INVESTMENT ANALYSIS - MORE EXAM QUESTIONS

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Question one

(a)    Within the concept of CAPM, determine whether the following securities are fairly priced, over or underpriced, if the risk free rate is 12%, expected return o market portfolio is 18% and the standard deviation of return on market portfolio is 13%.

Security	Expected return (%)	Standard deviation (%)	Beta
R	35	24	1.25
Q	25	16	1.72
A	26	25	1.80
B	16	10	0.60
C	10	3	0.25

(b)   Briefly discuss the key steps involve in the portfolio management process.

Question two

There are undoubtedly individual who prefer risk and others who are indifference to it, but both logic and scientific observation suggest that mot investor and investment manager are predominantly risk averters.

What do you think is the most logically satisfying reason for this?

(c)    Discuss the implication of capital market efficiency for corporate financial management.

Question three

(a) The Abuja corporation has currently paid a dividend of N1.50 per share; the-company expects dividends to grow at 20 percent annual rate the first five years, at 16 percent rate the next, five years, and the increase at a 10 percent annual rate afterwards. The phased growth pattern is keeping with the expected life cycle of earnings, if the current market price per share of Abuja Corporation, is N40.00 Calculate the investor’s expected rate of return using H-model.?

(b) Distinguish carefully between investing and speculating. Is it possible to incorporate investment and speculation within the same security? Explain.

Question four

a)      An investor holds a portfolio which is expected to yield a rate of return of 18% with a standard deviation of 2.5%n the investor is considering buying a new share(investment being 5% of the total investment in the new portfolio). The share has the following distribution of return :

RETURN	PROBABILITIES
40	0.30
30	0.40
-10	0.30

           

                     

                         

The correction coefficient between the new portfolio and the new security is 0.3; calculate the portfolio return and standard deviation of the portfolio.

(b) What are the assumption underlying of Markowitz portfolio analysis.

Question Five

M&M Corporation has 16% debenture bond outstanding that mature in 25 years, the bond is callable in 10 years at 116 it currently sell for 123. Calculate each of the following for this bond

(a)    Current yield

(b)   Yield to call

(c)    Yield to maturity

(d)   What yield calculation should an investor as the most important for the decision making? Why?

Question Six

(a)    What does it mean to assume that all investors have homogeneous expectation? Why is this assumption necessary to capital market theory?

(b)   What is the relationship between borrowing and lending rates in the real world? How does this real world relationship affect the shape of CML and identification of the optimal portfolio?

Question One

Consider the following three securities and the relevant data on each.

	Stock 1	stock 2	stock 3
Expected return	10	12	8
Standard deviation	10	15	5

  

CORRELATION COEFFICIENT:

                                       Stock 1, 2 = 0.2

                                       Stock 2, 3= 0.4       

                                       Stock 1, 3= 0.5      

                

Required:

What are the portfolio risk and return if the following proportions are assigned to each stock?

                Stock 1= 0.2

                 Stock 2= 0.4

Stock 3 = 0.4

     Question Two

a)      The palatin paper package (PPP) corporation is N1000 bonds that pay a coupon rate of 8 percent in a single annual payment and mature in 20 years are selling for a current market price of N1050. What does an investor in these bonds earned in terms of :

                                I.            Yield-to-maturity

                              II.            Current yield

                            III.            Nominal yield

(b) The Ndaduma corporation has a 12 percent semi-annual bond issue with F=1000 that matures in 15 years but is called in 6 years at N1200. If the current price bond is N900, determine its yield-to-call

Question three

a)      Distinguish carefully between investing and speculating. Is it possible to incorporate investment and speculation within the same security? Explain

b)      Compare briefly the traditional and modern approaches to security analysis: to portfolio management.

Question Four

a)      The M&M mining company has been experiencing a 6 percent year decline in its cash dividend growth rate for the past few years: this decline is expected to continue, M&M has a current dividend per share N3. If M&M’s required rate of return is 14.5 percent. What is a share of the stock worth?

b)      B) If conditions remain the same, what will M&M’s price be 3 years from now?

Question Five

a)      What is the implication of random walk for technical and fundamental analysis?

b)      How do technicians and random walk advocate differ in their view of the stock market?

