THE COPPERBELT
UNIVERSITY
SCHOOL OF BUSINESS
GAF/GSB 720: Investment Policy and Portfolio
Management
Revision Questions
Lecturer: Dr Young Kafwembe
2025
1. On November 1, you bought 100 shares of Shoprite stock for K34 a share and
a year later you sold it for K39 a share. During the year, you received a cash
dividend of K1.50 a share. Compute your HPR and HPY on this stock
investment.
2. During the past five years, you owned two stocks that had the following
annual rates of return:
Year
1
2
3
4
5
Stock X
0.19
0.08
-0.12
-0.03
0.15
Stock Y
0.08
0.03
-0.09
0.02
0.04
a. Compute the arithmetic mean annual rate of return for each stock. Which
stock is most desirable by this measure?
b. Compute the standard deviation of the annual rate of return for each stock.
By this measure, which is the preferable stock?
c. Compute the coefficient of variation for each stock. By this relative
measure of risk, which stock is preferable?
d. Compute the geometric mean rate of return for each stock. Discuss the
difference between the arithmetic mean return and the geometric mean
return for each stock. Relate the differences in the mean returns to the
standard deviation of the return for each stock.
3. You are considering acquiring shares of common stock in Bata. Your rate of
return expectations are as follows:
Possible
Probability
Return
-0.60
0.05
-0.30
0.20
-0.10
0.10
0.20
0.30
0.40
0.20
0.80
0.15
a. Compute the expected Return and standard deviation on Bata stock.
4. Ms Musonda is 70 years of age, is in excellent health, pursues a simple but
active lifestyle, and has no children. She has interest in a private company for
K90 million and has decided that a medical research foundation will receive
half the proceeds now; it will also be the primary beneficiary of her estate
upon her death. Ms Musonda is committed to the foundation’s well-being
because she believes strongly that, through it, a cure will be found for the
disease that killed her husband. She now realizes that an appropriate
investment policy and asset allocations are required if her goals are to be met
through investment of his considerable assets. Currently, the following assets
are available for use in building an appropriate portfolio:
$45.0 million cash (from sale of the private company interest, net of
pending $45 million gift to the foundation)
10.0 million stocks and bonds ($5 million each)
9.0 million warehouse properties (now fully leased)
1.0 million Musonda residence
$65.0 million total available assets
a. Formulate and justify an investment policy statement setting forth the
appropriate guidelines within which future investment actions should take
place. Your policy statement must encompass all relevant objective and
constraint considerations.
b. Recommend and justify a long-term asset allocation that is consistent with the
investment policy statement you created in Part a. Briefly explain the key
assumptions you made in generating your allocation.
5. 4. Define a primary and secondary market for securities and discuss how they
differ. Discuss why the primary market is dependent on the secondary market.
6. Discuss the Zambian equity Market, highlighting its features and any major
changes experienced since 1994. Why in the Zambian capital market
described as underdeveloped? What are the main capital market challenges
and key developments in Zambia’s capital markets and potential solutions?
7. Discuss briefly several uses of security market indices?
8. Discuss the rationale for expecting an efficient capital market. What factor
would you look for to differentiate the market efficiency for two alternative
stocks?
9. List and briefly define the three forms of the efficient market hypothesis.
10. Given the following market values of stocks in your portfolio and their
expected rates of return, what is the expected rate of return for your common
stock portfolio? Erp=W1*R1
Stock
CEC
Shoprite
Lafarge
Zambeef
ZANACO
Market Value
(K million)
K15,000
17, 000
32, 000
23,000
7,000
ER
0.14
-0.04
0.18
0.16
0.12
11. You expect a Risk-free rate of 10 percent and the market return (RM) of 14
percent. Compute the expected (required) return for the following stocks.
Soc
k
X
Y
Z
Beta
0.85
1.25
-0.20
12. What is the value to you of a 9 percent coupon bond with a par value of
$10,000 that matures in 10 years if you want a 7 percent return? Use semiannual compounding.
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