This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Monash University Semester 2 Examination 2002 Faculty of Business and Economics EXAM CODE: AFW3046
TITLE OF PAPER: INVESTMENT AND PORTFOLIO ANALYSIS EXAM DURATION: 180 minutes writing time READING TIME 10 minutes THIS PAPER IS FOR STUDENTS STUDYING AT: (oﬂlce use only  tick where applicable)
Berwick Cl Clayton D Peninsula E] Distributed Learning IZl Open Learnng I]
Caulfield Cl Gippsland El Sunway El Enhancement Studies D Other (specify) [3 Candidates are reminded that they should have no material on their desks unless their use has been
specifically permitted by the following instructions. Eighﬂ”
. Total number of questions: Nine (8) 9 Answer ALL questions. Question 1 to be answered on Answer Sheet provided at the end of the exam paper.
3. Total marks = Ninety (90). AUTHORISED MATERIALS
CALCULATORS OPEN BOOK
SPECIFICALLY PERMITTED ITEMS 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) .................................................................................................................... Page 1 of 9 Multiple Choice. Answer all questions on the answer sheet at the end of this exam paper. Use the following information to answer the next three problems.
Formulas are provided on page 8 of the exam script. You have concluded that next year the following relationships are possible: Economic Status Probabilirv Rate ofRemm
Weak Economy .10 —5 %
Static Economy .65 5%
Strong Economy .25 10% What is your expected rate of return for next year? (a) 4.25% (b) 5.25%
(c) 6.25%
(d) 7.25%
(e) 8.25% What is your standard deviation for the next year? (a) 2.042%
(b) 4.023%
(C) 8.250%
(d) l6.750% (e) 32.500% (iii) What is your coefficient of variation for the next year? (a) 0.576
(b) 0.676
(c) 0.766
(d) 0.876
(e) 0.976 (iv) The Markowitz model is based on several assumptions regarding investor behaviour.
Which of the following is not such an assumption? (a) Investors consider each investment alternative as being represented by a probability
distribution of expected returns over some holding period. (b) Investors maximise oneperiod expected utility. (c) Investors estimate the risk ofthe portfolio on the basis of the variability of
expected returns. (d) Investors base decisions solely on expected return and risk. (e) None of the above (that is, all are assumptions of the Markowitz model). Page 2 of 9 Use the following information for the next two problems. Given: E(R])=.12 E(R2)=.16 0’) 13(01) = .04 E(62) = .06 Calculate the expected return and expected standard deviation of a two stock portfolio
when w! = .75 and r13 = — .60. .13 and .0024
.13 and .0242
.12 and .0585
.12 and .5585
.13 and .6758 Calculate the expected return and expected standard deviation of a two stock portfolio
when w] = .60 and r1. 3 = .80. (a) .144 and .0002
(b) .144 and .0018
(c) .136 and .0042
(d) .136 and .0456
(e) .l36 and .4290 Given the following returns and yields over the past four years, compute the arithmetic
mean (AM) and geometric mean (GM) rates of return. Period Holding Period Return (HPR) Holding Period Yield ( HP 1")
tl 1.05 0.05
0.90 —0. 10
1.1 l 0.1 1
0.98 —0.02 (a) AM = 4.000%. GM = 1.010%
('0) AM = 1.000%. GM = 0.692%
(c) AM = 0.692%, GM = 4.000%
(d) AM = 1.000%. GM = 1.069293
(e) AM = 4.000%, GM = 0.0692% If equal risk is added moving along the curve containing the best possible combinations
the return will: (a) decrease at an increasing rate
(b) decrease at a decreasing rate
(c) increase at an increasing rate
(d) increase at a decreasing rate
(e) remain constant A portfolio is considered to be efficient if: (a) no other portfolio offers higher expected returns with the same risk
(b) no other portfolio offers lower risk with the same expected return
(c) there is no portfolio with a higher return ((1) choices (a) and (b) only (e) none of the above Page 3 of 9 (x) Given the following weights and expected security returns, calculate the expected return y
for the portfolio. Weight Expected Return .20 .06 .
