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Bcom 435: Financial Modelling And Forecasting Question Paper
Bcom 435: Financial Modelling And Forecasting
Course:Bachelor Of Commerce
Institution: Chuka University question papers
Exam Year:2013
CHUKA
UNIVERSITY
UNIVERSITY EXAMINATIONS
EXAMINATIONS FOR THE AWARD OF DEGREE OF
BACHELOR OF COMMERCE
BCOM 435: FINANCIAL MODELLING AND FORECASTING
STREAMS: BCOM TIME: 2 HOURS
DAY/DATE: THURSDAY 25/4/2013 2.30 PM – 4.30 PM
INSTRUCTIONS:
Answer Question ONE and any other TWO Questions
Show all your workings
Do not write on the Question Paper
QUESTION ONE
(a) Outline the basic assumptions underlying the capital market theory [6 Marks]
(b) With respect to CAPM and APT, show how these asset pricing models are derived. [12 Marks]
(c) Compare and contrast the CAPM and the APT [8 Marks]
(d) Explain the following terms as used in options market
(i) Strike price [1 Mark]
(ii) European market [1 Mark]
(iii) Call option [1 Mark]
(iv) Straddle [1 Mark]
QUESTION TWO
(a) Explain the theory underpinning technical analysis (Chartism) as stock market forecasting tool and show how it conflicts with efficient market hypothesis.
[8 Marks]
(b) An aggressive mutual fund promises an expected return of 16 per cent with possible volatility of 20 per cent. On the other hand, a conservative mutual fund promises an expected return of 13 per cent and volatility of 15 per cent.
(i) Which fund would you like to invest in? [3 Marks]
(ii) Would you like to invest in both if you have money? [2 Marks]
(iii) Assuming you can borrow money from fund at an opportunity cost
of 10 per cent, which fund would you invest your money in? [5 Marks]
(iv) Would you consider both funds if you could lend or borrow money at 10 per cent?
[2 Marks]
QUESTION THREE
(a) P Ltd has an expected return of 22 per cent and standard deviation of 40 per cent. Q Ltd
has an expected return of 24 per cent and standard deviation of 38 per cent. P has a beta of 0.86 and Q 1.24. The correlation between the returns of P and Q is 0.72. The standard deviation of the market return is 20 per cent.
(i) Is investing in Q better than investing in P? [2 Marks]
(ii) If you invest 30 per cent in Q and 70 per cent in P, what is your
expected rate of return and the portfolio standard deviation? [4 Marks]
(iii) What is the market portfnolio’s expected rate of return and how much is risk-free
rate? [4 Marks]
(iv) What is the beta of portfolio if P’s weight is 70 per cent and Q is 30 per cent?
[2 Marks]
(b) More often, financial decision makers apply qualitative approaches to forecasting that rely heavily on judgment and less on analytical tools. Discuss three such judgmental forecasting methods. [8 Marks]
QUESTION FOUR
(a) Calculate the value of a call option using the Black Scholes model given the following information
(i) Current market price of the share (S) ksh 75
(ii) Volatility (standard deviation, S) : 0.45
(iii) Exercise price (E): ksh 80
(iv) Risk-free rate(rf):0.12
(v) Time to expiration (t): 6 months = 0.5 years
If an investor wants to buy a put with the same exercise price and expiration date as call option, what will be the value of put? [9 Marks]
(b) Outline five factors affecting the value of call options [5 Marks]
(c) Discus three components of a financial planning model. Give examples. [6 Marks]
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