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    8 views12 pages

    Acst404 2012 Exam

    Uploaded by

    nigerianhacks
    wefwef

    Copyright:

    © All Rights Reserved
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    of 12
    This question paper must bo SEAT NUMBER? ne ROOM returned. Candidates are not Permitted to remove any part FAMILY NAME, (of from the examination room. OTHER NAMES, STUDENT NUMBER. MACQUARIE UNIVERSITY ‘SESSION 2 EXAMINATIONS - NOVEMBER 2012 Unit Gode/Name: ACST 404, ACST 871, ACST 871X Investment & Asset Modeling ‘Time Allowed: 3 hours plus 10 minutes reading time. ‘Total Number of Questions: 20 multiple choice questions, Song form questions. Instructions This exam has 3 pars. Part A has 20 mutple choice questions and is worth 20 matis. ‘Attempt ALL questions from part A. Each multiple choice question is worth 1 mark ‘Answer pat on the multiple choice answer sheet provide. Part B has 2 long answer questions and fs worth 40 marks. ‘Attompt ALL questions from part B. ‘Answer each question part 8 ina separate answer booklet. Part ¢ has 3 long answer questions and is worth 40. marks. ‘Attempt ALL questions from part C. ‘Answer each question part C in a separate answer booklet. Materials Allowed: ‘No printed or wrtton materials may be used inthis exerninaticn. Dictionaries: No dictonaries permited ‘Coleuiators: 'Non-programmable calculators (no text retrieval capacly) permited PART A, 20 Marks INSTRUCTIONS ‘There are 20 questions in thi tection, anrwer each question onthe multiple chace annwershetprovied Attempt ALL questions. 1. Which one ofthe following statements regarding orders i false? A.A market order is simply an order to buy oF sella stock immediately a the prevailing market price. 'B.A market order i an order to buy or sella stock ona specific exchange (market) C.Ifstock ABC is sling at $50,» limit-buy order may instruct the broker to buy the stack fand when the share price falls below $45. D. A limit sell order is where investors specify prices at which they are willing to sll a sceurity. E,None of the above. 2. You sell short 1000 shares of Down Co. at a market price of $30 per share. Your maximum possible loss C.unlimited D.s9000 , Cannot tell from the information given, 3. With regard toa futures contract, the long postion is held by ‘A the trader who bought the contract at the largest dicount B.the trader who commits to purchasing the commodity on the delivery date CC the trader who hs to travel the farthest distance to deliver the commodity D. the trader who plans to hold the contract open forthe lengthiest time period [E. the trader who commits to delivering the commodity om the delivery date 4.When a distribution s mgatively skewed, ‘A. standard deviation overestinates risk B. standard deviation underestimates risk standard deviation correctly estimates risk 1D. the tails are fatter than in a normal distribution the tails are skinnier than ina normal distribution 5. The _ {sa measure ofthe Internal Rate of Return (IRR) an Investor will earn if the Investor buys a bond wow and holds unt! maturity. A.yield to maturity BLeurrent yield C.dividend yield D.PE ratio EE. discount yield 6. The expectations theory ofthe term structure of interest rates states that = A. forward rates are determined by investor’ expectations of future interest rates 1. forward rates exceed the expected future interest rates CC. yelds on long- and short-maturity bonds are determined by the supply and demand forthe secures D. Allof these are correct None of theses correct. 7. The "break-even" interest rate for year m that equates the return on an n-period zero-coupon boud ‘© that ofan n-1-period zero-coupon bond rolled over Into a one-year bond in yearn is defined a3 Tt short rate 1B. the forward rate . the yield to maturity D. the discount rate E-None of these is correct. 8. Which of the following combinations will result in sharply increasing yield curve? ‘A. Decreasing fature expected short rates and increasing lquidity premiums. B Increasing future expected short rater and decreasing liquidity premiums, C Increasing future expected short rates and constant liquidity premiums, . Increasing future expected short rates and increasing Hquigty premiums. E- Constant future expected short rates and increasing liquidity premiums. 9. Low Prie/Barnings (P/E) ratios tend to indicate that a company wil ‘A.grow at the same speed asthe average company B. grow quickly relative tothe average company C. grow slowly relative tothe average company D. have a zero growth rate E. None of these i correct. 10. Investors want high plowback ratios, ‘A for all firms B. whenever Market Capitalization Rate (K) exceeds Return Or (C.whenever ROE > ke only when they arin low tax brackets -E. whenever bank interest rates are high ity (ROE), k> ROE, 41, Nonsystematie isk inthe Single-Index Model (SIM) is, ‘A. the current account deflelt B. the growth rate in Gross National Product (GNP) . amarket index, such asthe S&P 500 . the global unemployment rate E.None of the above, 12, Theda that there is a limit fo the reduetion of portfolio risk due to diversification is A contradicted by both the Capital Aset Pricing Model (CAPM) and the Single-Index Model SIM) contradicted by the CAPM CC. contradicted by the SIM D. supported in theory, but not supported empirically EE. supported both in theory and by empirical evidence 13, An arbitrage opportunity exists if am investor can construct a A. positive net investment portfotio