INVESTMENT ANAYLYSIS - EXAM QUESTIONS.

 Here are the questions to expect - all of it and nothing more.  So, read them and practice the solutions that I have posted and the ones to come. 

For comments, observations, questions and answers, email; theotherwomaninmarriage@gmail.com 

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 discernable 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-portfolio, 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?