Get premium membership and access revision papers, questions with answers as well as video lessons.
Cfm 303F Portfolio &Amp; Investment Analysis Question Paper
Cfm 303F Portfolio &Amp; Investment Analysis
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 3 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 303F PORTFOLIO & INVESTMENT ANALYSIS (SUNDAY)
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE (COMPULSORY)
i) Distinguish between:
a) An American and a European option (1 Mark)
b) A warrant and a call option (1 Mark)
c) Financial and Business risk (1 Mark)
ii) Write brief explanatory notes on:
a) Trend Walk Theory (2 Marks)
b) Agency Theory (2 Marks)
c) Real Investments (2 Marks)
iii) The stock of Mt. Elgon Holdings has a mean return of 12% with an associated total risk of 18% in
standard deviation, against a Market return of 11.58%, and a correlation coefficient with the
Market of 0.98. Suppose the Market volatility is standard deviation of 21% and the mean risk free
rate of return is 6.8%.
a) Interpret the beta coefficient of Mt. Elgon Holdings. (2 Marks)
b) Compute any three measures of portfolio performance for this stock. (4 Marks)
c) Based on CAPM, predict the cost of capital of Mt. Elgon Holdings? (2 Marks)
2
iv) You are given a call option valued at KShs. 21.85, with the underlying stock currently priced at
KShs. 88. If the exercise price is KShs. 85, interest rate is 10% and time to maturity is 91 days,
using the put-call parity approach, find the value of the corresponding put option. (5 Marks)
v) Describe any two implications of the Efficient Market Hypothesis (EMH) for portfolio managers
(4 Marks)
vi) After a comprehensive assessment of the stock Market, a portfolio manager at the Kernel Asset
Managers has made the following forecasts, regarding portfolios A, B and C.
Portfolio Expected Portfolio Return Std. Dev of Portfolio
A 17% 6%
B 14% 7%
C 15% 10%
If the Market return is 12% with a Standard Deviation of 5% and riskless rate of 7%, state the Capital
Market Line (CML) linear equation and determine which of the portfolios are efficient and which are
inefficient. (4 Marks)
(Total 30 Marks)
QUESTION TWO
i) By showing the mathematical expressions, describe the three most commonly used methods in the
evaluation of portfolio performance, and how they are interpreted. (6 Marks)
ii) As an investment analyst, you develop the following opinion about the returns of securities A and
B. Mr. Odhiambo invests equally in the two stocks.
State of Economy
Return on
Stock A
Return on
Stock B Probability
Strong 35% 40% 0.3
Average 30% 28% 0.4
Weak 25% 12% 0.3
Required:
3
Compute the expected portfolio return. Determine the standard deviation and coefficient of variation of
each security and compare by interpreting your results as you may deem appropriate. (5 Marks)
iii) By use of a diagram, illustrate how the share price of XYZ bank will react to the news that the
bank has just announced end-of-year results with a good dividend proposal, having made good
profits, both in an efficient Market and in an inefficient Market. (4 Marks)
iv) Find an expression for the expected portfolio return of a two-asset portfolio in terms of the assets’
and portfolio’s standard deviations if the two assets are perfectly positively correlated.
(5 Marks)
(Total 20 Marks)
QUESTION THREE
i. Consider the following information about stocks A and B.
State Probability
Return on
Stock A
Return on
Stock B
1 25% 5% 30%
2 45% 15% 10%
3 30% 20% -10%
Showing all the steps and formulae involved, and by finding the correlation coefficient between A
and B, determine whether stocks A & B can form a well diversified portfolio (5 Marks)
ii) Returns for Zinduka Group have been found to depend on only three risk factors, inflation, industrial
production and the interest rate. The risk free rate is 8%, the required rate of return on a portfolio
with unit sensitivity to inflation and zero-sensitivity to other factors is 13.0%, the required rate of
return on a portfolio with unit sensitivity to industrial production and zero sensitivity to inflation and
other factors is 10% and the required return on a portfolio with unit sensitivity to interest rate and
zero sensitivity to other factors is 6%. Zinduka Group has betas of 0.9 with the inflation portfolio,
1.2 with the industrial production and -0.7 with the interest rate. Assume also that the mean Market
return is 15% and Zinduka Group has a CAPM beta of 1.1. Determine the required rate of return
using both CAPM and APT. (5 Marks)
4
iii) The following information relates to three listed companies X, Y and Z. Mrs. Oloba invests 45%
and 25% of her KShs. 800,000 capital in stocks Y and Z, respectively.
State of the Economy Expected Return Probability
X Y Z
A 35% 42% 22% 15%
B 20% 25% 9% 35%
C 13% 12% -1% 37%
D 8% -5% -8 13%
Required:
Compute the standard deviation of the portfolio. {Hint: For a three asset portfolio, the std deviation, dp
= [w1
2d1
2 + w2
2d2
2 + w3
2d3
2 + 2 w1w2 d12 + 2 w1w3 d13 + 2 w2w3 d23]½}. (10 Marks)
(Total 20 Marks)
QUESTION FOUR
i) State the complete mathematical framework for the Black and Scholes model for the value of a put
option, indicating what each parameter stands for (5 Marks)
ii) State and briefly explain the relationship between a call option’s value and the following variables.
a) The underlying stock’s price (2 Marks)
b) The exercise price (2 Marks)
c) The time to maturity (2 Marks)
iii) State any four differences between Futures and Forward contracts (4 Marks)
iv) Mr. Tembo has a portfolio comprising of the stock of Alasiri (Al) Holdings and the Treasury bill
(T).
a) Derive the covariance for the two stocks in Mr. Tembo’s portfolio. (2 Marks)
b) Show that the portfolio’s total risk is given by [(1- WT)2dAl
2]½ (3 Marks)
(Total 20 Marks)
QUESTION FIVE
i) We often do asset pricing as part of the investment analysis process. The “five Greeks” are
5
measures used in understanding the dynamics of the asset valuation process. In relation to option
pricing, state and explain these measures. (5 Marks)
ii) There is a controversy whether, indeed, the efficient Market hypothesis (EMH) can explain the
reality in capital Markets. Describe any three categories of EMH anomalies, giving an example in
each case (6 Marks)
iii) The Kenya National Bureau of Statistics (KNBS) has performed a macroeconomic assessment of
the national economy and made some forecasts. Based on these forecasts and a fundamental
analysis of the stock of Mlolongo Group, you develop the following opinion.
State Expected Returns Likelihood of State
Market Unga Group
Recession 18% 23% 45%
Average 14% 15% 35%
Boom 5% -7% 20%
If the return on the short-term government bond is currently 8.5%, and with your knowledge of the
Capital Asset Pricing Model, would you recommend your client to invest in the stock of Mlolongo
Group? (9 Marks)
(Total 20 Marks)
More Question Papers
Popular Exams
Return to Question Papers