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Fina 333:Investment Analysis And Portfolio Management Question Paper

Fina 333:Investment Analysis And Portfolio Management

Course:Business Administration

Institution: Kenya Methodist University question papers

Exam Year:2013

KENYA METHODIST UNIVERSITY

END OF 3''RD ''TRIMESTER 2013 (PT) EXAMINATION
SCHOOL : BUSINESS AND ECONOMICS
DEPARTMENT : ACCOUNTING FINANCE & INVESTMENTS
UNIT CODE : FINA 333
UNIT TITLE : INVESTMENT ANALYSIS AND PORTFOLIO MGT

TIME: 2 HOURS

Instructions:

Answer question one and any other two questions.

Question One

Investment is a process if a well balanced portfolio is to be achieved, explain what activities you will perform in the following stages of investment with necessary examples.

Specification of investment objectives and constraints

(4 marks)

Choice of the asset mix

(3 marks)

Formulation of portfolio strategy

(3 marks)

Selection of securities

(3 marks)

Portfolio execution

(3 marks)

Portfolio revision

(3 marks)

Performance evaluation

(3 marks)

Charles H. Dow formulated a hypothesis that the stock market does not perform on a random basis but is influenced by three distinct cyclical trends that guide its general directions. This view contradicts the efficient markets hypothesis. Discuss the argument in favour and against market efficiency.

(8 marks)

Question Two

Explain the term structure of interest rates.

(2 marks)

Data for a stock market and security A is given below, as well as the state of the economy

State of Economy Probability Return on Security A Return on Market
Strong 20% 20% 15%
No change 50% 10% 5%
Weak 30% -15% 2%

Required:

Calculate the return on security A and the market.

(4 marks)

Calculate the covariance of security A with the market.

(4 marks)

Calculate the beta of security A.

(4 marks)

If the return of 3-month treasury bills is 4%, calculate the required return in security A under Capital Asset Pricing model

(6 marks)

Question Three

Explain four assumptions of the capital asset pricing model.

(8 marks)

Explain the elements of the portfolio theory.

(4 marks)

Malindi Ltd has a 12% bond (per value Shs. 1000). This bond pays interest at the end of each year and has four years to maturity.

Required:

Determine the value of this bond if required return is 10%

(4 marks)

Risk-premium should be paid only on systematic risk. Discuss this statement.

(4 marks)

Question Four

Explain each of the following bond portfolio management strategies.

Buy and hold strategy

(2 marks)

Valuation analysis

(2 marks)

Horizon matching

(2 marks)

..

Explain three basic assumptions of technical analysis.

(3 marks)

Explain the difference between technical analysis and fundamental analysis.

(4 marks)

A stocks return has the following distribution.

Demand for the company’s
Products Probability of this demand occurring Rate of return of this demand occurs %
Weak 0.1 50
Below average 0.2 5
Average 0.4 16
Above average 0.2 25
Strong 0.1 60

Required:
Calculate the expected return of the security. (4 marks)

Question Five

You are considering constructing a portfolio containing two assets F and G. Asset F will represent 40% of the value portfolio and asset G will account for the other 60%. The expected returns for each of these assets are shown below.
Probability of occurrence expected rates of return
F G
0.1 6% 2%
0.2 8% 6%
0.4 10% 9%
0.2 12% 15%
0.1 14% 20%

Calculate the expected rate or return for each of the assets F and G.

(3 marks)

Standard deviation of the two assets.

(5 marks)

Covariance

(5 marks)

Expected return of the portfolio of the two assets.

(3 marks)

Standard deviation of the portfolio of the assets.

(5 marks)

Fina 333:Investment Analysis And Portfolio Management Question Paper

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