Department of Accounting & Information Systems Jagannath University, Dhaka BBA 12" Batch (Session: 2016-17) 4" Year ® Semester Final Examination-2020 Course Code: ACCT 4104; Course Title: Financial Markets and Portfolio Management Time: 03 hours Total marks: 60 [N.B. Answer any four questions. Figures in the right margin indicate full marks. Different parts of each question must be answered sequentially.] ) Explain why you would change your nominal required rate of return if your expected rate of inflation to go from 0 (no inflation) to 4 percent. Give an example of what would happen if you did not change your required rate of return under these conditions. 03 ») You have tk. 50,000 to invest in S company, a stock selling for tk. 80 a share. The initial margin requirement is 60%. Ignoring taxes and commission, show in detail the impact on your rate of return if the stock rises to tk. 100 a share and if it declines to tk. 40 a share assuming: (a) you pay cash for the stock and (b) you buy it using maximum leverage. 04 ©) You are given the following long run annual rates of return for alternative investment instruments: 05 Government T - bills 49% Large capitalization common stock 11.30 Small capitalization common stock 15.60 Long term corporate bonds 5.50 Long term government bonds 5.10 The annual rate of inflation during this period was 4%. Compute the real rate of return on these investment alternatives 4) Consider the following information: The possible :ate of retum for a portfolio for an investment is shown below. aan 03 Probability Poss! 0.10 0.00 0.10 0.25 \ Calculate expected rate of return for the investment, ) Consider the following information about two stocks (D&E) and two common risk factor (1&2): 10 Stock i 2 ER) D 12 3.4 13.1% E 26 2.6 15.4% i. Assuming that the risk free rate is 5.0%, calculate the levels of the factor risk Premia that are consistent with the reported values for the factor betas and the expected returns for the two stocks. ii, You expect that in 1 year the prices for the stocks D&E will be Tk. 55 and Tk.36, respectively. Also, neither stock is expected to pay a dividend over the ‘next year. What should the price of each stock be today to be consistent with the expected return levels listed at the beginning of the problem? ili Suppose now the risk premium for the factor Ithat you calculated in part i suddenly increase by 0.25%, What are the new expected returns for stocks D and E?») b) ©) 4) b) If the increase in the factor | risk premium in part iii does not cause you to change your opinion about what the stock prices will be in I year, what adjustment is necessary in current prices? . You ask a stock broker what the firm's research department expects for the 3 stocks. You expect an RFR of 10% and market return of 14%. Moreover that the broker responds with following information: Stock Beta Current Price Expected price Expected dividend K 0.85 2 25 0.75 Y 1.25 45 51 2.00 c -0.20 37 42 1.25 Compute the expected return for the following stock and plot them on SML. And indicate what actions you would take with regard to these stocks. Discuss your lecisions. 05 What information is necessary before a financial planner can assist a person in constructing an investment policy statement? 03 What are stock warrants and call options? How do they differ? 03 Define a primary and secondary market for securities and explain how they differ. Describe how the primary market is dependent on the secondary market? 03 You own 200 shares of Shamrock Enterprises that you bought at Tk.25 a share. The stock is now selling for Tk.45 a share. 06 i, You put ina stop loss order at Tk.40. Give your reasoning for this action. ji, If the stock eventually declines in price to Tk.30 a share, what would be your rate of return with and without the stop loss order? Discuss the rationale for expecting an efficient capital market. What factor would you look for to differentiate efficient capital market for two alternative stocks? oe Suppose you are an analyst and you have calculated the following annual rate of return for the stocks of both: 09 ———————————————— Year __Square’s Rate of Return Beximco’s Rate of Return 6 6 2016 2017 " 14 2018 “Ul 5 2019 10 7 2020 12 -10 Your manager suggests that because these companies produce similar products you should continue your analysis by computing their covariance. Show all calculations. Prepare a table showing your calculations and explain how to interpret the results. Would the combination of Beximco and Square be good for diversification? Assume you buy a round lot of ABC industries stock on 50 percent margin when the stock is selling at Tk. 20 a share. The broker charges a 10 percent annual interest rate and commission are 3% of the total stock value on both the purchase and sale. A year later you received a Tk. 50 per share dividend and sell the stock for 27. What is your rate of return on investment? 