CUSTOMER_CODE
SMUDE
DIVISION_CODE
SMUDE
EVENT_CODE
OCTOBER15
ASSESSMENT_CODE MF0010_OCTOBER15
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
17767
QUESTION_TEXT
Explain the various steps involved in Investment Process.
Steps involved in Investment Process:
1.Setting investment policy
Asset allocation
a. time horizon
b. Risk tolerance
Portfolio management style
a. Active management
SCHEME OF EVALUATION b. Passive management. (3 marks, with explanation)
2.Performing security analysis
a. Fundamental analysis
b. Technical analysis.(2 marks, with explanation)
3.Portfolio construction
4.Portfolio revision
5. Portfolio performance evaluation.
(1 mark each=3 marks, with explanation)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
17769
QUESTION_TEXT
Briefly explain Dow Theory.
SCHEME OF
EVALUATION
Dow Theory– Introduction. (1 mark, with explanation)
Assumption:
a.The averages discount everything.(1 mark, with explanation)
b. The market is comprised of three trends.
i. Primary trends.
ii. secondary trends
iii. minor trends(3 marks, with explanation)
c. Primary trends have three phases
i. First phase
ii. Second phase
iii. Third phase(3 marks, with explanation)
d. The volume confirms the trends (1 mark, with explanation)
e. A trend remains intact until it gives a definite reversal signal. (1
mark, with explanation)
QUESTION_TYPE DESCRIPTIVE_QUESTION
QUESTION_ID
126188
Differentiate between CML and SML.
QUESTION_TEXT
1.
SCHEME OF
EVALUATION
2.
CML: is a straight line on a plot of absolute returns versus risk that
begins at the point of the risk–free asset and extends to its point of
tangency with the efficient frontier for risky assets that we call the
market portfolio and beyond.
SML: allows us to represent the risk and return characteristics of
every asset in a market portfolio. SML disaggregates the market
portfolio into its individual risky assets and plots return against the
only meaningful aspect of total risk for each asset that is rewarded
(its beta).
CML: shows the relation between the expected return from a
portfolio and its standard deviation and helps investors in their
capital allocation.
While SML shows the relation between expected return and beta
and helps investors in security selection and individual asset pricing.
(Any two differences to be explained)
(10 marks)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
126191
QUESTION_TEXT
SCHEME OF
EVALUATION
a. What is EMH?
b. Write notes on prospects theory
c. What are convertible bonds?
a. Efficient Market Hypothesis (EMH) asserts that financial markets
are ’efficient’, meaning the prices of traded assets (Example stocks and
bonds) reflect all known information. The prices of assets reflect the
collective beliefs of all investors about future prospects. EMH implies
that it is not possible to consistently outperform the market,
appropriately adjusted for risk, by using any information that the market
already knows, except through luck. Only new information affects price
of assets
b.
The prospect theory was propounded by Kahneman and Tversky.
It describes how people frame and value a decision involving
uncertainty. According to this theory, people look at choices in terms of
potential gains or losses in relation to a specific reference point, which is
often the purchase price. The decision attempts to maximise utility,
keeping in mind the following features of the utility function.
The utility function is concave for gains. This means that people feel
good when they gain, but twice the gain does not make them feel twice
as good.
It is convex for losses. This means that people experience pain when
they lose, but twice the loss does not mean twice the pain.
The utility function is steeper for losses than for gains. This means that
people feel stronger about the pain from a loss than the pleasure from an
equal gain-about two and half times as stronger and this phenomenon is
referred as loss aversion.
c.
Convertible bonds give the bondholders an option to exchange
each bond for a specified number of shares of common stocks of the
firm. The conversion ratio gives the number of shares for which each
bond may be exchanged. Suppose a convertible bond that is issued at par
value of $1,000 is convertible into 40 shares of a firm's stock. The
current stock price is $20 per share, so the option to convert is not
profitable now. However, should the stock price later rise to $30, each
bond may be converted profitably into $1,200 worth of stock.
The market conversion value is the current value of the shares for which
the bonds may be exchanged. At the $20 stock price, the bond’s
conversion value is $800. The conversion premium is the excess of the
bond value over its conversion value. If the bond is selling currently at
$950, its premium will be $150.
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
126193
QUESTION_TEXT
What are the four crucial criteria of financial performance measure
by Financial Ratios?
SCHEME OF
EVALUATION
1.
Profitability
2.
Liquidity
3.
Efficiency
4.
Solvency
(2.5 marks each, explanation required)
QUESTION_TYPE
DESCRIPTIVE_QUESTION
QUESTION_ID
126195
QUESTION_TEXT
Discuss the Risks and returns from foreign investing.
Returns: International investing provides superior return adjusted for
risks. International equities also offer access to a broader spectrum of
economies and opportunities that can provide for further diversification
benefits. – (3 marks)
Risks:
SCHEME OF
EVALUATION
(7 marks)
i.
Changes in currency exchange rates
ii.
Dramatic changes in market value
iii.
Political, economic and social events
iv.
Lack of liquidity
v.
Less information
vi.
Reliance on foreign legal remedies
vii.
Different market operations