CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS SCIENCES AND MANAGEMENT

DEPARTMENT OF ACCOUNTING SCIENCES AND FINANCE

BSc (HONS) IN ACCOUNTANCY

COURSE: INVESTMENT ANALYSIS & PORTIFOLIO MANAGEMENT (MAIN)

CODE: CUAC 404

DATE: NOV/ DEC 2013

DURATION: 3 HOURS

INSTRUCTIONS TO CANDIDATES
Answer ALL questions
Formulas are attached
Question 1
a. What is the Efficient Markets Hypothesis (EMH)? [5]
b. What is the difference among the three forms of the EMH: (1) weak form, (2) semi
strong form, and (3) strong form? [10]
c. Using evidence from Zimbabwe and financial markets beyond, evaluate the
implications of the EMH for financial decisions? [10]
[Total marks-25]
Question 2

a. Why do most investors hold diversified portfolios? [5]

b. What is covariance, and why is it important in portfolio theory? [5]
c. Why do most assets of the same type show positive covariances of returns with
each other?
Would you expect positive covariances of returns between different types of assets
such as returns on Treasury bills, Econet stock, and commercial real estate stock
like Pearl Properties? Why or why not? [5]
d. Draw a properly labelled graph of the Markowitz efficient frontier. Describe the
efficient frontier in exact terms. Discuss the concept of dominant portfolios and
show an example of one on your graph. [5]

[Total marks-20]

Question 3
The following are monthly percentage price changes for two market indexes:
Compute the following:

Month DJIA S&P 500

1 0.03 0.02
2 0.07 0.06
3 -0.02 -0.01
4 0.01 0.03
5 0.05 0.04
6 0.06 0.04

a. Expected monthly rate of return for each series. [2]

b. Standard deviation for each series.[2]
c. Covariance between the rates of return for the indexes [2]
d. The correlation coefficients between the DJIA and the S&P 500 . [2]
e. Using the answers from Parts a, b, and d, calculate the expected return and
standard deviation of a portfolio consisting of equal parts of the S&P and the
DJIA. Discuss the portfolio.[7]
[Total marks-15]

Question 4
Consider the following table, which gives a security analyst’s expected return on two
stocks for two particular market returns:

Market Return,Rm Aggressive stock A Defensive stock B

5% 2% 3.5%
20% 32% 14%

a) What are the betas of the two stocks?[2]

b) What is the expected rate of return on each stock if the market return is equally
likely to be 5% or 20% ?[3]
c) If the T-bill rate is 8%, and the market return is equally likely to be 5% or 20%,
draw the SML for this economy.[5]
d) Plot the two securities on the SML graph. What are the alphas of each and advise
on the significance of the alpha measure?[5]
e) What hurdle rate should be used by the management of the aggressive firm for a
project with the risk characteristics of the defensive firm’s stock?[5]
[Total marks -20]

Question 5

A universe of available securities includes two risky stock funds, A and B, and Treasury
Bills. The data for the universe are as follows:
Expected Return(%) Standard deviation (%)
Stock A 10 20
Stock B 30 60
Treasury bills 5 0

The correlation coefficient between A, B = -0.2

a) Find the optimal risky portfolio, P, and its expected return and standard
deviation.[10]
b) Find the slope of the CAL supported by T-Bills and Portfolio P and explain the
significance of this measure in investment theory. [2]
c) How much will investors with A = 5 invest in funds A, B and in T-Bills? Also
advise on the Expected Return and risk parameters of the complete
portifolio [8]
[Total marks-20]

Question 6

Consider the two (excess return) index model regression for shares of firm A and B
RA= 1%+1.2RM
R-SQRA=0.576 RESID STD DEV-NA=10.3%
RB=-2%+0.8RM
R-SQRB=0.436 RESID STD DEV-NB=9.1%
a) Which stock has more firm specific risk? [5]
b) Which stock has greater market risk? [5]
 Comment in each case.
[Total marks-10]

Question 7

Estimate the index model and the total variance when given the following
information about the 6 month performance of the Mbizi Corporation ( listed on
the Zimbabwe Stock Exchange-ZSE) and the ZSE Index below. Comment on the
significance of your results and illustrate your answer with a Security
Characteristic Line (SCL). [25]

Month Mbizi Corporation- ZSE Index- HPR Treasury bill rate

HPR (%) (%) (%)
June 100 44 50
July 99 69 50
August 121 91 75
September 154 150 110
October 166 111 120
November 87 177 120

Formulas: Investment Analysis and Portfolio Management

  d  i 
1. MV  P 1    
  365  100 
Issuing certificates of deposits

MV
C
  d  i 
1   365  100 
   
Dealing in certificates of deposits

2. Treasury Bills
  360  D 
Y   
 t  F 
  Yt 
P  F 1   
  360 

BeY 
 365 * y 
360   y * t 
CDeY 
 360 * y 
360  yt

 d 
Tender Price= F  1 * 
 365 

 P  TP  365
Required discount rate=  * * 100
 100  d

F  TP 365
Actual yield= * * 100
TP d

 i d 
Consideration= N   N * *
 100 365 

3. Bankers Acceptances

 d
TC  N   c  i   sd 
 365 

 i d 
GP  N   N * *
 100 365 

3. E  R A    Pr* R A

4.
2

 A   R A  E  R A  Pr
2

COV A, B
5. rA , B 
 A B

6. E  Rp   E  Ri Wi

7.  2 p  W 2 A 2 A  W 2 B 2 B 2COV A, BW AWB

E  Rp   Rf
8. Sp 
p
 E  Rp   Rf
9. Y* 
0.01 * A *  2 p

E ( Rm)  Rf
10. Y
0.01 * A *  2 p

 E  RD   Rf  2 E   E  RE   Rf COV D,E
11. WD 
 E  RD   Rf  2 E   E  RE   Rf  2 D   E  RD   Rf  E  RE   Rf COVD,E
12.   ER   Rf  E  Rm  

D1 P1  P0
13. HPR  
P0 P0

14. Ri     i Rm  ei

15. Rp  p   pRm  ep

16.  2 i   2 i 2 m   2  ei 
Variance of the rate of return on a security

17. COV  Ri Rm   i 2 m

18. COV  Ri , R j   COV   i Rm;  j Rm 

  i j 2 m

 COV  Ri Rm  
19. 
 2m

 1 n 2
20.  2  ei     e t
 n  2  t 1
Variance attributable to firm specific factors
2
1  _

21.  2m 
n 1
  RM  RM 
 
 2 2 m  Variance attributable to market forces

2
n
1
22.  2  ep       2 ei
t 1  n 

 2 2 m
23. R2 
2
  2  ei 
R 1 2
2

 i

 X Y
XY   

 n
24.
 X
X  
2
2
n
_
25.  Y  X
_ _

Cu  Cd
26. h
uS  dS

T
27. U  e
n

1
28. d
u

1  rf  d
29. 
ud
30. C 0  N  d 1  S  Xe  rft N  d 2 

31. P0  X e  rfT N   d 2   SN   d1 

S  2 
32. In   r   T
X  2 

33. d 2  d1   T

D1
34. P0 
Ke  g

D 365
35. d  *
S T

S  P 365
36. Yield  *
P T

N  P 360
37. rbd  *
N T

2
1  n  1
38. Q 2
P  n  Q2   Q ji
n  n 