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Cfm 303: Portfolio &Amp; Investment Question Paper
Cfm 303: Portfolio &Amp; Investment
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE I EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 303: PORTFOLIO & INVESTMENT
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Outline an option claim as used in investment giving two main types of options depending on
when they are exercisable. (5 Marks)
(b) Explain the term efficient portfolios. (3 Marks)
(c) An investor is considering making an investment in the share of ABC Limited. He following
are the attributes of 5 economic forces that influence the returns of the company’s shares.
Factor Bea Expected Values (%) Actual Values (%)
GNP 1.95 6.00 6.50
Inflation 0.85 5.00 5.75
Interest rate 1.20 7.00 8.00
Stock Market index 2.50 9.50 11.50
Industrial production 2.50 9.00 10.00
The risk free rate of return of ABC shares is 9%. Calculate the expected rate of return on the
shares using the Arbitrage Theory (APT). (4 Marks)
Why is Beta (ß) an important factor in APT? (2 Marks)
2
(d) Explain the difference between the capital Market line and security Market line. (4 Marks)
(e) You have identified two quoted shares which you believe will exhibit negative correlation in
their possible returns over the next year, as follows:
Probability Predicted rate of return
Hitech Plc Reddibank plc
State A 0.30 25% 14%
State B 0.45 22% 18%
State C 0.25 12% 20%
1.00
Required:
(i) Calculate the expected return, variance and standard deviation of each security.
(4 Marks)
(ii) Is the correlation between the two shares returns likely to be positive or negative?
(2 Marks)
(iii) You construct a portfolio consisting of 70% by value of Hitech shares and 30%
Reddibank shares.
What are the returns of this portfolio for each of the possible states, A, B and C?
Calculate the expected return, variance and standard deviation of the portfolio from
these figures. (4 Marks)
(f) Explain the difference between a forward and a futures contract. (2 Marks)
QUESTION TWO
(a) Calculate the required return from the following securities using the CAPM.
rm
%
dm (Std.
Dev.) %
rf
%
Security risk
%
Cor
Security A 15 5 8 7 1.0
Security B 16 8 8 6 0.5
Security C 12 3 8 5 0.3
Security D 14 5 8 8 -0.2
(8 Marks)
3
(b) Write out the basic formula of the capital asset pricing model (CAPM). Explain how rj is to be
used in investment appraisal. (6 Marks)
(c) Why does the CAPM ignore unsystematic risk in determining rj? (6 Marks)
QUESTION THREE
(a) The portfolios identified below are being considered for investment during the period under
consideration. The risk free rate is 7%.
Portfolio Return Beta factor Standard deviation
(%)
P
Q
R
S
Market
15
20
10
17
13
1.0
1.5
0.6
1.1
1.0
5
10
3
6
4
Compute and rank the portfolio using Sharpe’s and Treynor’s measure. (10 Marks)
(b) Explain any THREE limitations of Jensen’s portfolio performance measure. (6 Marks)
(c) Discuss any FOUR limitations of Treynor’s portfolio performance measure. (4 Marks)
QUESTION FOUR
(a) Consider a call option with the following characteristics.
9 months remaining to expiry. The risk free rate is 10% while the standard deviation of the
returns is 40%. The current Market price is Sh.100 while the exercise price is Sh.110.
Using the Black Scholes option valuation model, determine the value of a similar put option.
(12 Marks)
(b) Outline any 4 factors that influence the value of a call option. (8 Marks)
QUESTION FIVE
(a) Contrast between portfolio theory and capital Asset Pricing Model. (12 Marks)
(b) The Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model (CAPM) have
received much attention from practitioners and academicians for use in asset pricing and
valuation. Explain the conceptual differences between the APT and CAPM. (8 Marks)
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