W1-2-60-1-6

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

UNIVERSITY EXAMINATIONS 2020/2021
THIRD YEAR SECOND SPECIAL/SUPPLEMENTARY EXAMINATION FOR
THE DEGREE OF BACHELOR OF COMMERCE
HBF 2304: INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
DATE: OCTOBER 2021 TIME: 2 HOURS
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INSTRUCTIONS:
ANSWER QUESTION ONE [COMPULSORY] AND ANY OTHER TWO
QUESTIONS
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QUESTION ONE [30 MARKS]
(a) Describe the steps of portfolio management process and the components of
those steps. [4 marks]
(b) A fundamental analysis estimate of intrinsic value is different from the
present value of all income. Is this statement true, false or uncertain?
Explain. [4 marks]

(c) Compare and contrast the conclusions and underlying assumptions of

CAMP and APT models. [4
marks]
(d) Discuss the efficient market hypothesis and explain the differences between
the three forms of hypothesis which have been distinguished. [6 marks]

(e) List the assumptions about investor behavior underlying the Markowitz
model. [4 marks]
(f) Explain why indifference curves of more risk averse investors are more
steeply sloped than those of investors with less risk aversion. [4 marks]
(g) Explain the term “investment” as it relates to securities investment.
[4 marks]

QUESTION TWO [20 MARKS]

(a) The first free rate is 10% and the expected return on the market portfolio is
15%. The expected return for 4 securities and listed below with their
expected before.

Security Expected Return Expected Beta

 A 17.0% 1.3
B 14.5% 0.8
C 15.5`% 1.1
D 18.0% 1.7

REQUIRED:
On the basis of these expectations, which securities are overvalued? Which
are undervalued? [10 marks]

(b) Define systematic and unsystematic risk, and expaoin why an investor
should not expect to receive addition return for assuming unsystematic risk.
[10
marks]
QUESTION THREE [20 MARKS]
(a) Distinguish between current yield, yield to maturity and coupon rate.
Discuss the concept involved [10 marks]
(b) Graphically explain the capital allocation and the capital market lines (CAL
and CML) and the relation between them. [10 marks]

QUESTION FOUR [20 MARKS]

(a) Use the following data to answer question (i) and (ii) and (iii). An
investment has 50% chance of a 20% return. A 25% chance of 10% return
and a 25% chance of a -10% return received. [10 marks]
(i) What is the expected return?
(ii) What is the investments standard deviation?
(iii) What is the investment variance of return?
(b) Discuss the distinction between fundamentals and technical analysis.
[10
marks]

QUESTION FIVE [20 MARKS]

(a) Which of the following is least likely an example of a portfolio constraint.
(i) Tax concerns [3 marks]
(ii) Liquidity concerns [2 marks]
(iii) Total return requirement [2 marks]
(b) Which of the following statements about investment policy statements is
most likely correct?
(i) For some investors, specifying on investment goal in terms of return
alone is appropriate
(ii) An investment policy statements should have objectives and
constraints.
(iii) Risk is an important investment policy constraint [3 marks]

(c) Explain the assumptions of capital market theory including its underlying
assumptions [10 marks]