicles. (16 marks)
[Total: 32 marks]

QUESTION FOUR
a) In the context of technical analysis distinguish between the following pairs of concepts (illustrate using diagrams)
i. Line charts vs. Bar charts (4 marks)
ii. Upward vs. Downward trend lines (4 marks)
iii. Support vs. Resistance levels (4 marks)
iv. 20 day moving average vs. 50 day moving average (4 marks)

b) Describe the following option strategies:
i. A protective put (1 mark)
ii. A covered call (1 mark)
iii. A spread (1 mark)
iv. A stradole (1 mark)
[Total: 20 marks]

Investment Analysis And Portfolio Management Question Paper

More Question Papers

Popular Exams