03 It is widely believed that changes in certain macroeconomic variables may directly affect performance of an equity portfolio. As the chief investment officer of a hedge fund employing a global macro-oriented investment strategy, you often consider how various macroeconomic events might impact your security selection decisions and portfolio performance. Briefly explain how each of the following economic factors 04 adewould affect portfolio risk and return: aggregate consumption, and (iv) oil prices. industrial production, (ii) inflation, b) Whatare the some major uses of security-market indexes? 02 ¢) What major factors must be considered when constructing a market index? Explain how a price-weighted index and a value-weighted index adjust for stock splits? 03 4) You are given the following information regarding prices for a sample of stocks. 06 Price Stock’ Number of Shares T T+1 A 1,000,000 60 80 B 10,000,000 20 35 c 30,000,000 18 25 Instructions: i. Construct a price-weighted index for these three stocks and compute the percentage change in the index for the period from T to T+1. ii. Construct a value weighted index for these three stocks and compute the percentage change in the index for the period from T to T+1. iii, Briefly discuss the difference in results for the two indexes. a) The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant? 03 b) What is arbitrage pricing theory (APT) and how is it similar and different from the CAPM? 03 ¢) You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: 05 — Portfolio Expe a s R s T U i. For each portfolio, calculate the risk premium per unit of risk that you expect to receive. Assume that the risk free rate is 3.0% ii, Using your computations in Part i, explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital, market line (CML). iii. If you are only willing to make an investment with standard deviation of 7.0 percent, is it possible for you to earn a return of 7.0 percent? iv. What is the minimum level of risk that would be necessary for an investment to earn 7.0 percent? What is the composition of the portfolio along the CML that will generate that expected return? d) What is the peer group comparison method of evaluating an investor’ s performance? 02 ©) What is information ratio? How the information ratio measures the portfolio performance? 2 The end “3Time: 03 hours Department of Accounting & Information Systems Jagannath University, Dhaka BBA 11" Batch (Session: 2015-16) 4" Year 1 Semester Final Examination-2019 Course Code: ACCT 4104; Course Title: Financial Markets and Portfolio Management EF Total marks: 60 Lb 2 a) b) °) a) b) °) a) °) a) b) IN.B. Answer any four questions. Figures in the right margin indicate full marks. Different parts of each question must be answered sequentially.) Define investment. Explain the two major factors that determine the market nominal risk-free rate. Explain which of these factors would be more volatile over the business cycle. Assume the expected long-run growth rate of economy increased by 1 percent and the expected rate of inflation increased by 4%. What would happen to the required rates of retum on government bonds and common stocks? Show graphically how the effects of these changes would differ between these alternative investments. Suppose, you owned two stocks that had the following annual rates of return: Year Stock-T Stock-B 2012 0.19 0.08 2013, 0.08 0.03 2014 0.12 0.09 2015 0.03 0.02 2016 0.15 0.04 Requirements: i. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? ii, Compute the standard deviation of the annual rate of retum for each stock. By this measure, which stock is the preferable stock? iii. Compute the co-efficient of vetiation for each stock. . By this measure, which stock is the preferable stock? iv. Compute geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean and geometric mean retum for each stock. What are the four steps in the portfolio management process? Explain the role of asset allocation in investment planning, What objectives and constraints should be detailed in a policy statement? What are Electronic Communications Networks (ECNs) and Altemative Trading Investments (ATSs) and how do they differ from the primary listing markets? Some investors believe that intemational investing introduces additional risks. Describe these risks and how they can affect your retum? Write short notes on (i) Eurobond, (ii) Subordinated bonds, (iii) Mutual Funds. Assume that the nominal return on U.S. government T-bills was 10% during 20X2, when the rate of inflation was 6%, What was real risk-free rate of return on these T- bills? Consider the following information about two sto ks (D&E)and is factor (18): (D&E)and two common risk 04 03 08 03 03 03 03 089 b) ») Stock Ba Ba ER) D 12, 34 13.1% E 26 2.6 15.4% i. Assuming that the risk fee rate is 5.0%, calculate the levels of the factor risk premia that are consistent with the reported values for the factor betas and ___ the expected returns for the two stocks. fi, You expect that in 1 year the prices for the stocks D&E will be Tk. 55 and Tk.36, respectively. Also, neither stock is expected to pay a dividend over the next year, What should the price of each stock be today to be consistent __ With the expected retum levels listed at the beginning of the problem? iii, Suppose now the risk premium for the factor Ithat you calculated in part i suddenly increase by 0.25%, What are the new expected returns for stocks D and E? iv. Tf the increase in the factor | risk premium in part iii does not cause you to change your opinion about what the stock prices will be in 1 year, what adjustment is necessary in current prices? You are given the following long run annual rates of return for alternative investment instruments: Government T - bills 45% ‘Large capitalization common stock 12.50 Small capitalization common stock 14.60 Long term corporate bonds 5.80 Long term government bonds 5.10 The annual rate of inflation during this return on these investment alternatives. riod was 4%. Compute the real rate of Draw and explain why the line from the RFR that is tangent to the efficient frontier defines the dominant set of portfolio possibilities. The following are the historic returns of Jimmi computer company: Year | Jimmi computer | General Index 1 37 15 2 9 13 3 = 14 4 8 9 5 in 12 6 4 9 Based on this information , compute the following: i. The correlation co efficient between Jimmi computer and General Index. The standard deviation for the company and the index iii, The beta for the Jimmi computer company What is the marginal tax rate for a single individual if her taxable income is Tk. 20,000? Tk.40, 000? What is her tax bill for each of these income levels? What is her average tax rate for each of these income levels? Define risk and elaborate the assumptions regarding investor behavior in the Markowitz model. ‘An analyst wants to evaluate portfolio X, consisting entirely of Bangladesh common stock, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average annual rate of retum for the portfolio X, the oe 03 03 08°° a) b) 9) a) market portfolio (as measured by the Dhaka Stock Exchange Index) Bangladesh Treasury bills (T bills) during the past eight years, i, Calculate both the Treynor measures and Sharpe measures for both portfolio X and DSE. Briefly explain whether portfolio X underperformed, equated or over performed the DSE on a risk weighted basis using both the Treynor measures and Sharpe measures, ii, Based on performance of portfolio X relative to DSE calculated in part i, briefly explain the reason for the conflicting results when using the Treynor measures and Sharpe measures. Lauren has a margin account and deposits tk. 50,000. Assuming the prevailing margin requirement is 40%. Commissions are ignored and Gentry shoe corporation is selling at tk. 35 per share. i, How many shares can Lauren purchase using the maximum allowable margin? : ii, What is Lauren’s profit/loss if the price of Gentry’s stock: rises to tk.45 and falls to tk. 25, ‘What is the peer group comparison method of evaluating an investor's performance? What is the information ratio, and how is it related to the other performance measures? How do bond portfolio performance measures differ from equity portfolio performance measure? : It has been contended that the derivation of an appropriate model for evaluating the performance of a bond manager is more difficult than an equity portfolio evaluation model because more decisions are required. Discuss some of the specific decisions that need to be considered when evaluating the performance of a bond portfolio manager. You have just gathered the following perforinance data for three different money managers, based on a regression of their excess returns relative to those for the S&P 500 Index. Each manager’s performance wes measured over the same three year riod, but the return period for each was different. Manager Alpha Beta Sid. Error of | Retum Period Regression A 0.058% 0.95 0.533% Weekly, B 0.115 112 5.884 Biweeki ic 0.250 0.78 2.165 Monthly i Calculate the information ratio for each manager, ignoring the difference in retum reporting periods. ii, Calculate the annualized information ratio for each manager. iii. Rank the managers’ performance according to your answers in parts (i) and (ii). Which manager performed the best? Explain. 