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Unformatted text preview: MONASH UNIVERSITY LIBRARY l lllllH l  . Q94092591 J
EXAMINATIGNS I z ' " ' y’
o . E R s \ w“
' Monash UnIverSIQEm. Semester Two Examinations 2000 ' 7 Faculty of Business and Economics
Department of Accounting and Finance EXAM CODES: AEE3121 TITLE OF PAPER: INVESTMENTS AND PORTFOLIO MANAGEMENT
EXAM DURATION: 3 Hours READING TIME: 10 Minutes THIS PAPER IS FOR STUDENTS S T UDYING A T: (oﬂice use only — tick where applicable) Berwick El Clayton El Peninsula El Distance Education El Open Learning Cl
Caulﬁeld Gippsland El Sunway E] Enhancement Studies El Other (specify) El Candidates are reminded that they should have no material on their desks unless their use has been .
speciﬁcally permitted by the following instructions. AUTHORISED MATERIALS NONPROGRAMNIABLE CALCULATORS YES NO El
OPEN BOOK YES El NO E
SPECIFICALLY PERMITTED ITEMS YES El NO if yes, items permitted are: This paper consists of Two (2) Sections printed on Six (6) pages (including 1 page of formulae and 1 page of
tables). PLEASE CHECK BEFORE COMMENCING. This is a FINAL paper and a CLOSED BOOK
examination. STUDENTS MUST PASS THIS EXAMINATION IN ORDER TO PASS THIS SUBJECT. Section A = 40% Section B = 60% . Total = 100% which represch 70% of the total assessment for the subject. 00842VF Page 1 of 6 OFFICE USE ONLY E AFF3121 INVESTMENTS AND PORTFOLIO MANAGEMENT 00342VF Section A [40 marks) Answer all the Questions. Each Question is worth 8 marks. List the four term structure theories and explain the impact of these theories on the predictive
power of the yield curve. A $500,000 180day note is purchased with a yield of 6% p.a and sold 90 days later at a yield of 5% p.a. What is the discrete holding period return for this note? What is the continuous holding period return for this note? The market portfolio has a return of 12% and standard deviation of 18%, while an inefficient
portfolio has a return of 14%. Given a riskwfi‘ee rate of 4%: ' (a) What is the beta of the inefﬁcient portfolio? .
(b) What is the beta of an efﬁcient portfolio with the same return? What sort of philosophy about market efﬁciency do you believe underlies tactical asset
allocation and active stock selection as an investment strategy? Explain. The current quotation for 90day bank bill futures is 94.32. You believe that interest rates
will fall in the near ﬁrture.  (a)
(b) What position should you take in the futures market? 
Assume that you take such a position and close out the position at 95.06. Have you
made a profit or loss? How much? Section B (60 maer
Answer any four 14) questions. Brieﬂy explain the concept of the efﬁcient market hypothesis (EMH) and each of its three
formsweak, semistrong and strong and briefly discuss the degree to which existing
empirical evidence supports each of the three forms of the EMH. (15 marks) Multifactor models of security retumS have received increased attention. The arbitrage
pricing theory (APT) probany has drawn the most attention and has been proposed as a
replacement for the capital asset pricing model (CAPM). (a) Brieﬂy explain the primary differences between APT and CAPM.
(b) Identify the four systematic factors suggested by Roll and Ross that determine an
asset’s riskiness. Explain how these factors affect an asset’s expected rate of return. (6 + 9 marks = 15 marks) Page 2 of 6 :‘l OFFICE USE ONLY I AFF3121 INVESTMENTS AND PORTFOLIO MANAGEMENT 3. 00842VF (a)
(b) (a)
(b) Explain the process of and purpose for immunisation of a ﬁxed interest rate portfolio.
A bond has the following details: $1000 10% per annum, payable semiannually
6.0% per annum 3 years Par value , Coupon rate
Yield to maturity
Term to maturity (i)
(ii) (iii) What is the duration of the bond?
By using the duration measure to estimate the change in bond price expected if
the yield increases to 7.5% per annum. ' Calculate the convexity of the bond.
