Applied Investment Question Paper

Applied Investment

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2009

KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE

BAC 408: APPLIED INVESTMENT

DATE: Tuesday 29th December 2009 TIME: 2.00pm – 4.00pm

INSTRUCTIONS
Answer ALL questions
Question one
a)
Portfolio management is a process whose key steps are applicable in all

investment management situations. Identify and briefly discuss these steps.

[7marks]
b)
A 60 year old widow with two grown up children received her husband’s life

insurance proceeds. She is healthy and has no financial liabilities. She receives a

monthly pension to cover her daily needs.

Briefly discuss the objectives and constraints that must be considered in

developing an investment policy for the 60 year old window.
[8marks]
c)
Discuss the efficient market hypothesis and its applicability to Kenya.

[10marks]

[Total: 25marks]

Page 1 of 3

Question two
a)
Briefly discuss the benefits of mutual fund investments.

[4marks]
b)
A bond has the following features:
Face
value:
Shs.
1,000,000
Coupon
interest
rate:

16% payable annually

Year to maturity:

16 years
Yield
maturity: 17%
Calculate:
i)
The
duration
of
the
bond
[4marks]

ii)
The volatility of the bond and explain the results

[2marks]
c)
Explain how the bond holder can protect himself against reinvestment and default

risks.

[5marks]

[Total 15marks]
Question three
b)
The Sharpe and Treynor performance measures both calculate portfolio’s average

excess return per unit of risk. Under what circumstances would it make sense to

use both measures to compare the performance of a given set of portfolios?

[3marks]
b)
The following portfolios are being considered for investment. During the period

under consideration, RFR = 0.07.

Portfolio Return Beta
a
i
P
0.15
1.0
0.05

Q
0.20
1.5
0.10
R
0.10
0.6
0.03
S
0.17
1.1
0.06

Market
0.13
1.0
0.04

i)
Compute the Sharpe Measure for each portfolio and the market portfolio.

[5marks]

ii)
Compute the Treynor Measure for each portfolio and the market portfolio.

[4marks]
Page 2 of 3

Rank the portfolios using each measure, explaining the cause for any differences
you
find
in
the
ranking. [3marks]

[Total 15marks]
Question four
The risk free rate is 10% and the expected return on the market portfolio is 15%. The
expected returns for 4 securities are listed below together with their expected betas.
SECURITY
EXPECTED
RETURN EXPECTED
BETA
A
17.0%
1.3
B
14.5%
0.8

C
15.5%
1.1
D
18.0%
1.7
Required:
a)
On the basis of these expectations, which securities are overhauled? Which are
undervalued?
[10marks]
b)
If the risk free were rate to rise to 12% and the expected return on the market

portfolio rose to 15% which securities would be overhauled? Which would be

undervalued? (Assume the expected returns and the betas remain the same).

[5marks]

[Total 15marks]
Page 3 of 3

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