Get premium membership and access revision papers, questions with answers as well as video lessons.
Cfm 303: Portfolio And Investment Analysis (Sunday) Question Paper
Cfm 303: Portfolio And Investment Analysis (Sunday)
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
(SUNDAY)
DATE: DECEMBER 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ONE and Any other TWO Questions
QUESTION ONE
a) Consider the following two securities X and Y with the following characteristics.
Probability Return of X Return of Y
0.3 28% 18%
0.4 20% 14%
0.3 15% 10%
Assume that an investor owns 60% of security X and 40 % of security Y.
i) Determine the covariance between security X and Y. [3 Marks]
ii) Determine the correlation coefficient of X and Y. [4 Marks]
iii) Determine the expected return of the portfolio. [2 Marks]
iv) Determine the standard deviation (risk) of the portfolio. [2 Marks]
b) The directors of Umoja Ltd wish to use an alternative estimate of the cost of capital. They
prefer to use CAPM. The following details have been provided.
2
Security Return (%) Variance of Covariance of returns of security
Return (%) j with the Market (m) (Covjm)
(Market) M 18.64 0.3047 0.3047
B 16.45 0.3721 0.2986
C 10.18 0.0 0.00
D 30.20 1.5876 0.5606
E 15.47 0.2043 0.3717
Umoja (U) ? ? 0.4571
i) Determine the beta factor of each security and Interpret results of each. [6 Marks]
ii) Predict the return of Upendo Ltd using CAPM. [3 Marks]
c) The following statement contains several errors with refernce to the three levels of Market
efficiency.
“According to the efficient Market hypothesis all share price are correct at all times. This is
achieved by process moving randomly when new information is publicly announced. New
information from published accounts is the only determinant of the random movements is share
prices.
Fundamental and technical analysis of the stock Market serve no function in making the Market
efficient and cannot predict future share prices. Corporate financial managers are also unable
to predict future share prices.”
Explain the errors in the above statement. [10 Marks]
QUESTION TWO
a) Outline 5 factors that influence the value of a call option. [10 Marks]
b) Discuss 5 limitations of the Black and Scholes model. [10 Marks]
3
QUESTION THREE
a) Compute sharpe’s and Treynor’s measure for each of the portfolio’s below.
Portfolio Return Beta factors Standard Deviation (%)
A 15 1.0 5
B 20 1.5 10
C 10 0.6 3
D 17 1.1 6
Market 13 1.0 4 [10 Marks]
b) Outline any 3 limitations of Jensen’s portfolio performance measure. [6 Marks]
c) Explain the factors that affect the efficiency of a portfolio. [4 Marks]
QUESTION FOUR
Compare and contrast the conceptual differences between portfolio theory and the Capital Asset
Pricing Model. [20
Marks]
QUESTION FIVE
a) As a senior financial analysts of an investment bank, you are charges with the responsibility of
estimating the expected returns of various securities. One of the securities you want to estimate
its expected return is Alpha Steel Works Ltd. You have decided to use arbitrage pricing model
and you have derived the following estimates for the factor betas and risk premiums.
Factor Beta Risk premiums (%)
1 1.2 2.5
2 0.6 1.5
3 1.5 1.0
4 2.2 0.8
5 0.5 1.2
i) Identify the risk factor for Alpha Steel Works Ltd. [2 Marks]
ii) If the risk free rate is 5%, estimate the expected return on Alpha Steel Works Ltd.
4
` [2 Marks]
b) On the basis of one-factor model, Mwangi assumes that the risk free rate is 6 % and the
expected return on a portfolio with unit sensitivity to the factor is 8.5. Consider a portfolio of
two securities with the following characteristics.
Security Factor Sensitivity Proportion
A 4.0 0.3
B 2.6 0.7
According to the arbitrage pricing theory, what is the portfolio equilibrium expected return?
[2 Marks]
c) Outline the differences between arbitrage pricing theory and capital asset pricing model.
[10 Marks]
d) The standard deviation of a portfolio is not a weighted average unless under TWO conditions,
explain. [4 Marks]
More Question Papers
Popular Exams
Return to Question Papers