Semester One Final Examinations, 2014

FINM7403 Portfolio Management

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School of Business
EXAMINATION
Semester One Final Examinations, 2014

FINM7403 Portfolio Management

This paper is for St Lucia Campus students.

Examination Duration:

120 minutes

For Examiner Use Only

Reading Time:

10 minutes

Question

Mark

Exam Conditions:
This is a Central Examination
This is a Closed Book Examination - specified materials permitted
During reading time - writing is not permitted at all
This examination paper will be released to the Library
Materials Permitted In The Exam Venue:
(No electronic aids are permitted e.g. laptops, phones)
Calculators - Any calculator permitted - unrestricted
Materials To Be Supplied To Students:
1 x 14 Page Answer Booklet
1 x Multiple Choice Answer Sheet
Instructions To Students:
Please answer multiple choice questions on the Multiple Choice Answer Sheet
provided.
Please answer ALL other questions in the Answer Booklet provided.

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Semester One Final Examinations, 2014

FINM7403 Portfolio Management

Question 1 Multiple Choice (1x10=10 Marks)

Question 1: Investment assets differ in risk because of:
A. cash flow uncertainty
B. time value of money uncertainty
C. uncertainty regarding the rate of inflation
D. all of the above
Question 2: The value of a bank-accepted bill with face value of $100 000, 180
days to maturity and a current yield of 3% p.a. is closest to:
A. $95 238
B. $98 782
C. $98 542
D. $99 011
Question 3: Arbitrage profits are generally defined to exist in situations where there
are positive returns to be made from investments that have:
A. no-risk and zero gross investment
B. high-risk and zero gross investment
C. no-risk and zero net investment
D. high-risk and zero net investment
Question 4: Which of the following is not a characteristic of a portfolio that lies on
both the capital market line and the security market line?
A. low variance
B. zero correlation with the market
C. both a and b
D. efficiency
Question 5: The Fama-French three factor model includes which three factors?
A. Market premium, Size Premium and Book-To-Market premium
B. Market premium, Value Premium and Size Premium
C. Value Premium, Economic Premium, Exchange Rate Premium
D. Answers A and B.
Question 6: The EMH has three forms, the form that relates to prices that fully
reflect all available information is:
A. weak form
B. semi-strong form
C. strong form
D. none of the above
Question 7: The price of a security is set by:
A. the underlying company
B. the securities exchange upon opening
C. securities exchange listing rules
D. the marginal investor

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Semester One Final Examinations, 2014

Question 8:

A.
B.
C.
D.

FINM7403 Portfolio Management

__________ portfolio management involves the setting of exposure

levels to asset classes, and then selecting securities within asset classes
with the view to holding these securities for the medium to long term.
Active
Passive
Selective
Conservative

Question 9: A tracking error is one way that an index portfolio managers

performance can be evaluated. Two such measures that compare this
are:
A. Average and absolute tracking performance
B. Average and maximum tracking performance
C. Relative and absolute tracking performance
D. Maximum and relative tracking performance
Question 10: One misconception about market efficiency is that:
A. inefficiency implies price volatility
B. prices are set in a varying manner
C. expected returns imply actual returns
D. new information is unpredictable

Question 2 (20 marks)

The Efficient Markets Hypothesis (EMH) described by Fama (1984) is comprised of
three components.
Required:
a. Briefly describe the three forms of market efficiency and how each form
could be tested.
[8 marks]
b. Suppose your friend made a return of 50% in the share market last year using
a charting technique. Would this violate any form of efficiency? Explain.
[6 marks]
c. If weak form market efficiency holds, must strong form market efficiency also
hold? Conversely, does strong form efficiency imply weak-form efficiency?
Explain your answer.
[6 marks]

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Semester One Final Examinations, 2014

FINM7403 Portfolio Management

Question 3 (25 marks)

You are trying to determine whether to sell your stock portfolio now or in 12 months.
There is a lot of market commentary indicating that the stock market is over-priced and is
going to fall over the next 12 months, but you are not sure. There are other signals that it
is going to increase. Currently your share portfolio is valued at $950,000. The current
stock market index is 1200 index points.
There is a futures contract on the stock market index and there are two contracts trading.
One expires in 6 months (contract A) and the other in 18 months (contract B). These are
priced for delivery at 1100 and 1000 index points respectively. You know that each
futures contract is valued at $25 x index points.
Assume you hedge your risk and enter the futures contract.
Time ticks over and it is not long before 12 months is up. The futures contract you
entered settles at a price of 1300 index points. The stock market index does not perfectly
converge with the futures contract and at the close of business it is 1350 index points.
Your stock portfolio is currently worth $1,100,000 when you sell.

Required:
a. What is the gain in percent per annum on your stock portfolio assuming
continuous returns and assuming discrete returns? Show details.
(5 marks)
b. How many and which futures contracts (A or B) and short or long do you need to
enter to cover your exposure? Show all details.
(5 marks)
c. Show details of the hedge and the gain or loss on the portfolio including the
hedge. Show the components of basis and specification risk in your answer. Has
the hedge been successful? Explain why.
(15 marks)

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Semester One Final Examinations, 2014

FINM7403 Portfolio Management

Question 4 (15 marks)

Required:
a. Describe top-down and bottom-up investment analysis.
[5 marks]
b. Why is industry an important step in investment analysis?
[5 marks]
c. Outline Rolls critique and explain how this affects
the application of the CAPM in practice.
[5 marks]

Question 5consists of two parts A and B

(30 marks)

Brian is a young investor who currently has an investment portfolio of stocks worth $800,000.
This portfolio currently has a Beta of 1.20 and a standard deviation of 17.2% per annum. The
expected excess return of this portfolio above the risk free rate is 12% per annum. Brian
wishes to purchase $200,000 of units in his friends hedge fund. The hedge fund has a Beta of
0.4 and expects to generate a return of 6% per annum above the risk free rate.
Part A
Required:
a.
Calculate the Beta of Brians new portfolios.
[7 marks]

b.

Calculate the excepted return of the new portfolio.

[7 marks]

c.

Has the addition of the hedge fund added to the overall risk-return profile of
the portfolio? Explain your answer.
[6 marks]

Part B
Assume now that the total risk (standard deviation) of Brians new portfolio, which has
exposure to the hedge fund, is 16% per annum.
Required:
a.
Name specifically the technique employed above to assess the overall riskreturn performance of Brians pre and post portfolios? What does this
technique measure and what it its main underlying assumption?
[5 marks]

b.

Calculate the performance of Brians new portfolio when using the Sharpe
ratio as a measure of portfolio performance.
[5 marks]

END OF EXAMINATION

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