MERU UNIVERSITY OF SCIENCE AND TECHNOLOGY

P.O. Box 972-60200 – Meru-Kenya

Tel: +254(0) 799 529 958, +254(0) 799 529 959, + 254 (0) 712 524 293,
Website: info@must.ac.ke Email: info@must.ac.ke

UNIVERSITY EXAMINATIONS 2019/2020

THRID YEAR SECOND SEMESTER SUPPLEMENTARY/SPECIAL EXAMINATION

FOR THE DEGREE OF BACHELOR OF COMMERCE

BFC 3379: INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

DATE: JANUARY 2021 TIME: 2 HOURS

INSTRUCTIONS: Answer question one and any other two questions

QUESTION ONE (30 MARKS)

a) Mr. Charles Kabazi has a capital of 1,000,000 which he wishes invest in three sectors
of the economy agriculture, service and manufacturing. The funds will be allocated as
follows:
Sector Amount invested
Agriculture 400,000
Service 200,000
Manufacturing 200,000

Details on the possible future economic states their probabilities of occurrence and the
expected return for each of the sectors is as shown below
Possible future Probability of Expected return of each sector
Economic state occurrence
Manufacturing Manufacturing Agriculture Service
Recession 0.1 16 14 3
Average 0.4 14 19 5
Boom 0.5 20 22 6

Required:
i. Determine the risk associated with the investment in each of the three sectors
above (22 marks)
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 ii. Determine the expected portfolio return (8 marks)

QUESTION TWO (20 MARKS)

a) Discuss exhaustively the three performance evaluation measures (12 marks)

b) Explain the investment management process (8 marks)

QUESTION THREE (20 MARKS)

a) Consider the following four portfolios

Portfolio E(Rp) ( p)

%
Expected Standard
Return Deviation
A 20 5
B 18 6
C 15 7
D 20 10

If the marked return is 10% with a standard deviation of 4% and risk free rate of 6%
Required:
i. Determine using the capital market line equation which of the portfolio are
efficient and which are inefficient (12 marks)
ii. Explain meaning of security market line (8 marks)

QUESTION FOUR (20 MARKS)

a) Taranda limited is an all equity financed company with a cost of 18.5% the company is
considering the following one year investment projects
Project Outlay Annual cash flow Beta

Sh. 000 Sh. 000 Sh. 000

A 3,000 2,095 0.3
B 3,000 2,130 0.5
C 3,500 2,780 1.0
D 4,000 3,385 1.5

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 E 4,000 3,400 2.0

The risk free rate of return is 8% and market rate of return is 15%

Required:

i. The beta factor of Taranda limited (4 marks)

ii. The required rate of return and expected return of each of the above projects
indicating which project the company should undertake and which ones to reject
(10 marks)
iii. The beta factor of the investment in the accepted project

QUESTION FIVE (20 MARKS)

An investor expects a risk-free of return (rf) of 4.5% per annum and a market rate of return
(rm) of 14.5% per annum. Two stocks, A and B have the following betas and estimated
returns

Stocks Beta Estimated return

A 1.2 16%

B 0.8 14%

Required:

i. Assuming stocks A and B are fairly valued under the capital assets pricing model
(CAPM) use a graph to indicate the points where stocks would be plotted on the
security market line (SML) (12 marks)
ii. State whether stocks A and stocks B are undervalued or overvalued or overvalued
(8 marks)

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