Question Six

Capital market theory and capital asset pricing model (CAMP) are based on certain specific assumptions, and capital asset pricing model suggests rather specific things about asset pricing.

a)      What are the basic assumptions underlying capital market theory?

b)       What happens to the capital market line (CML) and choice of an optimal portfolio if borrowing rate is allowed to exceed the lending rate?

 Question one

The returns on two securities A &B for a one year holding period are not certain. However, the probability distributions of possible returns are given as follows:

Security A			Security B
	Possible rate of return (%)	Probability of occurrence	Possible rates of return (%)	Probability of occurrence
1	19	0.30	16	0.30
2	21	0.20	23	0.50
3	25	0.50	13	0.20

Question two

M&M Corporation has a 16% debenture bond outstanding that matures in 25years. The bond is callable in 10years at 116, it currently sells for 25. Calculate each of the following for this bond.

a)      Current yield

b)      Yield-to-call

c)       Yield-to-maturity

Explain briefly what you understanding by the team “Beating the market”

Question three

Very few financiers would fit neatly into one of the three categories on thinking on the behavior of stock prices. Identify the categories and discuss them in detail.

Question four

a)      Distinguish between a feasible and an efficient portfolio. Is an inefficient portfolio % ever a feasible portfolio?

b)      Point out the differences between efficient frontier under capital market theory and under the Markowitz approach.

Question five

a)      Why in the perfect world, of the capital asset pricing model (CAPM), are the investment decision and the financing decision separate?

b)      What specifically should a “true believer” in the CAPM do with his money if he seeks to hold a portfolio with a beta of 1.25?

Question six

a)      Discuss the key steps involved in the portfolio management process.

b)      Describe briefly the following approaches to investment decision making:

                                 I.            Fundamental approach

                               II.            Psychological approach

                             III.            Academic approach

Question one

Justice Rabe of the Abuja Institute of Advanced Legal Studies is due to retire from service in December, 2007 at which time he will be 65 years old. His retirement benefit under the old pension, scheme is expected to amount to 3420, 000, 00. As part of his retirement plan, he is considering investing in a portfolio consisting of three securities with the following risk and return characteristics:

Security X		Security Y		Security Z
Possible rates of Return (%)	Probability of Occurrence	Possible rates of Return (%)	Probability of Occurrence	Possible rates of Return (%)	Probability of Occurrence
32	0.20	52	0.30	42	0.10
26	0.30	33	0.60	31	0.40
22	0.50	13	0.10	14	0.50

Calculate the expected return and standard deviation of the portfolio, if the proportion of funds invested in security X, Y & Z are 20%, 35% and 45% respectively and the coefficient between the securities are as follows:

Security   X, Y            0.30

                 Y, Z             0.40

                 X, Y             0.60

Question Two

c)       The Abuja Corporation has currently paid a dividend of N1.20 per share. The company expects dividends to grow at 21 percent annual rate the first five years, at a 14 percent rate the next, five years, and then increase at a 7.5 percent annual rate afterwards. The phased growth pattern is in keeping with the expected life cycle of earnings. If the cuii.nl market price per share of Abuja Corporation is N24.50, calculate the investors expected rate of return (Use H- model)

d)      Distinguish between systematic and unsystematic risk.

Question Three

a)      Suppose that the following five portfolios are lying on the efficient frontier of an opportunity set, determine the best (optimal) portfolio, if the investors risk tolerance is 40%

              

Portfolio	A	B	C	D	E
Expected Return	7.60	9.13	9.43	9.73	9.85
Expected Variance	0.19	0.52	0.61	0.74	0.75
Standard Deviation	4.32	7.24	7.79	8.59	8.67

b)      Although there are no discernible differences between investment, speculation and gambling from the overt action of the individuals involved, yet significant differences exist between them on the basis of a number of the other parameters. Discuss.

Question Four

a)      The capital market is a major segment of the financial markets. State and explain the major functions of the capital market in an economy.

b)      The NUAMBS Company Plc has q two security-portfolios, consisting of sixty percent (60%) investment in security A and forty percent (40%) investment in security B. The expected return and standard deviation of security A are 20% and 10%, while those of security B are 25% and 18% respectively. If the covariance of security A and security B is 0.0072. Calculate:

i.                     The Expedited Return on the Portfolio

ii.                   The Standard Deviation of the Portfolio

Question Five

Within the concept of CAPM, determine whether the following securities are fairly priced, over or underpriced. If the risk free rate is 20%, expected return on market portfolio is 18% and the standard deviation of return market on market portfolio is 13%.

