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SECTION A MULTIPLE CHOICE _25 MARKS_

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SECTION A MULTIPLE CHOICE _25 MARKS_ Powered By Docstoc
					 Confidential                                                                            AFD 3063 / July – Nov 2005



SECTION A (30 Marks)
PART I: Multiple Choice (20 Marks)

    1. Which of the following investments is the most liquid and considered short-term?

                a.   Money market instrument
                b.   Common stock
                c.   Preferred stock
                d.   A put option

    2. Cash flow per share is calculated as
          a. Net cash flow / shares outstanding
          b. Operating cash flow / shares outstanding
          c. Investing cash flow / shares outstanding
          d. Financing cash flow / shares outstanding

    3. Which of the following is a basic assumption of technical analysis in contrast to
       fundamental analysis?
          a. Financial statements provide information crucial in valuing a stock
          b. A stock’s market price will approach its intrinsic value over time
          c. Aggregate supply and demand for goods and services are key determinants of
             stock value
          d. A daily history of the ratio of advancing issues over declining issues.

    4. Which of the following is NOT a characteristic of derivative assets?

                a.   They represent a claim on other financial assets.
                b.   They represent the future price of another asset
                c.   Their value is derived from another existing asset
                d.   They are frequently issued to raise capital for special projects.

    5. The yield to maturity on a bond is:
          a. Below the coupon rate when the bond sells at a discount and above the coupon
              rate when the bond sells at a premium
          b. The interest rate that makes the present value of the payments equal to the bond
              price.
          c. Based on the assumption that all future payments received are reinvested at the
              coupon rate
          d. Based on the assumption that all future payments received are reinvested at future
              market rates




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   6. Which one of the following statements about convertible bonds is true?
        a. The longer the call protection on a convertible, the less the security is worth
        b. The more volatile the underlying stock, the greater the value of the conversion
            feature
        c. The smaller the spread between the dividend yield on the stock and the yield to
            maturity on the bond, the more the convertible is worth
        d. The collateral that is used to secure a convertible bond is one reason convertibles
            are more attractive than the underlying common stocks.

   7. The coupon rate for a Treasury note is set
         a. The same for all Treasury note issues
         b. By a formula based on the size of the Treasury note issue
         c. According to prevailing interest rates at time of issuance
         d. According to the supply and demand for money

   8. Which of the following statements concerning equities are true?
        a. A company must pay dividends to the owners of common stock before paying
            dividends to preferred stockholders.
        b. Companies are legally required to pay dividends.
        c. Dividends on a preferred stock are usually fixed at some value.
        d. Dividends on futures are made at the discretion of the firm’s directors.

   9. The market risk premium is defined as _______________
         a. The difference between the return on an index fund and the return on Treasury
            bills.
         b. The difference between the return on a small mutual fund and the return on
            KLSE’s Industrial Index
         c. The difference between the return on the risky asset with the lowest returns and
            the return on the Treasury Bills.
         d. The difference between the return on the highest yielding asset and the lowest
            yielding asset.

   10. Which of the following measures the impact of a change in the interest rate on an option
       price?
           a. Vega
           b. Rho
           c. Delta
           d. Theta

   11. Which of the following statements is true regarding the distinction between futures
       contracts and forward contracts?
          a. Futures contracts are exchange-traded, whereas forwards contracts are OTC
              traded
          b. All else equal, forward prices are higher than futures prices


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               c. Forwards contracts are created from baskets of futures contracts
               d. Futures contracts are cash-settled at maturity, whereas forward contracts result
                  delivery

   12. JMart experiences returns of 0 percent, 25 percent, or 50 percent, each with a one-third
       probability. What is the approximate return standard deviation for JMart?
          a. 30 percent
          b. 25 percent
          c. 20 percent
          d. 10 percent

   13. The systematic risk of a stock is measured by its
          a. Beta coefficient
          b. Correlation coefficient
          c. Return standard deviation
          d. Return variance

   14. In the Capital Asset Pricing Model (CAPM), a security’s expected return is
           a. The return on the market portfolio
           b. The risk-free rate plus the return on the market portfolio
           c. The return on the market portfolio plus a market risk premium
           d. The relationship between unsystematic risk and unexpected returns

   15. Which types of risk is essentially eliminated by diversification?
         a. Perceived risk
         b. Market risk
         c. Systematic risk
         d. Unsystematic risk

   16. Which of the following investments is the most liquid and considered short – term?

               a.   Money market instrument
               b.   Common stock
               c.   Preferred stock
               d.   A put option

   17. Which of the following is NOT a characteristic of derivative assets?
         a. They represent a claim on another financial assets
         b. They represent the future price of another assets
         c. Their value is derived from another existing assets
         d. They are frequently issued to raise capital for special projects




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Confidential                                                                 AFD 3063 / July – Nov 2005



   18. __________________ are boundaries that investors place on their choice of investment
       assets.
           a. Investment constraints
           b. Investment objectives
           c. Investments policies
           d. None of the above

   19. The market risk premium is defined as ______________.
          a. the difference between the return on an index fund and the return on Treasury
             bills
          b. the difference between the return on a small mutual fund and the return on the
             KLSE ‘s Industrial Index
          c. the difference between the return on the risky asset with the lowest returns and the
             return on the Treasury Bills
          d. the difference between the return on the highest yielding asset and the lowest
             yielding asset

   20. According to the CAPM, ___________________________________.
          a. all securities must lie on the capital market line
          b. all securities must lie on the security market line
          c. under priced securities lie below the security market line
          d. overpriced securities lie above the security market line


   PART II: True of False (10 Marks)

