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Revision Questions

Revision questions

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akothanne92
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31 views3 pages

Revision Questions

Revision questions

Uploaded by

akothanne92
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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i) XYZ ltd. is considering three possible capital projects for next year. Each
project has a 1 year life, and project returns depend on next year’s state of the
economy. The estimated rates of return are shown below.

State of the Probability Rate of Return


Economy of Occurrence M N Q

High 0.25 10% 9% 14%


Medium 0.50 14 13 12
Low 0.25 16 18 10

REQUIRED:

a) Determine the:
(i) expected rate of return
(ii) variance,
(iii) Standard deviation and coefficient of variation.
(10marks)
b) Compute the expected return on a portfolio if the firm invests equalwealth on
each asset. (5marks)
ii) Briefly explain the differences between systematic risk and unsystematic risks.
(5marks)
iii) Sketch a well labeled diagram showing efficient frontier (5marks)
iv) Discuss the limitations of CAPM model in investment analysis (5marks)

a) Discuss the characteristics of various investment securities traded in capital


markets. (8 marks)
b) Explain the meaning of the following terms:
i) Diversification (2marks)
ii) Risk and return (2marks)
iii) Efficient Portfolio (2marks)

c) Distinguish between the security market line (SML) and Capital Market Line
CML) (6marks)

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a) Explain key problems that are addressed by Capital Asset Models in relation to

investment performance. (12marks)

b) Security returns depend on only three risk factors-inflation, industrial

production and the aggregate degree of risk aversion. The risk free rate is 8%, the

required rate of return on a portfolio with unit sensitivity to inflation and zero-

sensitivity to other factors is 13.0%, the required rate of return on a portfolio with

unit sensitivity to industrial production and zero sensitivity to inflation and other

factors is 10% and the required return on a portfolio with unit sensitivity to the

degree of risk aversion and zero sensitivity to other factors is 6%. The security has

betas of 0.9 with the inflation portfolio, 1.2 with the industrial production and-

0.7 with risk bearing portfolio (risk aversion). Assume that required rate of return on

the market is 15% and the stock has CAPM beta of 1.1

REQUIRED:

Calculate the security's required rate of return using CAPM (8 marks)

a) Discuss any seven implications of the Capital Asset Pricing Model in relation to its
application in investment portfolios. (16 marks)

b) Explain the meaning of the following terms:


i) Aggressive Assets (2 marks)
ii) Defensive Assets (2 marks)

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