(4+5+2+4= 15 marks) Outline the differences between active and passive management of an equity portfolio. Shares in Acme Insurance are currently trading with a P/E of 8.5. (i) Under an Earning Capitalisation Model, what is the implied cost of equity
capital? ‘ (ii) Using your answer from part (i), calculate the price using the Dividend
Discount Model if the current dividend is $0.50 per share and constant growth
is expected at 5% pa ‘ _ (iii) Return to the Earning Capitalisation Model in part (i) and estimate price ' assuming that Acme adopts a policy of full payout of earnings that currently
equate to a dividend of $0.50 per share. (iv) Compare your answers to parts (i) and (ii). Why are they different? Can you
reconcile the results? ' (v) What realistic range is the present value of grth opportunities likely to fall in?
(4+2+2+2+3+2=15marks) Page 3 of 6 OFFICE USE ONLY
2. ’4 3 7 I
AF F3 121 INVESTMENTS AND PORTFOLIO MANAGEMENT 5. Strategic Investment Services (SIS) has developed the following forecasts of expected .
returns, variances and covariances on two securities (share A and B), the Market Index (M)
and 91 day Treasury Notes (T). SIS intends to use these forecasts as the basis for investment decisions on behalf of their clients. Security Expected Return (%)
A 7 B  6 Market Index (M) 10 91day Treasury Notes (T) 5 Variance —Covariance Matrix — B T
—
—_ 00004 —
0.000625
. 0 _ 0 (a) Construct a portfolio for a client with $10,000 in cash to invest, who seeks maximum diversiﬁcation yet demands a standard deviation of portfolio returns no greater and no
. less than 2.5%. (b) in equilibrium, what is the expected return on an efﬁcient portfolio with a standard
deviation of returns equal to 9.6% (c) are the expected return forecasts provided by SIS consistent with a CAPM
equilibrium for securities A and B? Explain. ((1) Assume that another client currently holds $1,000 in Security A and $9,000 in
Security B. Advise that client how much she should invest in each of securities M and
T if she prefers to maximise her return with no greater and no less standard deviation
risk. ' (3+2+5+5=15marks) 00842VF I Page 4 of 6 Discrete period return
rt = (Pt + D: ‘ Ptl) J, PH Continuously compounded period return:
rt = ln[(Pt + D) / PH] Annual effective return:
R = (1 + r.)''  1 Expected return: E0) = 2pm Arithmetic average return: 1 ll.
R=EZrt t=l Geometric average return: R=[f1(1+r,)] —1 i=1 Variance: a} = [i — E(r)]? Portfolio return:
E(R‘p)=ZWiE(Ri) i=1 Portfolio variance: 2 n n ‘
“p =ZZWiWiCDVi i=1 j=l Covariance
COVij '2 pijGi Gj Coefﬁcient of variation:
CV = of E(r) Capital Market Line:
E(Ri) = Rf + [E(Rm)  Rf]Gi/O'm Capital Asset Pricing Model:
580 = Rf+ [E(M) “ Rflﬂi Asset beta: OFFICE USE ONLY I AF F3 121 INVESTMENTS AND PORTFOLIO MANAGEMENT FORMULAE
Portfolio beta: Bond duration:
1‘ ' T t c
B = Wi i I t
i '3 D=§a+yr
. ct
Arbitrage Pricing Model: g H (1 + y): K
E(Ri) = 10 + meak
 k=l _ Costofcarry futures:
Ft = P: e‘MT Dividend Discount Model
W = (D: +I)(1+ g) ke—g Share index futures:
F. = Pt e“)? Black Scholes option pricing: Imputation tax credit c = PM do F XerTN(d2) 1= D[tc/(1tc)] where:
Earnings Capitalisation Model: 62
PV=EPS I'ke , 1n(P/X)+(r+—)T
. d1 = _ 2
PIE multiplier: oJ—f
PV=EPSXPiE d2=dl_6ﬁ
Free Cash Flow Model: _ _ _
T FCF Binomial option pricing:
PV=————‘— =u+1— /1+R
; + kc)l c [c a cd( ( )
where:
Net tangible asset backing: (1+ R) _ d
NTAB = (Tangible Assets  01 = Liabilities) / “
(Number of ordinary Shares) Putca“ opﬁonTmmy:
Bills: g=°'P+Xe
P FV ‘ Warrant:
(1+ yT) _ 1 c
' (1+ q) w Share ratio:
SR= 1000(P / Acne” Reserve Bank of Australia Jensen’s Alpha:
bond pricing formula: 01, = (RIJ — Rf) — [5,,(Rm — Rf) P = Vﬂd[g(x + (1 — V“) I i) + Sharpe Index: ioovn] (RP—Rf)
Share price Index Futures: 51}, =‘—
A95 . “P
N = a F—
Bond Price Approximation Treyn‘zgndeli: )
i‘ﬁ*100%=— D‘ *100% TIP=*’—f
P (1+ 1') ﬁg Page 5 of 6 g.— RKUJ I 35. g; g. 83.. 3.. g; 0...
