BSc (Hons) Banking and International
Finance
Cohort: BBIF/10/FT
Examinations for 2012 – 2013 Semester I
/ 2012 Semester II
MODULE: SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT
MODULE CODE: ACCF 3309
Duration: 2 Hours
Reading time: 10 Minutes
Instructions to Candidates:
1.
This question paper consists of Section A and Section B
2.
Section A is Compulsory.
3.
Answer any TWO questions from Section B.
4.
Always start a new question on a fresh page.
5.
Total Marks: 100.
This question paper contains 4 questions and 5 pages.
Page 1 of 5
SBMFEXAM3309
SECTION A: COMPULSORY
QUESTION 1: (40 MARKS)
A bond for the Edgar Corporation has the following characteristics:
Maturity – 12 years
Coupon – 10 percent, semi-annual
Yield to maturity – 9.50 percent
Macaulay duration - 5.7 years
Convexity – 48
Noncallable
a) Calculate the approximate price change for this bond using only its duration
assuming its yield to maturity increased by 150 basis points.
Discuss
(without calculations) the impact of including the convexity effect in the
calculation.
(10 marks)
b) You expect interest rates to decline over the next six months.
Given your interest rate outlook, state what kind of bonds you want in your
portfolio in terms of duration. Explain your reasoning for this choice.
(5 marks)
c) Why does the present value equation appear to be more useful for the bond
investor than for the common stock investor?
(10 marks)
d) How might an analyst determine the value for a firm that pays no dividends
and is expected to operate at a loss next year?
(10 marks)
e) Explain the difference between statistical and judgmental forecasts of
earnings. Give two examples of each.
(5 marks)
Page 2 of 5
SBMFEXAM3309
SECTION B: ANSWER ANY TWO QUESTIONS
QUESTION 2: (30 MARKS)
a) Discuss and justify a measure of diversification for a portfolio in terms of
capital market theory.
(5 marks)
b) What changes would you expect in the standard deviation for a portfolio of
randomly selected stocks between 4 and 10 stocks, between 10 and 20
stocks, and between 50 and 100 stocks?
(8 marks)
c) You ask a stockbroker what her firm’s research department expects for these
three stocks over the next year. The broker responds with the following
information:
Stock
Current Price Expected Price
Expected Dividend
Beta
U
22
24
0.75
0.85
N
48
51
2.00
1.25
D
37
40
1.25
-0.20
Indicate what actions you would take with regard to these stocks, if the risk free
rate is 5% and the return on the market is 14%. Discuss your decisions.
(17 marks)
Page 3 of 5
SBMFEXAM3309
QUESTION 3: (30 MARKS)
Michelle Industries issued a Swiss franc-denominated five-year discount note for SFr200
million. The proceeds were converted to U.S. dollars to purchase capital equipment in the
United States. The company wants to hedge this currency exposure and is considering
the following alternatives:
a)
At-the-money Swiss franc call options
b)
Swiss franc forwards
c)
Swiss franc futures
Contrast the essential characteristics of each of these three derivative instruments.
Evaluate the suitability of each in relation to Michelle’s hedging objective, including both
advantages and disadvantages.
Page 4 of 5
SBMFEXAM3309
QUESTION 4: (30 MARKS)
Portfolio managers D, E and F had the following performance:
Manager
Annual return
Standard deviation
D
0.13
0.18
E
0.17
0.22
F
0.16
0.23
a) Calculate the Sharpe Ratio of the 3 managers and that of the market,
if the market return was 14% with a standard deviation of 20% and
the risk-free rate was 8%.
(10 marks)
b) What are the three major factors to consider when evaluating a
portfolio manager?
(6 marks)
c) Why is it suggested that an evaluation employ both the Treynor and
Sharpe measures of performance?
What additional information do we
gather when we compare the rankings achieved using the two measures?
(6 marks)
d) Briefly describe what is being measured in the following cases:
a. The interest rate effect (that is, market effect)
b. The maturity effect (duration)
c. The sector/quality effect
d. The selection effect
(8 marks)
***END OF QUESTION PAPER***
Page 5 of 5
SBMFEXAM3309