02 03 05w Department of Accounting and Information Systems = Jagannath University, Dhaka BBA 4" Year Ist Semester Final Examination-2018, Course Code: ACCT 4104 (Financial Markets and Portfolio Management) Time: 3 hours » 9 2 a) ») 9 4) 3. a) ») 9 a Total marks: 60 ENB. Answer amy four questions. Figures in the right margin indicate full marks. Different parts of each question must be placed sequentially) Define investment. What are the components of an investor's required rate of return? 3 Give an example of a liquid investment and an illiquid investment. Explain why you consider 04 ‘each of them to be liquid oF illiquid. Suppose, you owned two stocks that had the following annual rates of return 08 Year StockeT ek. 2012 0.19 0.08 2013 0.08 003 2014 012 0.09 2015 003 0.02 2016 015 0.08 Required: {) Compute the arithmetic mean of annual rate of return for each stock. Wh ‘most desirable by this measure? 4) Compute the standard deviation of the annual rate of return for each stock. By this ‘measure, which stock is preferable? fii) Compute the co-efficient of variation for each stock. By this measure, which stock is the preferable? iv) Compute geometric mean rate of retum for each stock. Discuss the difference between the arithmetic mean and geometric mean retumn for each stock, ich stock is Give an example of an initial public offering (IPO). Give an example of a seasoned equity 04 issue inthe primary market. Discuss which would involve greater risk to the buyerfinvestor. Define liquidity and discuss the Factors that contribute to it oe Briefly define each of the following terms with example 2 1 Short sale; ii Stop loss order. Mr. Mofir has a margin account and deposits T%.50,000. Assume that prevailing margin requirement is 40%, commissions are ignored, and the Island corporation is selling at TK.3S per share, Required: 2 How many shares can Mr. Mofu purchase using the maximum allowable margin? fi) What is Mofu’s profit or los ifthe price of Island’s share: i rises to TIS or ii Falls 02 toTk28. f the maintenance margin is 30 percent, to what price can Island’s share fall before 03 Mofu will receive a margin call? It is widely believed that changes in certain macroeconomic variables may directly affect 04 performance of an equity portfolio. As the chief investment officer of a hedge fund employing a global macro-oriented investment strategy, you often consider how various macroeconomic events might impact your security selection devisions and portfolio performance. Briefly how each of the following economic factors would affect portfolio risk and return: (7) 1 production, (i) inflation, (i) aggregate consumption, and (iv) ol prices. ‘What are the some major uses of security-market indexes? a ‘What major factors must be considered when constructing a market index? Explain how a 03 Price-weighted index and a value-weighted index adjust for stock splits? ‘You are given the following information regarding prices fora sample of stocks. 06 { PRICE ‘Stock ‘Number of Shares 7 TH A 7,000,000 60 0 B 10,000,000 20 35 c 30,000,000) 18 35 Required: 1) Construct a price-weighted index for these thre stocks, and compute the percentage‘change in the index forthe period from ii) Construct a value weighted index for TT! these three stocks, and compute the change in the index forthe period from T to T+! is other risk variable not relevant? by) What are the similarities and differences between the CML: Briefly discuss the difference in results for these two indexes 4. a) The capita asst pricing model (CAPM) contends that ther tisk for an individual securiy. Which isthe relevant risk variable 2 that there is systematic nd why isi and SML as mo« percentage ‘and unsystematic it relevant? Why dels of the risk isk estimates For return trade-off? oe 1) Asan equity analyst, you have developed the following return forecas two different stock mutual funds (Fund