MU - S2 2003 - Investment and Portfolio Analysis

MU - S2 2003 - Investment and Portfolio Analysis - MONASH...

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Unformatted text preview: MONASH UNIVERSITY LIBRARY llll IIHH 004094677 U_Ll Monash University Semester Two Examination Period 2003 Faculty Of Engineering EXAM CODES: AFW3046 I AFW3046S TITLE OF PAPER: Investment and Portfolio Mgt EXAM DURATION: 3 hours writing time READING TIME: 10 minutes THIS PAPER IS FOR STUDENTS STUDYING AT:( tick where applicable) El Berwick El Clayton El Malaysia BtDistributed Learning El Open Learning El Caulfield MGippsland El Peninsula El Enhancement Studies El Sth Africa flOther (specify) During an exam, you must not have in your possession, a book, notes, paper, calculator, pencil case, or other material/item which has not been authorised for the exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised materials in an exam is a discipline offence under Monash Statute 4.1. AUTHORISED MATERIALS CALCULATORS E YES El NO OPEN BOOK CI YES M NO SPECIFICALLY PERMITTED ITEMS Cl YES M NO if yes, items permitted are: Candidates must complete this section if required to answer in this paper STUDENT ID DESK NUMBER SURNAME ......................................................................... ..SIGNATURE ............................................ .. OTHER NAMES (in full) ................................................................................................................................ .. Part A MULTIPLE CHOICE _ All 10 Questions are compulsory, each worth 3 marks . The the variance of returns, everything else remaining constant, the dispersion of expectations and the risk. a. Smaller, greater, lower b. Smaller, greater, greater c. Larger, greater, lower (1. Larger, smaller, higher e. Larger, greater, higher Which of the following is not a component of the risk premium? 3. Business risk b. Financial risk c. Unsystematic market risk d. Exchange rate risk e. Liquidity risk Which of the following is not a use of security market indicator series? a. To use as a benchmark of individual portfolio performance b. To develop an index portfolio c. To determine unsystematic risk (1. To determine factors influencing aggregate security price movements e. To determine systematic risk When identifying undervalued and overvalued assets, which of the following statements is false? a. An asset is properly valued if its estimated rate of return is equal to its required rate of return. b. An asset is considered overvalued if its estimated rate of return is below its required rate of return. c. An asset is considered undervalued if its estimated rate of return is above its required rate of return. d. An asset is considered overvalued if its required rate of return is below its estimated rate of return. e. None of the above (that is, all are true statements) Utilizing the security market line an investor owning a stock with a beta of (-2) would expect the stock's return to in a market that was expected to decline to percent. a. Rise or fall an indeterminate amount b. Rise by 20.0% c. Fall by 20.0% d. Rise by 10.2% 6. Fall by 10.2% . Which of the following statements is true with regard to the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT)? 3. CAPM is a single-factor model, while APT can be a multi-factor model. b. APT Overcomes all the shortcomings of CAPM. c. APT does not assume that capital markets are perfectly competitive, while CAPM does. d. e. CAPM does not assume common investment horizons, while APT does. All of the above are true. . 7. According to the strong-form efficient market hypothesis, stock prices fully reflect a. All security market information only. b. All public information only. c. All public and private information only. d. All of the above. e. None of the above. 8. Which of the following is not an assumption of an efficient market? a. The presence of a large number of profit maximizing participants concerned with the analysis and valuation of securities. b. There exists a small group of investors who have monopolistic access to certain sources of very important information. c. New information randomly comes to the market. d. Investors adjust security prices rapidly to reflect information. e. The security prices that prevail at any point in time should be an unbiased reflection of all currently available information. 9. A call option differs from a put Option in that a. a call option obliges the investor to purchase a given number of shares in a specific common stock at a set price; a put obliges the investor to sell a certain number of shares in a common stock at a set price. b. both give the investor the opportunity to participate in stock market dealings without the risk of actual stock ownership. c. a call option gives the investor the right to purchase a given number of shares of a Specified stock at a set price; a put option gives the investor the right to sell a given number of shares of a stock at a set price. d. a put option has risk. since leverage is not as great as with a call. e. None of the above 10. You own a stock which has risen from $10 per share to $32 per share. You wish to delay taking the profit but