Sms 3468 Investment and Asset Management

MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY
P.O. Box 972-60200 – Meru-Kenya.

Tel: +254(0) 799 529 958, +254(0) 799 529 959, +254 (0)712 524 293
Website: www.must.ac.ke Email: [email protected]
UNIVERSITY EXAMINATIONS 2021/2022
FOURTH YEAR, SECOND SEMESTER EXAMINATION FOR THE DEGREE OF

BACHELOR OF SCIENCE IN ACTUARIAL SCIENCE
SMS 3468: INVESTMENT AND ASSET MANAGEMENT
DATE: JANUARY 2022 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and any other TWO questions.
QUESTION ONE (30 MARKS)
a) Suppose that there are two assets with r1 = 0.12 , r2 = 0.15 , σ 1 = 0.20, σ 2 = 0.18 and
σ 12 = 0.01 . A portfolio is formed with weights w1 = 0.25 and w2 = 0.75 . Calculate the
mean and variance of the portfolio. (8 Marks)
b) Suppose there are three uncorrelated assets. Each has variance 1, and the mean values are
1, 2, 3, respectively. Assuming markowitz formulation, derive
i. The optimal portfolio
ii. The standard deviation for the optimal portfolio (6 Marks)
c) Consider an oil venture/investor considering investing in a share of a certain oil well that
will produce a payoff that is random because of uncertainty associated with whether or
not there is oil at that site and because of uncertainty in future oil prices. Given, expected
payoff is $ 1000 and the standard deviation of return in a relatively high 40%, the beta of
the asset is β = 0.6 , risk-free rate, = 10%, and market portfolio return is 0.17. What is
the value of this share of the oil venture, assuming CAPM? (8 Marks)
d) State the main uses of multifactor models and single-index models. What is their main
limitation?
e) If β i doubles (with everything else remaining unchanged) does the expected return on
security i also double? Explain. (8 Marks)
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QUESTION TWO (20 MARKS)
a) List the assumptions underlying the mean-variance portfolio theory. (8 Marks)

b) Suppose there are only two portfolios A and B available to invest in. A is a portfolio of
risky assets and B is a portfolio consisting of just one risk-free asset. Show that the
efficient frontier must be a straight line. (6 Marks)
c) Suppose that the market of risky assets being considered is that consisting of FTSE 100
companies only and that there are 15 million investors.
i. State the marker portfolio
ii. Suppose investor number one holds 5% of risky assets in Vodafone share. What
percentage does any other investor, among the 15m investors, hold in Vodafone
shares? Explain. (8 Marks)
QUESTION THREE (20 MARKS)
a) Define
i. The capital market line
ii. The security market line (8 Marks)
b) Derive the security market line equation. Explain any parameters or variables used in the
derivation. (4 Marks)
c) Consider security A, which has a standard deviation of investment return of 4% if:
- The standard deviation of the market return is 5%
- The correlation between A’s return and that of market is 0.75%
- The risk – free rate is 5%
- And the expected return on the market is 10% then calculate:
i. The beta of security A
ii. Security’s A expected return (8 Marks)

QUESTION FOUR (20 MARKS)
a) Define what is meant by the term arbitrage

b) Suppose that just two factors I1 and I2 are needed to describe the returns from assets.
Asset A is heavily influenced by I1, where as B is heavily influenced by I2. Suppose also
that the expected returns from each of A and B are given by the following equations:
Ε (R A ) = 4 + 2 I 1 + I 2
Ε (RB ) = 5 + I 1 + 2 I 2
Asset C has equal weighting on the two factors. Write down the equation for the expected
return on Asset C. (14 Marks)
QUESTION FIVE (20 MARKS)
a) An investor is trying to predict the expected return on a security using the arbitrage
pricing theory. She decides a two-factor model as appropriate and estimates that:
λ0 = 3.0 % λ1 = 0.9% λ 2 = 0. 8% bi1 = 0.5 bi 2 = 1.05
i. bi 2 > bi1 , explain

ii. Estimate the expected return on the security. (10 Marks)
b) State
i. The 1 – fund theorem
ii. The 2 – fund theorem (6 Marks)
c) Prove the 2 – fund theorem. (4 Marks)


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MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

P.O. Box 972-60200 – Meru-Kenya.

UNIVERSITY EXAMINATIONS 2021/2022

FOURTH YEAR, SECOND SEMESTER EXAMINATION FOR THE DEGREE OF

SMS 3468: INVESTMENT AND ASSET MANAGEMENT

DATE: JANUARY 2022 TIME: 2 HOURS

INSTRUCTIONS: Answer Question ONE and any other TWO questions.

QUESTION ONE (30 MARKS)

Meru University of Science & Technology is ISO 9001:2015 Certified

a) List the assumptions underlying the mean-variance portfolio theory. (8 Marks)

QUESTION THREE (20 MARKS)

Meru University of Science & Technology is ISO 9001:2015 Certified

a) Define what is meant by the term arbitrage

QUESTION FIVE (20 MARKS)

i. bi 2 > bi1 , explain

Meru University of Science & Technology is ISO 9001:2015 Certified

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