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Cfm 303: Portfolio And Investment Analysis Question Paper
Cfm 303: Portfolio And Investment Analysis
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 303: PORTFOLIO AND INVESTMENT ANALYSIS (EVENING)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
(a) Outline the assumptions that must be made in deriving the capital asset Pricing Model
(CAPM)? (8 Marks)
(b) Butere Sugar Company Ltd. has been enjoying a substantial cash in flow. Before the surplus
funds are needed to meet tax and dividend payments, and to finance further capital expentidue
in several months time, they are invested in a small portfolio of short term equity investments.
Details of the portfolio, which consist of shares of four companies listed on the stock exchange
are as follows:
Company
Number
of shares
Beta equity
coefficient
Market
price per
share
Sh.
Latest
dividend
yield
%
Expected
return on
equity in the
next year (%)
A Ltd.
B Ltd.
C Ltd.
D Ltd.
60,000
80,000
100,000
125,000
1.16
1.28
0.90
1.50
42.90
29.20
21.70
31.40
6.1
3.4
5.7
3.3
19.5
24.0
17.5
23.0
The current market return is 19% a year and treasury bill yield is 11% a year.
2
On the basis of the data given above, calculate the risk of Butere Sugar Company Ltd’s shortterm
investment portfolio relative to that of the market. (6 Marks)
(c) The investment portfolio of Mapeni Limited consists of shares in five companies operating in
different industries.
Company Amount Invested
(Sh. Million)
Stock beta
Coefficient
A Ltd.
B Ltd.
C Ltd.
D Ltd.
E Ltd.
160
120
80
80
60
0.5
2.0
4.0
1.0
3.0
The risk free rate is 8%. The market returns have the following probability distributions for the
next period.
Market return % Probability
10
12
13
16
17
0.1
0.2
0.4
0.2
0.1
Required:
(i) Comute the expected return from the market. (2 Marks)
(ii) Calculate the beta coefficient for the portfolio. (4 Marks)
(iii) Determine the equation for the security market line. (4 Marks)
(d) By giving examples, explain how the nature of the relationship between the security returns
forming the portfolio, affect the efficient of a portfolio. (6 Marks)
QUESTION TWO
(a) The return on Malibu Oil Ltd’s ordinary shares has been found to be influenced by three risk
factors; X1, X2, and X3.
X1 – Index reflecting energy costs
X2 – Changes in the level of stock market prices
X3 – Changes in the exchange rate of the local currency relative to other currencies.
The risk premium and the Beta factor associated with each risk factor are shown below:
3
Risk factor Risk premium Beta
X1
X2
X3
4.5%
7.5%
11.25%
0.7
0.3
1.1
The risk free rate is 8.25%
Determine the required rate of return on Malibu Oil Ltd’s shares using:
(i) Arbitrage pricing model. (3 Marks)
(ii) Capital asset pricing model. (3 Marks)
(b) Mr. Charles Kabazi has a capital of sh.1,000,000 which he wishes to invest in three setors of
the company: agriculture, service and manufacturing. The funds will be allocated as follows:
Sector Amount invested
Sh.
Agriculture
Service
Manufacturing
400,000
200,000
400,000
Details on the posible future economic states, their probabilities of occurrence and the expected
return for each of the sectors are presented below:
Possible future
economic state
Probability of
occurrence
Expected return for each sector %
Agriculture Service Manufacturing
Recession 0.1 16 14 3
Average 0.4 14 19 5
Boom 0.5 20 22 6
(i) Determine the risk associated with the investment in each of the three sectors above.
(6 Marks)
(ii) Determine the expected portfolio return. (2 Marks)
(c) Outline the efficient market hypothesis. (6 Marks)
QUESTION THREE
(a) Outline any 5 factors that influence the value of a call option. (10 Marks)
(b) The shares of ABC Ltd. Are currentlu selling at Sh.290 each at the stock exchange. The
exercise price for a six month call option is Sh.260 per share. The prevailing risk free rate is
4
12% p.a. in the past, the variance of ABC Ltd.’s share price has been 15%. Using the Black
and Scholes option valuation model determine the value of this call option. (10 Marks)
QUESTION FOUR
(a) Outline Jensen’s portfolio performance measure (JPPM) conclusions about the variable ‘a’ after
regression analysis has been carried out. (6 Marks)
(b) Discuss any 3 limitations of JPPM. (6 Marks)
(c) Explain any four conceptual differences between the arbitrage pricing model and the capital
asset pricing model. (8 Marks)
QUESTION FIVE
(a) You are provided the following information concerning a given security. The market risk is 0.5
and the covariance between security X and the market is 0.2. The risk free rate and the
expected return on the market are 0.09 and 0.12 respectively. The standard deviation of
security X is 0.4. Using the SML equation, determine the return of security X. (4 Marks)
(b) Assume the following information:
(i) Expected return of the market = 12%
(ii) Risk free rate = 5%
(iii) Market risk = 4%
Consider the following portfolios and examine their efficiency.
Portfolio SP Actual Return
1 8 19
2 12 25
3 6 16
4 16 32
5 10 22.5
6 2 8
(6 Marks)
(c) Outline the differences between portfolio theory and capital asset pricing model.
(10 Marks)
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