9x5.— 800; 88.. 0000.. 095.. 9x5.— 800.. sag.— 9%
008.0 800.0 008.0 0000.0 080.0 0000.0 0009.0 080.0 En
030.0 300.0 33.0 0000.0 003.0 0000.0 02.3.0 03.0.0 ﬁn
. 200.0 33.0 008.0 0000.0 030.0 0000.0 008.0 093.0 ﬁn
. 300.0 «80.0 0000.0 0000.0 02.0.0 2.00.0 260.0 ﬁn F0006 . baud 5000.0 5000.0 boggy 5000.0 0.0.00.0 1n
33.0 008.0 . 002.0 003.0 300.0 33.0 300.0 ﬁn
3.3.0 300.0 38.0 33.0 . 0.30.0 «000.0 23.0 ﬁn
«30.0 . «000.0 , «08.0 33.0 300.0 300.0 003.0 .é.
. 300.0 . 036.0 023.0 33.0 . an 00.0 53.0 3.3.0 0..” 300.0 300.0 . 33.0 200.0 . 200.0 58.0 33.0 o."
. 230 2.00.0 . 930.0 . 200.0 2.00.0 2.00.0 2.00.0 a." .
“had :30 33.0 300.0 300.0 003.0 35.0 ﬁn
«03.0 33.0 . . 33.0 5.3.0 020.0 200.0 33.0 a."
$00.0 3.00.0 304.0 9.00.0 3.00.0 030.0 23.0 nﬁ “30.0 030.0 . 53.0 300.0 «30.0 0.30.0 200.0 in
22.0. 800.0 v0.3.0 300.0 300.0 030.0 3.3.0. n.“ Page 6 of 6 OFFICE USE ONLY 300.0 300.0 2.00.0 .500 0000.0 300.0 33.0 a."
020.0 0.60.0 020.0 330.0 030.0 0800.0 33.0 in
0000.0 800.0 H206 02.0.0 .3500 02.0.0 "2.0.0 .0.n . 02.0.0 0.30.0 0.20.0 "2.0.0 02.0.0 a. 3.0 . 23.0 0..
300.0 030.0 . 2.00.0 300.0 030.0 2.00.0 .9000 0...
0. 00.0 . 2900.0 $3.0 mama.0 230.0 1.3.0.0 13.0.0 n.
336 n. 3.0 3.6.0 v9.9.0 v5.0.0 9.6.0 "2.0.0 o.—
a . 3.0 86.0 802.0 020.0 920.0 :26 «23.0 n._ «30.0 . 28.0 32.0. 020.0 23.0 53.0 "03.0 q.—
. 2.3.0 . 3.0.0 0000.0 "000.0 0000.0 300.0 «39.0 n.—
330 300.0 “03.0 502.0 :30 3:0 2.3.0 . q...
095.0 02.90 . 22.0 003.0 030.0 “30.0 2.3.0 n.
230 3.3.0 . 2.3.0 3.3.0 5.5.0 33.0 n p 3.0 0.— 0.2.0 23.0 . .1030 u 3.5.0 «2.0.0 050.0 on _ 0.0 0.0
2.0. .0 3.00.0 . hoard . 52.6 . 039.0 0. 2.0 52.0 :0
. 32.0 . 32.0 32.0 . 2.2.0 . «109.0 — _ 00.0 02.... 9.0
.323 3.2.0 . s 2.0 53.0 3:0 32.0 ha #0 0.0
S.— h.0 an _ 5.0 . . 306.0 . 200.0 33.0 3.3.0 23.0 . «.0 133.0 83.0 $05.0 .8500 . 903.0 030.0 33.0 33.0 v.0
030.0 260.0 003.0 Lnned .230 Quad 2.5.0 050.0 2—
35.0 300.0 280.0 :3. .0 0. and .590 «and 35.0 «.0
1.5.0 3.3.0 336 . nnnnd h. and 2.3.0 33.0 32.0 .6
0. 3.0 0300 923.0 02 “.0 0.... 2 0:36 03... .0 0800 0.0 TABLE FOR N[X] 00. 00. B. 8. . v0. n 0. n0. .0. 8. a . ed :3... 52 5... uses . or“ :23 E: as .3...“ m
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