with a certaa profit, 'B.zero net investment portfolio with a certan profit C.negative net investment portfolio with a certain profit Dcallarge positive net investment with an uncertain profit a large negative net Investment with an uncertain profit M.A. portfollo isa welhdiversifid portfollo constructed to have a beta of I om one of the factors anda beta of0 on any other factor. Armarket Binder factor Dilndex and market factor, market, and index 15, Ifyou belive in the {form ofthe Efficient Market Hypothesis (EME, you believe that stock prices reflec allrdlevant information including historical stock prices and current public Information about the frm, but not information that is available only to insiders. A.strang, B.semistrong Corveak. DD. strong, semlstrong and weak E.hard 16. Given the time to maturity the duration of zero-coupon bond is higher when the discount rate AHigher Blower The bond's daration Is independent ofthe discount rate D. equal tothe risk fee rate B. None of theses correct. 17. Immunization is not a strietly passive strategy because _ A. itrequires choosing an asset portfolio that matches an ide B-itrequires rebalancing as maturies and interest rates change . there is kely to bea gap between the values of assets and li 1D durations of asets and Habis fall atthe same rate [E-None ofthese is correc. tes in most portfolioe 18, Which ofthe following countries hasan equity index that les on the efficient frontier generated by allowing international dlversifiation? ‘A.Canada. B Greece. C.China D.Spain. E. None of theses correct. 18. Suppose two portfolios have the same average return the same standard deviation of returns, but pertioli A has a lower beta than portfolloB. According fo the Treynor measure, the performance of ‘As the same ws the performance of portfolio B Bis better than the performance of portfolio B Cis poorer than the performance of portfolio B . cannot be measured as there sno data onthe alp E.None of these i correct, 20, Passive portfolio management consists of, ‘A.market dming 1B security analysis Di sector rotation C.stock selection None of these is rue PART B, 40 Marks INSTRUCTIONS ‘There are 2 questions in this section, answer each question in separate answer booklet. Attempt ALL QUESTIONS. ‘Question 1.20 marks), (4) The Single Index Model (SIM) is a univariate (one Independent variable) regression mode! of stock/portfolio excess returns. Why is the SIM specified asa univariate regression and not as a ‘multivariate (more than one independent variable) regression (2 marks)? (©) What isthe independent variable in the SIM regresion mark)? (€) We observe a fat (constant) yield curve across maturities. Assume thatthe Liquidity Preference theory ofthe interes rate term structure of yeld curves is correc. What's the market expectation of the future movement of short term interest rates relative te long term rates (3 marks)? (@) Describe how market ‘arbitrage’ activity is used in the context ofthe Arbitrage Pricing ‘Theory (APT) (3 marks). (¢) We develop a multiple factor model of excess stock/portfolio returns. Stock A and well diversified portfolio H have the same factor exposures. Analyzing factor expesires we dicaver that stock is underpriced relative to portfolio H. Can we exploit this miss-pricing using the ‘Arbitrage Pricing Theory (APT)? What implications does this have for the APT (3 marks)? ‘man infuental research paper, Eugene Fama and Kenneth French (1992) developed a factor model of| ‘excess stock/portfolio returns that included excess market returns, returns dae to market ‘apltalization (size) and returns due to investment syle (value? minus ‘growth’. The Fame-French (1982) size and style factor regression is formulated: 71 = Boe (im tp) + Biss tue + BinmeTine + % + & where 7 The rtum on prtoliofsteck 1 Thorsk hoo ate Ty The markt otum Bin The market bota ‘sy Tho si20 factor return (small large cao) Bj.swp The potiolstock exposure to siz (igh valves fo low cap. exposure) Tryna, The iyo factor retune (value ~ growth) isn. The portotostock exposure to syle (igh values for value exposure) The portfolstoc return intoroopt Tho potoalstock resiualretume ‘Fama and French (1992) found that over the long term (1926-1992) a well-diversifed equity portfolio. ‘of small captalization stocks has a higher return than a well diversified portfolio of large capitalization stocks. Market capitalization and market turnover (volume) have a high positive correlation, ‘Therefore small capitalization stocks have lower turnover and lower liquidity, ( What implications docs the higher return of smaller capitalization stocks have for the validity ofthe Efficient Markets Hypothesis (marks)? Fama and French (1992) also found that over the long term (1926-1992) a well-diversifed equity portfolio of ‘value’ stocks with a high book to price ratio (B/P, the ratio ofthe accounting (wook) value ‘of equity over the market price of equity) has significantly higher returns than a well-diversitied portfolio of ‘growh’ stocks with alow book to price ratio. @) What implications does the higher return of ‘value stocks have for the validity of the Efficient Markets Hypothesis 4 marks)? esti 2 (20 marks) ‘Assume the Capital Asset Pricing Model (CAPM) of stock returns is correct and the S&-PS00 index isa suitable proxy forthe CAPM market portfolio, We analyse stock HAL listed on the New York Stock Exchange (NYSE). HAL has a 0.75 return correlation with NYSE stock JCN. The annual standard deviation of HAL returns fs 