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    Microeconomics

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    chelsea
    This document provides instructions for an examination on portfolio and investment analysis. It contains 4 questions. Question 1 has two parts that ask students to (a) explain errors in a statement about market efficiency and the efficient market hypothesis, and (b) calculate the risk of a portfolio relative to the market and determine if the portfolio composition should be changed. Question 2 covers futures options and contracts. Question 3 asks students to compute returns and betas for a stock and market portfolio and explain investment vehicles. Question 4 asks students to determine if securities are overvalued, undervalued or correctly priced based on their expected returns and betas compared to the market, and how this would change if risk-free rates and expected market returns increased.

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    © All Rights Reserved
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    Microeconomics

    Uploaded by

    chelsea
    9 views3 pages
    This document provides instructions for an examination on portfolio and investment analysis. It contains 4 questions. Question 1 has two parts that ask students to (a) explain errors in a statement about market efficiency and the efficient market hypothesis, and (b) calculate the risk of a portfolio relative to the market and determine if the portfolio composition should be changed. Question 2 covers futures options and contracts. Question 3 asks students to compute returns and betas for a stock and market portfolio and explain investment vehicles. Question 4 asks students to determine if securities are overvalued, undervalued or correctly priced based on their expected returns and betas compared to the market, and how this would change if risk-free rates and expected market returns increased.

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    microeconomics

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    This document provides instructions for an examination on portfolio and investment analysis. It contains 4 questions. Question 1 has two parts that ask students to (a) explain errors in a statement about market efficiency and the efficient market hypothesis, and (b) calculate the risk of a portfolio relative to the market and determine if the portfolio composition should be changed. Question 2 covers futures options and contracts. Question 3 asks students to compute returns and betas for a stock and market portfolio and explain investment vehicles. Question 4 asks students to determine if securities are overvalued, undervalued or correctly priced based on their expected returns and betas compared to the market, and how this would change if risk-free rates and expected market returns increased.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views3 pages

    Microeconomics

    Uploaded by

    chelsea
    This document provides instructions for an examination on portfolio and investment analysis. It contains 4 questions. Question 1 has two parts that ask students to (a) explain errors in a statement about market efficiency and the efficient market hypothesis, and (b) calculate the risk of a portfolio relative to the market and determine if the portfolio composition should be changed. Question 2 covers futures options and contracts. Question 3 asks students to compute returns and betas for a stock and market portfolio and explain investment vehicles. Question 4 asks students to determine if securities are overvalued, undervalued or correctly priced based on their expected returns and betas compared to the market, and how this would change if risk-free rates and expected market returns increased.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    UNIVERSITY EXAMINATIONS: 2021/2022

    SCHOOL OF BUSINESS

    EXAMINATION FOR THE DEGREE OF BACHELOR OF COMMERCE

    FIN 3103: PORTFOLIO & INVESTMENT ANALYSIS

    WEEKEND & DISTANCE LEARNING

    DATE: APRIL, 2022 TIME: 2 HOURS

    INSTRUCTIONS: Answer Question ONE and any other TWO


    QUESTION ONE (20 MARKS)

    (a) The following statement contains several errors with reference to the three levels
    of market efficiency:
    “According to the efficient market hypothesis all share prices are correct at all times. This is
    achieved by prices moving randomly when new information is publicly announced. New
    information from published accounts is the only determinant of the random movements in share
    price. Fundamental and technical analysis of the stock market serves no function in making the
    market efficient and cannot predict share prices. Corporate financial managers are also unable to
    predict future share prices” Explain the errors in the above statement. (10 Marks)

    b) Mr. Otieno is currently holding a portfolio consisting of shares of four companies


    quoted on the Bahati stock exchange as follows:

    1
    Company Number of Beta equity Market price per Expected return
    shares held factor share on equity in the
    next year
    A 20,000 1.12 65 18%
    B 30,000 0.89 50 23%
    C 30,000 0.70 45 11%
    D 20,000 1.60 80 17%
    The current market return is 14% per annum and the treasury bills yield is 9% per
    annum.
    Required:
    (i) Calculate the risk of Otieno’s portfolio relative to that of the market. (4 Marks)
    (ii) Explain whether or not Otieno should change the composition of his portfolio. (6 Marks)

    QUESTION TWO (15 Marks)

    (a) Using a numeric example, illustrate and explain the pay-offs of a futures’ option
    and a futures contract. (2 Marks)
    (b) Explain and illustrate graphically the options concept of being:
    (i) “at the money” (2 Marks)
    (ii) “in the money” (2 Marks)
    (iii) “out of the money” (2 Marks)
    For both a call and put option.
    (c) Explain with the aide of a diagram a protective put buying strategy. (2 Marks)

    2
    QUESTION THREE (15 Marks)
    a) The rates of return of stock A and the market portfolio for the 12 months are given below:
    Month 1 2 3 4 5 6 7 8 9 10 11 12
    Stock A 10 15 18 14 16 16 18 4 4 14 15 14
    (%)
    Market 12 14 13 10 9 13 14 7 1 12 4 16
    Portfolio
    (%)

    i) Compute the average return of stock A and the market. (4Marks)


    ii) Determine the variance of the return of stock A and the market. (4Marks)
    iii) Find the covariance between the return of stock A and the market portfolio. (2Marks)
    iv) Estimate the beta factor for stock A. (3Marks)
    b. Explain TWO investment vehicles that an investor may opt to use. (2 Marks)

    QUESTION FOUR (15 MARKS)


    a) The risk free rate of return is 10% and the expected return of the market portfolio is 15%. The
    expected returns of four securities are listed below together with their expected betas.
    Security Expected return % Expected BetaW
    W 17 1.3
    X 14.5 0.8
    Y 15.5 1.1
    Z 18 1.7

    On the basis of these expectations, which securities are expected to be overvalued, undervalued or
    correctly priced. (10Marks)
    B. If the risk-free rate were to rise to 12% and the expected return on the market portfolio rose to
    16%, which securities would be overvalued? which would be under-valued? (Assume the expected
    returns and the betas remain the same). (5 Marks).

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