   1. Fundamental analysis is an examination of a firm’s accounting statements and other
        financial and economic information to assess the economic value of a company’s stock.
                                                                                    (True / False)
   2. A common problem with sustainable growth rates is that they are sensitive to year
        fluctuations in earnings.                                                   (True / False)
   3. ROE and ROA are calculated using current year – end values for total assets and
        stockholder equity.                                                         (True / False)
   4. Support level is price or level above which a stock or the market as a whole is unlikely to
        rise.                                                                       (True / False)
   5. Charting can divided into 4 charting techniques, which are relative strength charts,
        moving average charts, hi – lo – close and candlesticks charts, and point and figure
        charts.                                                                     (True / False)
   6. The long hedger currently owns the underlying commodity.                      (True / False)



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Confidential                                                                    AFD 3063 / July – Nov 2005



   7. Futures trading accounts have margin requirements.                               (True / False)
   8. A futures position can only liquidated at contract maturity.                     (True / False)
   9. Slim profit margins are typical when attempting to exploit cash-futures arbitrage
        opportunities.                                                                 (True / False)
   10. The futures price is equal to the spot price discounted at the market rate of return.
                                                                                       (True / False)


   SECTION B: Structured (30 Marks)
   Answer all questions.

   QUESTION 1
   a) Sturgis Light & Power increases its dividend 5 percent per year every year. This utility is
   valued using a discount rate of 8 percent, and the stock currently sells for $85 per share. If
   you buy a share of stock today and hold on to it for at least three years, what do you expect
   the value of your dividend check to be three years from today?                    (4 marks)


   b) Trust Bankers just paid an annual dividend of $2 per share. The expected dividend growth
   rate is 5 percent; the discount rate is 10 percent, and the dividends will last for 5 more years.
   What is the value of the stock? What if the dividends last for 30 years?           (6 marks)
                                                                              Total : 10 marks


   QUESTION 2

   a) How do we calculate the expected return on security? Give an appropriate formula.
                                                                                     (1 mark)

   b) Use the following information to calculate the expected return and standard deviation of a
        portfolio that is 40 percent invested in Cocorex and 60 percent invested in DragonBall:
                                                       Cocorex       DragonBall
               Expected return, E(R)                     30%            26%
               Standard deviation                        65%            45%
               Correlation                                       0.30
                                                                                      (6 marks)


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 Confidential                                                                      AFD 3063 / July – Nov 2005



    c) In broad terms, why is some risk diversifiable? Why are some risks non-diversifiable?
                                                                                        (3 marks)
                                                                             Total : 10 marks


    QUESTION 3 (20 marks)
    a) i)       What is the capital asset pricing model (CAPM)?                         (2 marks)
         ii)    What is the expected return on this portfolio?                          (4 marks)


   b) Suppose the risk-free rate is 4 percent, the market risk premium is 8.6 percent, and a
        particular stock has a beta of 1.3. Based on the CAPM, what is the expected return on this
        stock? What would the expected return be if the beta were to double?            (4 marks)
                                                                             Total : 10 marks
SECTION C: ESSAY (30 MARKS)
Choose any TWO questions.


QUESTION 1
    a) Suppose we have the following information:
                     Security   Amount Invested    Expected Return        Beta
                   Stock A          $ 1000                8%              0.80
                   Stock B          $ 2000               12 %             0.95
                   Stock C          $ 3000               15 %             1.10
                   Stock D          $ 4000               18 %             1.40


          What is the expected return on this portfolio? What is the beta of this portfolio? Does
         this portfolio have more or less systematic risk than an average asset?        (6 marks)




    b) Use the following table of states of the economy and stock returns to answer the review
         problems:


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Confidential                                                                    AFD 3063 / July – Nov 2005




                    State of            Probability of         Security returns if State Occurs
                   Economy             State of Economy
                                                                   Roten            Bradley
                 Bust                         0.40                 - 10 %             30 %
                 Boom                         0.60                  40 %              10 %




        i)        Calculate the expected returns for Roten and Bradley.              (4 marks)
        ii)       Calculate the standard deviations for Roten and Bradley.           (3 marks)
        iii)      What is an efficient portfolio and expected return?                (2 marks)
                                                                             Total : 15 marks
QUESTION 2
   a) The table below shows end-of-month stock prices for Coca Cola and Pepsi over a six-
        month period. Calculate the THREE month moving average for Coca Cola stock and
        Pepsi.                                                                       (8 marks)


                               Month      Coca Cola           Pepsi
                                 1         RM 40              RM 25
                                 2         RM 45              RM 28
                                 3         RM 48              RM 32
                                 4         RM 44              RM 33
                                 5         RM 49              RM 35

 b) Differentiate between support level and resistance levels.                        (2 marks)
 c) What does a candlestick chart show?                                               (2.5 marks)
 d) Suppose that on a particular day the S&P 500 opened at 431.30, closed at 439.50, and the
 high low for the day were 447.20 and 430.00, respectively. Describe how you would construct
 a candlestick plot for these data.                                                   (3.5 marks)
                                                                               Total : 15 marks




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Confidential                                                                     AFD 3063 / July – Nov 2005



QUESTION 3
   a) Suppose that Kojak, Inc. just paid a dividend of RM 3.75 per share. The company will
        continue to pay dividends for the next 20 years and then go out of business. If the
        discount rate is 12 percent per year, what is the value of the stock for a dividend growth
        rate of:                                                                      (10 marks)
               i)     20 percent
               ii)    12 percent
               iii)   6 percent
               iv)    0 percent
               v)     – 5 percent
   b) ILU stock has a sustainable growth rate of 5 percent, ROE of 20 percent, and dividends
        per share of RM 3.00. If the P/E ratio is 15, what is the value of a share of stock?
                                                                                      (4 marks)
   c) What are the two basic types of risk?                                           (1 mark)
                                                                              Total : 15 marks




                                        End of Question Paper




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