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Portfolio And Investment Analysis Question Paper

Portfolio And Investment Analysis

Course:Bachelor Of Commerce

Institution: Kca University question papers

Exam Year:2008

UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CFM 303-F: PORTFOLIO AND INVESTMENT ANALYSIS
DATE: DECEMBER 2008 TIME: 2 Hours
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE (30 MARKS)
A) Assume that you can invest in three risky assets, S1, S2 and S3, with the following risk
return characteristics:
Expected Return Variance of Returns Covariances
E(R1) = 12%
E(R2) = 19%
E(R3) = 25%
Var(S1) = 0.06
Var(S2) = 0.09
Var(S3) = 0.14
Cov(S1, S2) = 0.05
Cov(S2, S3) = 0.1
Cov(S1, S3) = 0.05
i) When 25% of the funds are invested in asset S2 and 75% in asset S3, what would
be the mean portfolio return and its risk? (2 Marks)
ii) What would be the mean portfolio return and risk in the funds were invested
equally between Asset S2 and S3? (2 Marks)
2
B) Suppose that Horizon Ltd is currently selling at Sh. 40 per share,
i) and you buy 500 shares using Sh. 15,000 of your own money and borrow the
remainder of the purchase price from your broker, how long can Horizon’s price
fall before you get a margin call if maintenance margin is 25%?
(2 Marks)
ii) and they have an expected dividend of 5% on the purchase price at the end of
the year, what selling price will give a holding period return of 30% (2 Marks)
iii) What would be its expected value if it will earn a dividend of Sh. 10 in
perpetuity if the expected rare of return is 8%? (2 Marks)
iv) If you decide to invest 50% of your funds in horizon Ltd. and the other 50% in
treasury bills at a rate of 5%, what is the standard deviation your portfolio if the
standard deviation of Horizon is 0.9? (2 Marks)
C) i) Distinguish between a protective put and covered call. How do they help the
investor to maximise his payoffs? ( 4 Marks)
ii) In a butterfly spread, an investor purchases one call at X1 then writes 2 calls at X2
and purchases one call at X3. X1 is less than X2 and X2 is less than X3 by equal
amounts and all calls have the same expiration dates.
a) What is the value of the butterfly spread at option expiration? (6 Marks)
b) Graph the payoffs from this strategy. (2 Marks)
D) i) List and explain the four types of financial markets. (2 Marks)
ii) What are some of the mechanisms used to mitigate Agency problems in corporate
governance? (4 Marks)
QUESTION TWO
A. explain the following terminologies (8 Marks)
i) Systematic Risk
ii) Risk Free Rate
iii) Call Option
iv) Market Portfolio
3
B. i) How is an investor able to exploit an arbitrage opportunity if a bond’s conversion
value is not equal to current value of the stock? (3 Marks)
ii) If the convertible bond is issued at par value would it have a lower or higher coupon
rate than a non convertible bond issued at par? Why? (3 Marks)
C. Consider the following data for a one factor economy. All portfolios are well
diversified.
Suppose that another portfolio, E, is well diversified with a beta of 0.6 and expected return
of 8%. Would an arbitrage opportunity exist? If so what would be the arbitrage strategy?
(6 Marks)
QUESTION THREE
A. A project has the following net after tax cash flows
Year After-Tax cash flow
0 -40
1-10 15-per year
The project’s beta is 1.8 assuming that rf = 8% and E(rM) = 16%
i. What is the net present value of the project? (4 Marks)
ii. What is the highest possible beta estimate for the project before its NPV
becomes negative? (4 Marks)
B. Explain and distinguish between a Capital market line and Security Market Line.
(8 Marks)
C. Using the interest rate parity theorem, what is the forward price on the shilling against
the dollar after 2 years if the local interest rate is 15% and the U.S interest rate is 10?
Assume the current rate of exchange is $=65. (4Marks)
Portfolio E(r) Beta
A 12% 1.2
F 6% 0
4
QUESTION FOUR
A. List and explain the three forms of Efficient Market Hypothesis. (6 Marks)
B. What are the functions of financial Markets? (6 Marks)
C. according to the efficient market hypothesis, there is no merit in either Technical or
Fundamental analysis of stock movements. Discuss. (8 Marks)
QUESTION FIVE
A. Distinguish between an American Option and European option. Which type of option
would you prefer to hold? Explain your answer.
(3 Marks)
B. Liberty Ltd has a stock with a beta of 1.25. The rate of interest on Treasury bills is
currently 7% and the market risk premium is 9%. What would be the intrinsic value of
the stock if it just paid a Sh. 3 dividend expected to grow at a constant rate of 9%?
(5 Marks)
C. How can firm’s use the Capital asset Pricing Model in making financial Decisions?
(4 Marks)
D. i) Describe how a long straddle option strategy works and with the aid of graphs show
the expected payoffs and profits for an investor. (5 Marks)
ii) What is the difference between a Strip and Strap Straddle Strategy? (3 Marks)

Portfolio And Investment Analysis Question Paper

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