.25 .08
.30 .l0
.25 .12 (a) .092
(b) .090
(c) .085
(a) .097 (e) none of the above (10X 1% = IS marks) !\.) Your investment client asks for information concerning the benefits of active portfolio
management. She is particularly interested in the question of whether or not active managers
can be expected to consistently exploit inefficiencies in the capital markets to produce above
average returns without assuming higher risk. The semistrong form ofthe efficient market hypothesis asserts that all publicly available
information is rapidly and correctly reflected in securities prices. This implies that investors
cannot expect to derive above—average profits from purchases made after information has become public because security prices already reflect the information‘s full effects. (a) Identify and explain two examples of empirical evidence that tend to support the EMH
implication stated above. Identify and explain two examples of empirical evidence that tend to refute the EMH
implication stated above. On 27 Aug 2002, Woolworths delivered a record annual profit of $523 million, yet on the
same day investors wiped more than Si billion off the company’s market value. Discuss with reference to semistrong markets why this occurred to Woolworths. (4 + 4+ 3 = ll marks) Page 4 of 9 An analyst wants to evaluate Portfolio X, consisting entirely of US common stocks, using both
the Treynor and Sharpe measures of portfolio performance. The following table provides the
average annual rate of return for Portfolio X, the market portfolio (as measured by the S&P 500), and US Treasury bills during the past eight years. Average Annual Standard Deviation
Rate of Return of Return Beta Portfolio X 10% 13% 0.60
S&P 500 12 13 1.00
Tbills 6 N/A N/A Calculate the Treynor and Sharpe measures for both Portfolio X and the S&P 500. Brieﬂy
explain whether Portfolio X underperfomied. equalled, or outperformed the S&P 500 on
a riskadjusted basis using both the Treynor measure and the Sharpe measure. Based on the performance of Portfolio X relative to the S&P 500 calculated in part (a),
briefly explain the reason for the conﬂicting results when using the Treynor measure
versus the Sharpe measure. (6 +3 =9 marks) Marilyn Emma. a financial analyst at Del Advisors, Inc. (DAI). has been asked to assess the
impact that construction of Disney‘s new theme parks might have on its stock. DAI uses a
dividend discount valuation model that incorporates beta in the derivation of riskadjusted
required rates of return on stocks. Until now. Marilyn has been using a fiveyear earnings and dividends per share growth rate of
15% and a beta estimate of 1.00 for Disney. Taking construction of the new theme parks into
account, however. she has raised her growth rate and beta estimates to 25% and 1.15,
respectively. The complete set of Marilyn‘s current assumptions is: Current stock price $37.75 Beta 1.15 Riskfree rate of return 4.0%
Required rate of return on the market 10.0%
Shortterm growth rate (five years) for earnings and dividends 25.0%
Longterm growth rate (Beyond ﬁve years) for earnings and dividends 9.3%
Dividend forecast for 2003 (per share) $0.28? (a) Calculate the riskadjusted required rate of return on Disney stock using Marilyn’s
current beta assumption. (b) Using the results of part (a), Marilyn’s current assumptions, and DAI’s dividend discount
model, calculate the intrinsic, or fair, value of Disney stock at 30 September, 2002. After calculating the intrinsic value of Disney stock using her new assumptions and
DAl’s dividend discount model, Marilyn finds that her recommendation for Disney
should be changed from a “buy” to a “sell”. Explain how the construction of the new
theme parks could have a negative impact on the valuation of Disney stock, despite
Marilyn‘s assumption of sharply higher growth rates (25%). (2+7+3= 12 marks) Page 5 of 9 The agricultural price support system guarantees farmers a minimum price for their
output. Describe the program provisions as an “option”. What is the asset? The exercise
price? In what ways is owning a corporate bond similar to writing a put option? A call option? . Suppose the spot price of zinc was $4.70 per ounce and a futures contract that expires in
l00 days has a price of $4.78 per ounce. (i) If the futures price is correct. what is the cost of carry for zinc?
(ii) If the 100 day interest is l.2%, find the interest cost and the cost of storage. (3+3+S=llmarks) 6. Angus Gordon, CFA. is an independent investment adviser who is assisting Harry Ross, the
head of the Investment Committee on General Technology Corporation to establish a new
pension fund. Ross asks Gordon about international equities and whether the Investment
Committee should consider them as an additional asset for the pension fund. Real returns We) 4
. Account performance index
' EAFE index
3 O NonAust. Sbonds . Aust. $bonds [J 9 All 0rd index Variability
(standard
0 IO 20 30 40 deviation) Annualiscd historical performance data
14 years ended 31 Dec, 2000 (percent) Explain the rational for including international equities in General’s equity portfolio.
Identify and describe three relevant considerations in formulating your answer. List three possible arguments against international equity investment and briefly discuss
the significance of each. To illustrate several aspects of the performances of international securities over time,
Gordon shows Ross the accompanying graph of investment results experienced by an
Australian pension fund in the 19872000 period. Compare the performance of the
Australian dollar and nonAustralian dollar equity and fixedincome asset categories, and
explain the significance of the result of the Account Performance Index relative to the
results of the four individual asset class indexes. (4+3+5=12marks) Page 6 of 9 Several Investment Committee members have asked about interest rate swap agreements and
how they are used in the management of domestic ﬁxedincome portfolios. (:1) Define an interest rate swap and brieﬂy describe the obligation of each party involved. (b) Cite and explain two examples of how interest rate swaps could be used by a fixed
income portfolio manager to control risk or improve return. (c) Brieﬂy describe two active bondportfolio management strategies. (4+4+6= E4 marks) Explain the differences between Fundamental and Technical Analysis. (6 marks) FORMlULAE . . . D
 Price/Eamings ratio = ——l kg
 Variance  Covariance ==ietn~ztmr CW =EllRiEtRillleEtnll} i2! _ _ _ COVU
 Correlation Coeffament  Standard Deviation Bf 0} . . G'
n 2  C ff' 'entofVariation ’
0 = ’ZH[RE“E(RI)] 0e m we)
i=1  Dividend Discount Model  CAPM Expected Return D‘ + 03 + D3 ++ D” v=
5(Ri)=RFR+Bi(Rm—RFR) J ([+k) ([+k)2 (Hit)3 (1+k)°°  Expected Return of Security . AM = Z HPY/u E(Rt)= (FE)(Rt) ° GM =(anR)% —I  Company Growth Rate = (retention rate) >< return on equity ' Treynor Performance Measure _ R, — RFR
Br .1.  Sharp Performance Measure _ R, — RFR
SD I S;  Holding Period Yield = Holding Period Return — l Ending investment value Beginning investment value Page 8 of 9 AFW3046: INVESTMENT AND PORTFOLIO ANALYSIS Student name: ________.,_,_,_______________________________....._._.__.._.______...._..._.. Student ID number: ________,,________#w___________________________________________ ANSWER SHEET FOR QUESTION I  MULTIPLE CHOICE QUESTIONS Instructions: Place an X through the correct atternative. Enclose this answer sheet (check it has your name and student ID number) inside the front cover
of your examination answer booklet. ...
View
Full Document
 Three '08
 Smith

Click to edit the document details