MU - S2 2000 - Investment and Portfolio Management

MU - S2 2000 - Investment and Portfolio Management - MONASH...

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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 NON-PROGRAMNIABLE 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 $500,000 180-day 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 90-day 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 forms-weak, semi-strong 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 semi-annually 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 co-variances 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 91-day Treasury Notes (T) 5 Variance —Covariance Matrix — B T — —_ 0-0004 — 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: ‘ Pt-l) 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 _ Cost-of-carry 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 Xe-rTN(d2) 1= D[tc/(1-tc)] where: Earnings Capitalisation Model: 62 PV=EPS I'ke , 1n(P/X)+(r+—)T . d1 = _ 2 PIE multiplier: o-J—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) Put-ca“ 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 8-6.0 802.0 020.0 920.0 :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 0-2.... 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 M E G W m. .L 0 w R O P W m m m m m M 00842VF ...
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MU - S2 2000 - Investment and Portfolio Management - MONASH...

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