30% the annual standard deviation of SCN returns i 40% and JCN bas 9 ‘market Beta of 1.18. The SAPS00 market index has an annual standard deviation of 25%. The US risk fee interest rate is 2% (answers to 2 decimal places (a) What isthe market Beta of HAL (3 marks)? (0) Ifthe roquired Market Capitalization Rate (Ke) for HAL is 12% what ‘annual return on the S&PS0O index (2 marks)? he implied expected (We construct an active portfolio 4 afm stocks with stock weights hg = (hy /tg}: Assume ‘that we formulate the returns on each stock using the Single Index Mode. Give the formula of the expected stock specific return ca of portfolio A andthe formula ofthe stock spect, variance Varie,] of portfolio A (3 marks)? (@) What isthe relatonship between me to maturity f and modified duration D of azero ‘coupon bond with a continuously compounded yield lo maturity? Formalate a brief proof to ‘lstrate your answer 2 marks). (©)Bond A has a higher convexity C than bond B; both bonds have the same modified duration ‘D. Which bond will experience the greater percentage movement in rice forthe same downward movement in Yield To Maturity (YTM) and which bond will experience the greater percentage moyenent in price forthe same upward movement in YIM. Give reasons for Your answer 3 marks). We observe 3 fuir-valued welliversified portfolios X, ¥ and Zin the market at period 0. Returns on the portfolios are subject to 02 factor model of portale price returns. Te= Bhi + Bah Where isthe portfolio factor loading (exposure) to factor 1. {is te factor 1 return forthe next period. zs the portfolio factor loading (exposure) to factor 2 {fa is actor 2 return for the next period. ‘Tp is portollo retura for the next period (rx 7.72). ‘The factor loadings (exposures) for the 3 portfolios are: [Ferifowo[ Bs [ Ba] ost os | as] 10s ‘The period 1 factor returns are: [factor —[retara] a 4% The cetal portfolio pice returns for period I are: [Porto |p] x | 10% Y [3% Ze (© Assume tuat the market is eticent and that the “law of one price” ensures that any portfolio _miss-pricing is temporary. Deseribe ir detall the proportion you would buy or sell of pordaios X.Y and Zi peri I, fo make an arbitrage prot 7 marks). PART C, 40 Marks INSTRUCTIONS ‘There are3 quetons inthis ection, answer each question in separate answer booklet, ‘Attempt ALL QUESTIONS. Question 3 1S marks (Consider the fllowing information fr a hypothetical company: Proft ater tae wnat ‘StatementofEauity Equiyatyearbednning EO) New equity issuaice ne Dividends paid ° Shares bough back 3 Balance Sst Assets Taiies Shareholder equity E(t) Shortterm assets sa Shorttermaebt STD ‘ongtermasset LTA longterm debt__79 “Tofalasets TA te) Totaliabnies 1 ‘Two equity analysts are diseussing the advantages and disadvantages of Return On Equity (ROR) as 2 icant of determining which stocks listed on the stock exchange are likely tobe atractive selec ons for san active equity portfolio. In particular, they are examining whether past ROE and/or expected future ROEs should ferm part of their analysis, (@) What investment beliefs are implicit in using ROE as a measure of expected fature investment performance (2 marks)? (©) What are the advantages and disadvantageslimitations of past ROEs and the advantages and disedvantagesitations of expected future ROEs (5 marks)? (6) Provide two other non-price measures calculable from a company's accounts you would use as ‘ measure of expected fature investment performance and state the reasons for your cholce marks). @ Show that ROE is also equal tothe return on net astts (use timing notation ifyou think necessary) (2 marks). (Develop a relationship between ROE and the Price-Earnings (PER) and Price-to-Bookcvalue +atis (PBR). Comment onthe additonal information this transformation provides over snd above ROE (4 marks). ‘Question 410 marks) (@) The Reserve Bank of Australia (RBA) strutores its operation of monetary poliy around “ination targeting”. Desertbe what you understand by ths term. What aspect of taftaton ‘most concern the RBA? Ibe RBA is suecesfl inthis regard what eth kely to mean for the level of ash interest rates over ine? (S marks), () Sovereign Inflation-Linked Bonds (ILBs) are isued by number of countries, both in the developed and emerging markets. © Briefly comment onthe current market for developed market sovercign ILBs @ marks), (G) Foran investor contemplating an [LB exposure what issues would differentiate the Investment case for developed versus emerging market ILBs (3 marks)? 0 ‘Question 5 (15 marks) You are advising a commerclally operated accumulation superannuation fund. ‘The managers of the fund prefer retail clients (small investors) as fund members. The strength ofthe ‘member relationship is determined by the investment performance ofthe investment option the ‘member chooses, the breadth and quality ofthe services provided to the member and the ‘competitiveness ofthe fund's offerings. “The fund has been offered the opportunity to investin a new toll road. The road will replace an arterial road tat runs through several suburbs of the major clty in which it wil be locate. twill link these ‘outlying suburbs to another tl road that runs into the eltyceatre. There has not been a toll road in {his area before. Should it proceed, the fund would Invest into an unlisted ust that would contract with a construction and operating company to bulld and run the toll road. ‘Vou have heen aed to advice the fund ofthe sit

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