The document outlines the examination structure for a Bachelor of Commerce Honours Degree course on Investment Analysis and Portfolio Management, including instructions for candidates and a series of questions covering various topics in investment theory. Key areas of focus include the distinction between investment and speculation, financial market types, risk differentiation, portfolio evaluation, and bond pricing. The examination consists of four main questions, each with sub-questions requiring calculations and theoretical explanations.
The document outlines the examination structure for a Bachelor of Commerce Honours Degree course on Investment Analysis and Portfolio Management, including instructions for candidates and a series of questions covering various topics in investment theory. Key areas of focus include the distinction between investment and speculation, financial market types, risk differentiation, portfolio evaluation, and bond pricing. The examination consists of four main questions, each with sub-questions requiring calculations and theoretical explanations.
The document outlines the examination structure for a Bachelor of Commerce Honours Degree course on Investment Analysis and Portfolio Management, including instructions for candidates and a series of questions covering various topics in investment theory. Key areas of focus include the distinction between investment and speculation, financial market types, risk differentiation, portfolio evaluation, and bond pricing. The examination consists of four main questions, each with sub-questions requiring calculations and theoretical explanations.
The document outlines the examination structure for a Bachelor of Commerce Honours Degree course on Investment Analysis and Portfolio Management, including instructions for candidates and a series of questions covering various topics in investment theory. Key areas of focus include the distinction between investment and speculation, financial market types, risk differentiation, portfolio evaluation, and bond pricing. The examination consists of four main questions, each with sub-questions requiring calculations and theoretical explanations.
COURSE NARRATIO TION INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
COURSE CODE AC414
DATE NOVEMBER 2016
DURATION 3 HOURS
INSTRUCTION TO CANDIDATES
1. Answer all questions
2. Start each new question on a fresh page
3. Show all workings, where applicable
4. You may use a silent non
non-programmable calculator Question 1 (a) Distinguish investment and speculation. [6 marks] (b) Differentiate between real assets and financial assets with examples. [7 marks] (c) Securities are traded on the market. Explain briefly the following financial markets: i. Call market ii. Auction market iii. Over-the-counter market iv. Money market v. Continuous market [10 marks] (d) Differentiate between systematic and unsystematic risk. [2 marks] [Total marks: 25] Question 2 (a) Consider the following investment in stocks X and Y: Bear market Normal market Bull market Probability 0.2 0.5 0.3 Stock X -20% 18% 50% Stock Y -15% 20% 10%
Required: i. What are the expected returns for socks X and Y? [8 marks] ii. What are the standard deviations for returns on stocks X and Y? [8 marks] iii. Assume that of your $10 000 portfolio, you invest $9 000 in stock X and $1 000 in stock Y. What is the expected return on your portfolio? [4 marks] (b) The following investment portfolios are evaluated by investor:
Portfolio Expected rate of return % Standard deviation
A 12 15 B 10 8 C 10 9
Required: Using portfolio theory explain the choice for investor between Portfolios A, B and C. [5 marks] [Total marks: 25] Question 3 Investor owns the portfolio composed of three stocks. The Betas of these stocks and their proportions in portfolio are shown in the table. Stock Beta Proportion in portfolio % A 0.8 30 B 1.2 40 C -0.9 30
Required: (a) What is the Beta of the investor’s portfolio? [8 marks]
2 (b) If the investor wants to reduce risk in his portfolio how he could restructure his portfolio? [8 marks] (c) Consider the following data for a particular sample period when returns were high.
Portfolio A Market M Average return 35% 28% Beta 1.2 1 Standard deviation 42% 30%
Required Calculate the three performance measures (sharpe, Jensen or alpha, and Treyner’s ratios) for portfolio A and the market. The Treasury bill rate during the period was 6%. By which measures did portfolio A outperform the market? [9 marks] [Total marks: 25] Question 4 (a) Bond with face value of $1000, 2 years’ time to maturity and 10 % coupon rate, makes semi-annual coupon payments and provides 8% yield to maturity. Required: i) Calculate the price of the bond. [4 marks] ii) If the yield-to-maturity would increase to 9%, what will be the price of the bond? How this change in the yield-to-maturity would influence bond price? [6 marks] (b) Distinguish the two strategies/approaches to management of portfolio: i. Passive portfolio management and; ii. Active portfolio management. [6 marks]
(c) You have been named as an investment adviser to a foundation established by Dr
Samaz with an original contribution consisting entirely of the common stock of Pure Drugs, Inc founded by Dr Samaz. Pure Drugs manufactures and markets medical solutions invented by the doctor and collects royalties on other patented innovations. All of the shares that made up the initial contribution to the Foundation were sold at a public offering of Pure Drugs common stock, and US$5 million proceeds will be delivered to the foundation within the next week. At the same time Mrs Samaz will receive US$5 million in proceeds from the sale of her stock in Pure Drugs. Dr Samaz’s purpose in establishing the Samaz Foundation was to offset the effect of inflation on medical school tuition for the maximum number of worthy students. You are preparing for a meeting with the Foundation trustees to discuss investment policy and asset allocation. Required: i. Define and give examples that show the differences between an investment objective, an investment constraint, and an investment policy. [5 marks] ii. Identify and describe an appropriate set of investment objectives and investment constraints for Samaz Foundation. [4 marks] [Total marks: 25]
