Portfolio And Investment Analysis Question Paper
Portfolio And Investment Analysis
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2010
UNIVERSITY EXAMINATIONS: 2009/2010
THIRD YEAR EXAMINATION FOR THE DEGREE OF BACHELOR OF
COMMERCE
CFM 303-F: PORTFOLIO AND INVESTMENT ANALYSIS (DAY& EVENING)
DATE: AUGUST 2010 TIME: 2 HOURS
INSTRUCTIONS: Answer question ONE and any other TWO questions
QUESTION ONE
(a) Discuss two factors that affect the efficiency of a portfolio. (4 Marks)
(b) Consider the following two securities X and Y with the following characteristics:
Probability Return of X Return of Y
0.3 28% 18%
0.4 20% 14%
0.3 15% 10%
Assume that an investor owns 60% of security X and 40% of security Y.
(i) Determine the covariance between security X and Y. (3 Marks)
(ii) Determine the correlation coefficient of X and Y. (3 Marks)
(iii) Determine the expected return of the portfolio. (2 Marks)
(iv) Determine the standard deviation (risk) of the portfolio. (2 Marks)
(c) Explain the three forms of informationally efficient capital Markets. (6 Marks)
(d) Outline 5 factors that influence the value of a call option. (10 Marks)
2
QUESTION TWO
(a) Discuss any 5 uses of the capital assets pricing model (CAPM). (10 Marks)
(b) The directors of Utawala Limited wish to use an alternative estimate of the cost of capital.
They prefer to use CAPM. The following details have been provided.
Security Return % Variance of
return %
Covariance of returns of
security j with the
Market
Market (m) 18.64 0.3047 0.3047
B 16.45 0.3721 0.2986
C 10.18 0.0 0.0
D 30.20 1.5876 0.5606
E 15.47 0.2043 0.3717
Utawala U ? ? 0.4571
(i) Determine the Beta factor of each security and interpret the results of each.
(6 Marks)
(ii) Predict the return of Utawala Ltd. using CAPM. (4 Marks)
QUESTION THREE
(a) Outline 5 limitations of the Black and Scholes model. (10 Marks)
(b) Consider a call option with the following characteristics:
(i) Months remaining to expiry – 9 months
(ii) The standard deviation of the returns is 40%
(iii) The exercise price is Sh.110
(iv) The current Market price is Sh.100
Using the Black and Scholes option valuation model, determine the value of a similar put
option. (10 Marks)
3
QUESTION FOUR
(a) Outline the 5 conceptual differences between the arbitrage pricing model and CAPM.
(10 Marks)
(b) Discuss 5 differences between portfolio theory and CAPM. (10 Marks)
QUESTION FIVE
(a) The portfolio’s identified below are being considered for investment during the period under
consideration. The risk free rate is 7%.
Portfolio Return Beta factor Standard deviation (%)
P 15 1.0 5
Q 20 1.5 10
R 10 0.6 3
S 17 1.1 6
Market 13 1.0 4
Compute Sharpe’s and Treynor’s measure for each portfolio and the Market portfolio.
(10 Marks)
(b) Discuss 3 limitations of Jensen’s portfolio performance measure. (6 Marks)
(c) On the basis of a one factor model, Peter assumes that the risk free rate is 6% and the expected
return on a portfolio with a unit sensitivity to the factor is 8.5%. Consider a portfolio of two
securities with the following characteristics:
Security Factor sensitivity Proportion
A 4.0 0.3
B 2.6 0.7
According to the arbitrage pricing theory, what is the portfolio’s equilibrium expected return.
(4 Marks)
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