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ECON40215/WE01

Security Analysis

2020

Section A

Short Answer Questions

Answer any TWO questions from this section (each question carries 25 marks)

1.  Compare  and  contrast  ‘margin  purchase’  and  ‘short-selling’  of  stocks  and  discuss  the conditions in which  investors could  benefit from these strategies. Comment on  possible constraints that investors may encounter in implementing these strategies.

2.   Explain contrarian trading strategy. Comment on its success in generating excess returns.

3.  Discuss the investment strategies that are generally followed by hedge funds. Drawings on evidence documented in the literature critically evaluate the ability of hedge funds to generate excess returns.

4.  Discuss how changes in the rate of interest (i.e. discount rate) by the Central Bank of a country can affect stock returns. Substantiate your answer with empirical evidence available in the literature.

Section B

Essay Questions

Answer any ONE question from this section (each question carries 50 marks)

5.  Discuss what is meant by style investing in stock markets. Critically evaluate the success of such trading strategies drawing on empirical evidence documented in the literature.

6.  “Common stocks are expected to hedge against inflation; therefore, in a perfect market, return on common equity should keep pace with the inflation rate.” (Luintel and Paudyal, 2006, p. 1).  Discuss how the return on common stocks could be related to inflation and comment on whether empirical evidence documented in the literature supports this prediction.