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ECON40215-WE01

Security Analysis

2022

Section A

Short Answer Questions

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

1.        Compare and contrast the major characteristics of Unit trusts (open-end funds) and investment trusts (close-end funds) and comment on how such features might affect investors’ choice.

2.        Critically assess the major predictions of the differential information hypothesis in the context of the effects of earnings announcements on stock  returns and discuss what  lessons security analysts and investors could learn from this hypothesis.

3.        ‘Although creative accounting reduces the reliability of financial statements these are known to be useful in security selection. ’ Comment on this statement and critically assess the view that a detailed analysis of financial statements can help generate excess returns. Support your answer with the evidence documented in the literature.

4.        Explain contrarian trading strategy. Comment on its success in generating excess returns drawing on empirical evidence available in the literature.

Section B

Essay Questions

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

5.        Discuss whether announcements of accounting information, especially the announcements of earnings and revenues, are relevant for investors in generating excess returns from equity     trading. Support your answer with the help of empirical evidence available in the literature.

6.        “… investors should be willing to pay for brokerage investment advice only if the expected benefit is at least as great as the cost of advice.  A logical source of benefits for an investor would be excess stock returns following changes in broker recommendations.”  (Womack, 1996).  You are required  to  critically  evaluate  the  usefulness  of  analysts’  recommendations  to  investors  in generating excess returns. Support your answer with empirical evidence available in the literature.