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    BFI 4402 PORTFOLIO AND INVESTMENT ANALYSIS-Paper 1

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    Rohi Kiriga

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    BFI 4402 PORTFOLIO AND INVESTMENT ANALYSIS-Paper 1

    Uploaded by

    Rohi Kiriga
    7 views3 pages

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    Copyright:

    © All Rights Reserved
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    7 views3 pages

    BFI 4402 PORTFOLIO AND INVESTMENT ANALYSIS-Paper 1

    Uploaded by

    Rohi Kiriga

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 3

    TECHNICAL UNIVERSITY OF MOMBASA

    SCHOOL OF BUSINESS
    DEPARTMENT OF ACCOUNTING & FINANCE
    UNIVERSITY EXAMINATION FOR:
    BCOM
    BFI 4402: PORTFOLIO AND INVESTMENT ANALYSIS

    END OF SEMESTER EXAMINATION


    SERIES: AUGUST 2019
    TIME: 2HOURS
    DATE: 16Aug2019
    Instructions to Candidates
    You should have the following for this examination
    -Answer Booklet, examination pass and student ID
    This paper consists of FIVE questions. Attemptquestion ONE (Compulsory) and any other TWO questions.
    Do not write on the question paper.

    QUESTION One

    a) Explain the mechanics of calculating the present value of cash flows. (5Marks)
    b) Define a yield curve. What are the reasons for an upward sloping yield curve? What is an
    Inverted yield curve? (5Marks)
    c) Does diversification reduce the risk of investment? Explain with an example. (5Marks)
    d) i) Explain the security market line (SML) with the help of a figure. (3Marks)
    ii) How does it differ from the capital market line? (2 Marks)
    e) Star Computer Systems Limited has forecasted returns on its share with the following
    probability distribution:

    Return (%) Probability


    -20 0.05
    -10 0.05
    -5 0.10
    10 0.15
    18 0.20
    20 0.25
    30 0.05

    Calculate the expected return, variance and standared deviation of returns for star. (10Marks)

    ©Technical University of Mombasa Page 1 of 3


    QUESTION Two

    a) Discuss the assumptions of the Black-Scholes model (10Marks)

    b) John Sharma is interested in writing a six –months call option on L & T shares. L& T‘s is currently selling

    for Ksh. 120. The volatility (standared deviation) of the share returns is estimated as 67 per cent. Rakesh

    would like the exercise price to be Shs. 120. The risk-free rate is assumed to be 10percent. How much

    premium should Rakesh charge for writing the call option? (10Marks)

    QUESTION Three

    a) Using the diagram illustrate the Efficiency Market Hypothesis . (10Marks)

    b) Explain why the Nairobi Security Exchange bourse has failed to attract many companies for listing?

    (10Marks)

    QUESTION Four

    a) Discuss the phases involved in constructing a portfolio. (10Marks)

    b) The stock market and Treasury bills returns are expected to be as follows:

    Economic Conditions Probability Market Return (%) Treasury Bills (%)

    Growth 0.20 28.5 9.5

    Decline 0.30 -5.0 9.5

    Stagnation 0.50 17.9 9.2

    Required
    Calculate:
    i) The expected market and treasury bills. (5Marks)
    ii) The expected risk premium. (5Marks)

    QUESTION Five

    a) Discuss briefly about Sharpe’s measure mentioning its advantages and disadvantages as a tool to measure

    portfolio performance. (10Marks)

    ©Technical University of Mombasa Page 2 of 3


    b) During the last 10 years period the average annual rate of return on NSE (market portfolio) was 14% and the
    average annual rate of return on a risk free asset (TB) was 8%. As an administrator of a large pension fund
    that is divided among three money managers you must decide whether to renewal your investment with each
    of these money managers. You have gathered the following information:

    Investment Average annual rate of return Beta of portfolio Std. deviation of portfolio
    manager
    W 12% 0.90 1.8%

    X 16% 1.05 2.2%

    Y 18% 1.20 2.3%

    The standard deviation of the market (αm) = 2%

    Required
    Evaluate the performance of the managers using Treynor’s performance measure, Shape’s performance
    measure and Jensen’s portfolio measure and rank them. (10Marks)

    ©Technical University of Mombasa Page 3 of 3

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