Security	Expected return (%)	Standard deviation (%)	Beta
R	35	24	1.25
Q	25	16	1.72
A	26	25	1.80
B	16	10	0.60
C	10	3	0.25

What are the assumptions underlying the Capital Asset Pricing Model (CAPM). Explain what the Capital Market Line (CML) represents.

Question Six

a)      The common stock M&M Corporation is currently selling for N60.00 per share. Dividends per share have been grown from N1.50 to N4.00 over the last (10) years and growth in dividends is expected to continue in the future. Determine the required rate for the M&M stock.

b)      Suppose that the M&M Corporation recently paid a dividend of N6.00 per share and the dividend has been growing at an annual rate of 8%. If the growth rate in dividend is expected to continue in the foreseeable future and the required rate of return for the M&M stock is 14%. Determine the value of the stock.

c)       A bond inane with 0 ten percent (10%) coupon rate has a face value of N1, 000, 00. If the bond is currently selling in N800.00 in the market. Determine its current yield and the approximate yield to maturity under a five year holding period:

Question one: Compulsory

You are planning to invest N20m. two securities A and B are available and you can invest in either of them or in a portfolio with sum of each. Assume rho AB = -0.5. What percentage of your portfolio should be invested in each security to minimize your investment risk? Draw the feasible set of efficient portfolios and identify the efficient set. You estimated that the following probability distribution of returns are applicable to A and B.

SECURITY A		SECURITY B
Returns	Probability	Returns	Probability
-4	0.2	2	0.2
0	0.3	4	0.3
12	0.3	8	0.3
26	0.2	10	0.2

Question Two

“Securities markets tend to operate like omniscient hand”, setting the prices and returns on each security at level suppliers and demanders of the capital deem appropriate for the risk associated with that security. Discuss in the light of the concept of beating the market.

Very few financiers would fit neatly into one of the three categories on the thinking on the behavior of stock prices. Identify the category and discuss any of them.

Question Three

a)      Evans Company is expecting earnings per share next year to be N5 per share. If earnings has been growing at the rate of 8% per year in the past and it is expected to continue in the future, determine the required current rate of return for this company’s stock. Assume a dividend payout of 60% and current market price of N65.

b)      The M&M Corporation currently has a required rate of return of 16% and it’s currently dividend is N3.00 per share. If the current price of M&M’s stock is N55.00 per share. What is the growth rate?

 Question four

State and discuss the basic parameters of classifying investment.  What are the distinguishing features of a good investment?

Question five

a)      Mr. Smart is trying to determine the value of Franklin’s corporation common stock. The earnings growth rate over his planned 6-years holding period is estimated to be 10% and the dividend payout ratio is 60%. The ending P/F ratio is expected to be 20 and current earnings per share are N 4 if the required rate of return for this stock is 15%, what should be the price of franklins’ stock?

b)      What are the assumption underlying portfolio analyses?

Question six

In what way are Nigerian securities markets inefficient? Explain the term internal and external market efficiencies.

ADDITIONAL MISCELLANEOUS

Question three

a)      The M&M Corporation currently has earnings that are N4 per share. In recent years earning has been growing at the rate of 7.5%and this rate is expected to continue in the future. If the M&M Corporation has retention rate of 40%and a required rate of return of 14%, what is its current value?

b)      The M&M corporation currently has earning that are N4, a current growth rate of 7.5% that is expected to continue in the future, a retention rate of 40% and required rate of return of 14%. If M&M Corporation continues to do as expected in the future, what will its price be in 4years?

Question six

a)      The M&M mining company has been experiencing a 6 percent year decline in its cash dividend growth rate for the past few years; this decline is expected to continue, M&M has a current dividend per share ofN3. If M$M’s required rate of return is 14.5 percent. What is a share of the stock worth?

b)      If conditions remain the same, what will M$M’s price be in 3 years from now?

Question six

The T.Bill rate is 6% and the market portfolio is expected to return 12%with a standard deviation of return of 15%. A portfolio which is sufficiently diversified has a standard deviation of return of 10%.

a)      What is the beta of portfolio      b) what is the SML equation

b)      What is the E(R) of the portfolio   d) distinguish SML and CML.