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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:2011
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UNIVERSITY EXAMINATIONS: 2010/2011
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 303 PORTFOLIO AND INVESTMENT ANALYSIS
DATE: DECEMBER2011 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any Other Two Questions
Question One
(a) Butere Sugar Company Ltd. has been enjoying a substantial net cash inflow. Before the
surplus funds are needed to meet tax and dividend payments and to finance further capital
expenditure in several months time they are invested in a small portfolio which consists of
four companies listed on the stock exchange as follows:
Company Number of
shares
Beta equity
coefficient
Market price
per share
Last dividend
per share
Expected return
on equity next
year
A Ltd. 60,000 1.16 42.90 6.1 19.5
B Ltd. 80,000 1.28 29.20 3.4 24.0
C Ltd. 100,000 0.90 21.70 5.7 17.5
D Ltd. 125,000 1.50 31.40 3.3 23.0
The current market return is 19% a year and Treasury bill rate is 11% a year. On the basis
of the data given above, calculate the risk of Butere Sugar Company Ltd’s short term
investment portfolio relative to that of the market. (6 Marks)
(b) Outline the three forms of informationally efficient market hypothesis. (6 Marks)
(c) Discuss the difference between financial risk and business risk. (4 Marks)
(d) Discuss two factors which influence the efficiency of the portfolio. (4 Marks)
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(e) Outline 3 weaknesses of the arbitrage pricing theory. (6 Marks)
(f) You have been provided with the following information concerning a given security. The
market risk is 0.5, the risk free rate is 0.09, the covariance between security X and the
market is 0.2, the standard deviation of security X is 0.4 and the expected return of security
X. (4 Marks)
Question Two
(a) The shares of ABC Ltd. are currently selling at Sh.290 each in the stock exchange. The
exercise price for a six month call option is Sh.260. The prevailing risk free rate is 12%
p.a. The variance of ABC Ltd. share price has been 15%.
Using Black and Scholes option valuation model, determine the value of such a put option.
(10 Marks)
(b) Discuss five factors affecting the value of a put option. (10 Marks)
Question Three
(a) During the last 10 year period the average annual rate of return on the NSE was 14% and
the average annual rate of return on a risk free asset was 8%. As an administrator of a large
pension fund that is divided among three money managers you must decide whether to
renew your investment contract with each of these money managers. You have gathered
the following information.
Investment
manager
Average annual rate
of return
Beta of portfolio Standard deviation of
portfolio
W 12% 0.90 1.8%
X 16% 1.05 2.2%
Y 18% 1.20 2.3%
The standard deviation of the market is 2%.
Required:
Evaluate the performance of the managers using Treynor’s portfolio performance measure,
Sharpe’s portfolio performance measure and Jensen’s portfolio performance measure and
rank them. (14 Marks)
(b) Outline 3 shortfalls of Jensen’s portfolio performance measure. (6 Marks)
Question Four
(a) Mr. Mambo, the financial manager of Little Rock Ltd. is considering investing in a risky
project which would be added as an existing portfolio. He foresees five possible states of
the economy as follows:
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State of economy Probability existing Return on portfolio Return on proposed
investment
A 0.2 16% 12%
B 0.4 18% 11%
C 0.2 20% 10%
D 0.1 22% 9%
E 0.1 24% 8%
The risk free market rate of interest is 9% per annum. Is the proposed project acceptable?
(12 Marks)
(b) Mr. Peter Juma has a capital of Sh.1,000,000 which he wishes to invest in three sectors of
the economy, agriculture, service and manufacturing. The funds will be allocated as
follows:
Sector Amount invested
Agriculture 400,000
Service 200,000
Manufacturing 200,000
Details on the possible future economic states, their probabilities of occurrence and the
expected return for each of the sectors is as shown below:
Possible future
economic state
Probability of
occurrence
Expected return of 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)
Question Five
(a) Outline 5 differences between the arbitrage pricing model and the capital asset pricing
model. (10 Marks)
(b) Discuss 5 differences between the capital asset pricing model and portfolio theory.
(10 Marks)
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