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**Unformatted text preview: **l Australian
wﬁ": National
. Universny THE AUSTRALIAN NATIONAL UNIVERSITY RESEACH SCHOOL OF FINANCE, ACTUARIAL STUDIES AND APPLIED STATISTICS First Semester 2016
Mid-Semester Examination INVESTMENTS
(FINM2003) - Writing Period: 90 minutes
Study Period: 10 minutes
Permitted Material: Non-Programmable Calculator Paper-Based Dictionary Instructions to Candidates: 1. 2. This exam paper comprises a total of 4 pages. Please ensure your paper has the correct
number of pages. The exam includes a total of 3 questions, each containing multiple parts. The questions
are of unequal value, with marks indicated for each question. You must attempt to
answer all questions. . Do not round calculations until providing your ﬁnal answer to each question. Final answers should be rounded to 2 decimal places.
Include all workings for each question, as marks will not be awarded for answers that
omit necessary workings. . Ensure you include your student number on your answer book. Total Marks = 40
This examination is worth 20% of assessment for the course FINM2003 Investments: Mid-Semester Examination, Semester 1, 2016 Question 1 (12 marks) a) Having successfully completed your ﬁnance studies at the ANU, you embark on an b) - exciting career as a fund manager. One of your ﬁrst assigned tasks is to create a suitable portfolio for a client, from among the existing products offered by the ; ﬁrm. You identify two existing portfolios offered by the ﬁrm, a stock portfolio and
a bond portfolio, which you intend on using as the basis for creating the client’s portfolio. The stock portfolio has an expected return of 8% and a standard
deviation of 19%, and the bond portfolio has an expected return of 5% and a
standard deviation of 12%. The rate of return on T-bills is currently 3%. i) Your client advises that she would like her portfolio to consist of 72% stocks,
18% bonds, and the remainder being T-bills. If the covariance between the
stock and bond portfolios is 125, what is the return and standard deviation of
her desired portfolio? (2 Marks) ii) Your client is concerned about the level of risk of the portfolio in i) above.
Instead, she would like the returns of her portfolio to have a standard deviation
of no more than 13%. Assuming the security selection and weightings within
the risky component of her portfolio remains unchanged, what would be the
composition of the complete portfolio that would achieve her desired level of
risk, and what would be the expected return on this portfolio? (4 Marks) iii) Given ii) above, what is your client’s level of risk aversion? (2 Marks) Explain how you would calculate the variance of an n-asset risky portfolio using
the bordered covariance approach. (4 Marks) Page 2 of 4 FINM2003 Investments: Mid-Semester Examination, Semester 1, 2016 Question 2 (12 Marks) 6!) b) You have been provided with the order book for Apollo Ltd, from which you have
extracted the following data: Bid Ask
Price Size Price Size
$24.88 1000 $25.25 200
$24.75 1600 $25 .75 200
$24.63 1000 $27.38 600
$24.50 400 $29.13 200
$24.25 1200 i) In words, deﬁne the inside spread, and calculate the inside spread for Apollo
Ltd. (1 Mark) ii) A market order arrives to sell 2700 shares in Apollo Ltd. How much will the
investor receive in total for the shares? (2 Marks) iii) In words, explain what would happen if the investor instead placed a limit
order to sell the 2700 shares for $25.10 each. (1 Mark) Assume it’s the beginning of 2016, and shares in Mulholland Ltd are currently
selling for $50 each. The table below shows the anticipated stock price and the
dividend to be paid at the end of the year, given various possible states of the
economy: State Year-end price Annual dividend
1 $62 $3
2 $58 $3
3 $56 $2
4 $50 $2
5 $46 $0 You anticipate that States 1 and 2 each have a probability of occurrence of 15%,
State 3 has a probability of occurrence of 30%, and States 4 and 5 each have a
probability of occurring of 20%. i) Calculate the holding period return (HPR) for each of the possible states,
assuming a one-year holding period. (2 marks) ii) Calculate the expected return on Mulholland Ltd stock. (2 marks) iii) Calculate the standard deviation of the returns. (2 marks) Describe the difference between the primary and secondary markets, as they apply to issuing securities. What is one way a ﬁrm may issue securities via the primary
market? (2 Marks) Page 3 of 4 F INM2003 Investments: Mid-Semester Examination, Semester 1, 2016 Question 3 (16 marks)
a) An analyst has provided you with the following forecasts for four risky assets:
Asset Actual expected Beta Residual standard
return % deviation %
A 18 1.2 30
B 15 0.8 12
C 10 0.7 28
D 17 1.5 32 b) The expected return of the market portfolio is 14%, and its standard deviation is . 25%. The T-bill rate is 8%. i) Using the Capital Asset Pricing Model (CAPM), calculate the expected
returns for Assets A to D. (2 Marks) ii) Calculate the standard deviations of Assets A to D. (2 Marks) iii) You are interested in how Asset A is related to the returns of the remaining
three assets. Calculate the correlations between the returns of Asset A, and
those of each of the remaining assets. (2 Marks) iv) Calculate the alphas for Assets A to D. (2 Marks) v) Draw the Security Market Line (SML) and plot all information relevant to
Assets A to D, including their alphas. Ensure you correctly label the axes and important points relevant to the SML. (4 Marks) In class, we discussed six distinct assumption underlying the CAPM. List and
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