AFF/AFW3121 Dr J Wickramanayake Page 12 of 53 Question 5 Outline the major differences between fundamental analysis and technical analysis in answering the following questions. (a) Describe the three major components of each of the above analyses in top-down versus bottom-up approach. (6 marks) (b) How to decide whether to buy or sell a particular security in each of the above two analyses. Where appropriate, give examples. (10 marks) (c) What impact does an assumption of market efficiency have on each of the two analyses? (4 marks) (Total = 6 + 10 + 4 = 20 marks) Question 6 (a)Using an appropriate diagram, show how the optimal domestic portfolio is constructed. (6 marks) (b)Discuss why international diversification reduces portfolio risk. Specifically, why would you expect low correlation in the rates of return for domestic and foreign securities? (3 marks) (c)Using the theory of international diversification, discuss why portfolio managers should or should not internationally diversify their portfolios. Use an appropriate diagram. (6 marks) (d)At a social gathering, you meet the portfolio manager for the trust department of a local bank. She confides to you that she has been following the recommendations of the department’s six analysts for an extended period and has found that two are superior, two are average and two are clearly inferior. What would you recommend she do to run her portfolio? (5 marks) (Total = 6 + 3 + 6 + 5 = 20 marks)END OF EXAMINATION

OFFICE USE ONLY AFF3121/AFW3121 INVESTMENTS AND PORTFOLIO MANAGEMENT AFF/AFW3121 Dr J Wickramanayake Page 13 of 53 AFF3121/AFW3121 –INVESTMENTS AND PORTFOLIO MANAGEMENT LIST OF FORMULAE Future value: nk)1(Present value: tk)1/(1** Return (R): )(Pln )(Pln R1-ttwhere ln= natural logarithm and P = share price. **Annual effective return:R = (1 + rt)n–1 Holding period return (HPR): PricePurchaseChangePriceIncomeHPRReturn relative (RR): PricePurchaseInvestmentofValueEndingIncomeRRAnnualised HPR (AHPR): AHPR = (Return Relative)1/n–1 Real RFR: 1RateInflation1ReturnofRateFree-RiskNominal1Expected return: 1-premium)Risk (1Rate)Interest Free-RiskNominal1Foreign investment returns - Home country return relative (RR) = RateExchangeInitialRateExchangeCurrent )RRcountry (Foreign Arithmetic mean (AM): nHPRRA/Geometric mean (GM): 1Relatives)(Return /1nGRVariance: 1/)(22nRRAtCovariance of returns of two assets: RERRERECovjjiiijCoefficient of variation:ARCVExpected portfolio return: niiiportRWRE1)()(Portfolio standard deviation: njiinjijjiniiiportwww111222covAsset beta: 2,MMiiCovCovariance: COVij= rijijCorrelation coefficient:rjj= COVij/ijPortfolio beta: niiiportw1Security market line (SML): )()(,2MiMMjCovRFRR

#### You've reached the end of your free preview.

Want to read all 53 pages?

- Fall '16
- Dr.Wicky
- Finance, Capital Asset Pricing Model, Dr Wicky J Wickramanayake, Dr J Wickramanayake