T and Fund U) Fund Forecasted Return | CAPM Beta Fond 9.0% 120 080 Required: Fund U 10% Be Meistsaisa| 1) Ifthe riskelree rate is 3.9 percent and the expected market risk prem RFR) is 6.1 percent, calculate the expected return for each mutual fu the CAPM. Using the estimated expected returns fo forecasts, demonstrate whether Fund T and Fund U are currently priced t jum (ie, E(Rm)- ind according 10 1 Part (@) along with your own retum ‘on the security market line (SML), above the SML. or below the SML. i) Accor valued? to fall directly ing to your analysis, are Funds T and U overvalued, undervalued, or properly 5, a) Briefly explain the concept of the efficient market hypothesis (EMH) and each of its three forms-weak, semistrong, empirical evidence supports ezch ofthe three forms of the EMH, by What factor would you look for to differentiate the market efficiency for two altemative stocks? ind strong and briefly discuss the degree to which existing ©) Why do the advocates of behavioral finance contend that the standard finance theory is incomplete? 4d) Assume that you expect the economy's rate of inflation to be 3 percent, giving a Risk Free Rate (Rf) of 6 percent and a market return (Rm) of 12 percent Requi 4) Draw the SML under these assumptions. i) Subsequently, you expect the rate of inflation to increase from 3 percent 10 6 percent. ‘What effect would this have on the RFR and the Rm? Draw another SML on the graph from Part (). iliy Draw an SML on the same graph to reflect an RFR of 9 percent and Rm of 17 percent, How does this SML differ from that derived in Part ii? Explain what has transpired {6 8) What information is necessary before a financial planner can assist a person in constructing an investment policy statement? b) The Sharpe and Treynor performance measures both calculate a portfoli 4 03 03 a o4 03 03 05 average excess 04 retum per unit of risk. Under what circumstances would it make sense to use both measures to compare the performance of a given set of portfolios? What additional information is provided by comparison ofthe rankings achieved using the two measures? ©) You have just gathered the following performance data for three different money managers, based on a regression of their encess retumns relative 0 those for the XYZ index. Each manager's performance was measured over the sme three-year period, but the retumn period foreach was itferent Manager | Aw | Be] Se Evoraf Regiesiion | Return Pod a was | 095 osm | Weel Bons | a 3a [Biweekly Cf sors [a ea 2168 [Monthy Required: re 4) Caleulate the information ratio for each manager, iynoring the difference in return reporting periods. fi) Calculate the annualized information ratio for each mnanager. 0% Rank the manger's performance according to your ansivers in Parts ()) and (i). Which 02 ‘manger performed the best? ExplainDepartment of Accounting and Information Systems Jagannath University, Dhaka BBA 4" Year Ist Semester Final Examination-2017 Course Code: ACCT 4104 (Financial Markets and Portfolio Management) Time: 3 hours Total marks: 60 mM IN. Answer any four questions. Figures in the right margin indicate full marks. Different parts of each question must be placed sequentially) 1. a) Define risk and distinguish between systematic risk and unsystemati risk. 04 b) Mr. A has available fund Tk.10,00,000 for making investment. He is planning to invest 06 ‘Tk4,00,000 in asset X and Tk.6,00,000 in asset Y. The information related to these two assets given in the following table: ‘Asset X Hast ¥ Correlation Expected Retum | Probability | Expected | Probability | coefficient ) (P).% | Retum(%) | (Pi) % _| between asset | [aaa 7 10 30] Kana vis | | B 35 15 20 oso | 2s 15 135 25 | 2 30 B 25 Calculate Mr. A’s portfolio return and risk. ©) Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either 05 ‘Tk.700000 or Tk.1200000 with equal probabilities of 0.5. The alternative risk-free investment in ‘Tills pays 7% per year. (D If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? (Gi) Suppose that the portfolio can be purchased for the amount of Tk.8,50000. What will be the expected rate of return on the portfolio? (ii) Now suppose that you require a risk premium of 9%, What is the price thet you will be willing to pay? (Gv) Comparing your answers to ({) and (ii), what do you conclude about the relationship between the required risk premium on « portfolio and the price at which the portfolio will sell? 2. a) Discuss the two major factors that determine the market nominal risk-free rate (NRFR). Explain 03 which