you are troubled about the short run behavior of the stock market. An effective action on your part would be to a. Purchase a put. b. Purchase a call. c. Purchase an index option. d. Utilize a bearish spread. e. Utilize a bullish spread. . Z-match 52 57 2.00 (1). What is the rate of return for each stock and its matched stock? (W, W—match, Y, Y-match, Z. 2- match) (2). If the analyst constructed two portfolio consisting of either the three stocks or the three matched securities(at same percentage), what would be their average rates of return (portfolio, match portfolio) respectively? (3). How would you judge this individual as an analyst? Why? (3+2+3 = 8 marks) 5 Assume that vmi nut-chased shores nf n qtrwlr at n m‘ir‘s- Mm: nm- chm-n Ar thin Hmr‘ vnn “Hr-Plonan '1 nm Part B PROBLEMS All 8 questions are compulsory 1. At the beginning of the year an Australian investor purchased shares of a US. company at US$15 per share. At this time the exchange rate was $1.44 per US$. At the end of the year, the investor sold the shares at US$20 per share, and the exchange rate is $1.15 per US$. (1). What is the home country (Australia) holding period return? (2). What are the major factors an Australian investor should consider in investing in global securities? (4+3 = 7 marks) 2. The table provided below provides the probability of outcomes for various states of the economy and the corresponding rates of return for a security Economic Status Probability Rate of Return Weak Economy 0.10 -5% Static Economy 0.65 5% Strong Economy 0.25 10% (1). What is your expected rate of return [E(R-.)] for next year? (2). What is your standard deviation (SD) for the next year? (3). What is your coefficient of variation (CV) for the next year? (3+3+3 = 9 marks) 3. A stock has a beta of the stock is 1.25. The risk free rate is 5% and the return on the market is 6%. The estimated return for the stock is 14%. (1). Calculate the required rate of return of the stock. (2). What action do you recommend? Why? (3). If the market return goes up to 16%, will you change your recommendation? Why? (5++2=3 = I0 marks) 4. An analyst gives you the following data regarding the performance of three stock recommendations and a matched set of stocks (matched in terms of beta). Stock Beginning Price Ending Price Dividend W 41 44 1.00 W-match 12 13 .60 Y 72 68 4.00 Y-match 32 31 .15 Z 38 44 1.50 Formula Page Price earning ratio = (D. Isa/(k — g) Variance: o2 = )3 P. t R-. —E(R.)}2 Standard Deviation: 0' =~J 2 Pi [ Ri 4302012 Covariance: Covij = E {[Ri -—E(Ri)] x [11,- —E(Rj)]} Correlation Coefficient: Covij I Bi or barre-n» -r---.r—'-.——-- .— mm x Z-match 52 57 2.00 (1). What is the rate of return for each stock and its matched stock? (W, W-match, Y, Y-match, Z, Z- match) (2). If the analyst constructed two portfolio consisting of either the three stocks or the three matched securities(at same percentage), what would be their average rates of return (portfolio, match portfolio) respectively? (3). How would you judge this individual as an analyst? Why? (3+2+3 = 8 marks) . Assume that you purchased shares of a stock at a price of $35 per share. At this time you purchased a put option with a $35 strike price of $3. The stock currently trades at $40. (1). Calculate the profits on your investments in stocks and put. and you total return on this option strategy. (2). What is a derivative security? Why would an investor want to own a derivative instead of the underlying asset? (4+4 = 8 marks) Explain the concept of the efficient market hypothesis and each of its three forms -— weak. semi-strong, and strong, and briefly discuss the degree to which existing empirical evidence supports each of the three forms of this hypothesis. (12 marks) Four years ago your firm issued $1000 par 25-year bonds with a 7% coupon rate and 10% call premium. (1). If these bonds are now called, what is the approximate yield to call for the investors who originally purchased them at par? (2). Identify the three important determinants of the price of a bond, describe the effect of each. (3). Given a change in the level of interest rates, what factors will influence the relative changes in the price for individual bonds? What is the impact? (4+3+3 = lOmarks) (l). The technical analysts believe that one can use past price changes to predict future price changes. How do they justify this belief? (2). Discuss some disadvantages of the technical analysis. (3+3 = 6 marks) Formuia Page Price earning ratio = (D; lE.)f(k -— g) Variance: 0'2 = 2 Pi [Rt --E(Ri)]2 Standard Deviation: o :4 2 Pi [Ri -E(Ri)]2 Covariance: Covu 2 E {[Ri —E(Ri)] x [Rj —E(Rj)]} Correlation Coefficient: Covij I Bi oi Coefficient of variance: 0'; IE(R ) CAPM Model HR) = RFR + Bi ( Rm — RFR) Expected return of Portfolio: E(Rport) = Z WiRi Company growth rate = retention rate it return on equity Treynor performance measure: T = (Ri -— RFR) I [3; Sharp performance measure: Si = = (R - RFR) / SDi Return on owners’equity: ROE = profit margin x total asset turnover x financial leverage ...
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MU - S2 2003 - Investment and Portfolio Analysis - MONASH...

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