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Msfi 502:Investment Mathematics Question Paper
Msfi 502:Investment Mathematics
Course:Master Of Business Administration
Institution: Kenya Methodist University question papers
Exam Year:2013
KENYA METHODIST UNIVERSITY
SCHOOL OF BUSINESS AND MANAGEMENT
END OF SEMESTER EXAMINATION FOR MASTER IN BUSINESS ADMINISTRATION DECEMBER, 2013
UNIT CODE : MSFI 502
UNIT TITLE : INVESTMENT MATHEMATICS
TIME: 3 HOURS
Instructions: Answer question one and any other three questions.
Question One
Investment mainly involve foregoing spending now in expectation of higher future benefits. Discuss the functions investment companies perform for their investors. While using relevant examples.
(6mks)
Briefly explain the role of derivative markets in an economy.
(4mks)
An investor intends to invest 60% of his portfolio in stocks and 40% in bonds. The expected return on stocks is 10% while on bonds it is 6%. The standard deviation on stocks is 25% while the standard deviation on bonds is 12%. The standard deviation of the investorsportfolio is 15% determine.
The correlation coefficient between stock and bond returns. (5mks)
The expected return on the portfolio.
(5mks)
Alen investment trust managed by Mr. D. Robert, out performed the local stock index in each of the 10 years ending in 2007. Is Robert’s performance sufficient to dissuade you from a belief in efficient markets.
(5mks)
Question Two
The efficient market hypothesis has never been accepted in some quarters such as wall street and debate continues today on the degree to which security analysis can improve investment performance. Discuss the issues that continue to fuel this debate.
(8mks)
Suppose the risk premium on the market portfolio is estimated at 8% with a standard deviation of 22%.
Determine the risk premium on a portfolio invested 25% in BTC ltd with a beta of 1.15 and 75% in Aspen Ltd with a beat of 1.25. (5mks)
What would happen to market efficiency if all investors attempted to follow a passive strategy.
(5mks)
Briefly explain the relationship among coupon rate, current yield and yield to maturity for bonds selling at discounts from par? Illustrate using an 8% coupon, 30 yers maturity bond with par value of $ 1000 paying semi annual coupons and assuming it is selling at a yield to maturity of 10%. (7mks)
Question Three
The CAPM is a model that predicts the relationship between the risk and equilibrium expected returns on risky assets. Explain the application of the CAPM and clearly highlight how the APT has overcome CAPM’s shortcomings.
(10mks)
Suppose we have an asset priced at $ 68.5 and the exercise price si $ 65 while the continuously compounded risk-ree rate is 4 percent. The options expire in 110 days the volatility is 0.38. there are no cash flows on the underlying.
Determine the prices of European call and put options using the black-scholes.
(9mks)
Compare and contrast the binomial model and the black-scholes model in option pricing.
(6mks)
Question Four
Distinguish between the yield to maturity and yield to call while highlighting practical scenarios where each is mostly applicable.
(8mks)
Suppose that the short-term rate of interest is currently 8% and that investors expect is to remain at 8% in year two and three. If inventors demand a liquidity premium of 1% to invest in two-year bonds rather than one-year bonds then,
Determine the forward rate and the yield maturity on the two – year bond.
(7mks)
Assume that the expected value of the interest rate for year three remains at 8% and the liquidity premium for that year is 1%, determine the yield to maturity on three year bonds and the implication on the slope of the yield curve.
(10mks)
Question Five
Explain the main factors affecting option pricing.
(5mks)
Compare and contrast the application of stock and bond indexes. (8mks)
XD ltd stock dividend at the end of the year is expected to be sh. 2.15 and it is expected to grow at 11.5% per year in perpetuity. If the required rate of return on XD stock is 15.5% per year then.
What is its intrinsic value
(4mks)
If XD’s current market price is equal to the intrinsic value, what is next year’s expected price.
(8mks)
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