of these factors would volatile over the bu iness cycle b) During the past $ years, you owned two stocks that had the following annual rates of return: os ‘Year ‘Stock-A T ‘Stock-B i “09 oe 2 0.08 003 3 012 0109 = + 0.03 0.02 = I 5 i 05 O08 4 Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? . fi. Compute the standard deviation of the annual rate of retum for each stock. By this ‘measure, which stock isthe preferable stock? iii, Compute the co-efficient of variation for each stock. . By this measure, which stock is the preferable stock? iv. Compute geometric mean rate of return for each stock. Discuss the difference between the arithmetic mean and geometric mean return for each stock 2) At the beginning of the year, you invested Tk.4000 in 80 shares of the Top Corporation. Duriug 94 the year, Top paid dividends of Tk.S per share. At the end of the year, you sold the 80 shares for Tk.59 a shere. Compute HPR on this investment. ii, Compute HPY on these shares and indicate how much w2s due to the price change and how much was due to the dividend income.a) ») 4) a » 9 a) ») 9 a) b) 9 a Discuss the rationale for expecting an efficient capital market. What factor would you look for to 03, liforentite the market efficiency for two alternative stocks? Suppose you buy around lot of MHB industries stock on 45 percent margin when the stock is 93 selling at Tk 20 share. The broker charges a 10% annual interest rate and commissions are 3° ‘of the total stock value on both the purchase price and sale. A Year later you receive a TK.0.5 per ‘are dividend and sel the stock for 27, What is your rte of return onthe investment? ‘You own 300 shares of Kit Enterprises that you bought at 425 a share. The stock is now selling 04 for Tk.AS a share, 4. You puta stop loss order at Tk.40.Discuss your reasoning for this action. ii, If the stock mal ecg in rie t0 TK sar, what would be your rte of ‘etum with and without the stp loss order? ‘Semy has margin account and deposits Tk750000.A.ssuming the prev 's 40%, commission are ignored and the stock is selling at Tk 35 per share. |. How many shares can Semy purchase using the maximum allowable margin? li, What is Semy's profit(loss) ifthe price of stock rises to Tk.4S? Ifthe maintenance margin is 30%, to what price can fll before Semy will receive a margin call? ‘A pension fund manager i considering three mutual funds. The frst isa stock “D” with expected 06 ‘tum of 15% and standard deviation of 20%, the second is a long-term government and corporate fund “E” with retum of 10% and standard deviation of 13% and the third is a T-bill ‘money market fund “F” that yields a rate of 7%. The coreation between D &E funds is 0:35. Required: 1g margin requirement 05 (@ Calculate the proportions of investment between D & E? i) Calculate the proportions of investment D, E & F? (Gi) Calculate portfolio return and risk? Write short notes on (3) CML (ii) SML and (ii) CL. e ‘An portfolio manager has made three portfolios: Portfolio X with 13% sample return, 0.80 beta, 06 nonsystematic risk 1.5% and 6% standard deviation; Portfolio Y with 10% sample return, 1-10 beta, nonsystematic risk 2% and 6.5% standard devietion; Portfolio Z with 14% sample return, 4S beta, nonsystematic risk 3% and 8.5% standerd deviation, The market return is 16% and risk free retum is 7.5%, Calculate the followings and make comment about the performance of portfolios: (© Sharpe Index (i) Treynor Index (i) Jensen Index and (iv) Appraisal ratio. Define financial market. Differentiate between capital market and money market, 4 Following the information about 2 portfolios: 06 Portfolio Expected Return ‘Standard Deviation | Bond % 10% Sak 13 | Ifthe correlation coefficient (p)is-0.40 for these two risky assets i, What percent of your wealth is invested in each portfolio? fi, What isthe minimum variance portfolio you can construct? Suppose an analyst has provided you the following estimates in respect of equal shares of 3. 0S securities ‘Securities | Expected Return Ga) Standard Deviation @@) K a 2 Tr 15 8 M 30 1 16 Correlation coefficients of return between! KandL=08 Kand M-0.2 Land M=0.5 ‘Assuming that equal amounts of the available funds will be invested in the three securities, estimate the portfolio return and risk, Write short notes on: 5 Underwriters, (W Short sale; (Gil)Dealers and brokers; iv) Buying on margin; ee (v) Over the Counter (OTC) : . pote various categories of shars in Dak Sok Exchange Li with hi haters ws Explain with flow chart the trading procedute of Dhaka Stock Exchange Lt