FIN3001S INVESTMENT AND PORTFOLIO MANAGEMENT
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AUTUMN TRIMESTER EXAMINATION – 2022
Academic Year - 2022/23
FIN3001S
INVESTMENT AND PORTFOLIO MANAGEMENT
Section A (Answer any ONE question) 50 marks each.
Question 1
a. Compare and contrast the Capital Market Line (CML) and the Security Market Line (SML). (25 marks)
b. Assume two risky assets A and B with expected returns and standard deviations given as E(RA) = 10%, 
A = 25%, E(RB) = 15% and 
B = 35%. The risk-free rate is 4%.
i. If A and B are independent of each other, calculate the expected return and standard deviation of a combination portfolio consisting of 25% in the risk- free asset, 25% in asset A with the remainder 50% in asset B. Provide your answer to two decimal places. (14 marks)
ii. Calculate the Sharpe ratio of A, B and the combination portfolio from part
(i). If you are a mean-variance risk-averse investor, which of the three assets (A, B or the combination portfolio) will you choose? Please explain your answer in detail. (11 marks)
[Total: 50 marks]
Question 2
a. A stock is currently trading at $52 and the stock is not paying dividend in the next 3 months’ time. Determine the price of a European call option if the strike price is $50, the risk-free interest rate is 12% per annum, the volatility is 30% per annum, and the time to maturity is three months? (Hint: refer to normal distribution table.) (20 marks)
b. Discuss five (5) assumptions that are required for your calculation to be correct? (10 marks)
c. Would you use a short straddle strategy to bet on stock price stability? (20 marks)
[Total: 50 marks]
Section B (Answer any ONE question) 50 marks each. Question 3
a. The income statement and balance sheet for the IPM Ltd for 20x3 are as follows:
20x3
Revenues $750,000
Cost of goods sold 525,000
Gross profit $225,000
Selling, general and administrative expenses 120,000
Operating profit $105,000
Interest expense 15,000
Earnings before tax $ 90,000
Tax (@ 34%) 30,600
Earnings after tax $ 59,400
20x3
Cash $ 20,000
Accounts receivable 32,000
Inventory 8,000
Total current assets $ 60,000
Net fixed assets $ 250,000
Total assets $ 310,000
Accounts payable $ 7,500
Accruals 5,600
Notes payable 31,278
Total current liabilities $ 44,378
Long-term debt $ 61,000
Total liabilities $ 105,378
Equity (100,000 shares outstanding)
Total liabilities and equity
$ 204,622
$ 310,000
Base on the information above, compute the following financial ratios:
i. Current ratio
ii. Quick ratio
iii. Average collection period
iv. Inventory turnover
v. Total assets turnover
vi. Return on Equity
vii. Return on Assets
viii. Total debt to total equity
[40 marks]
Three companies have the following results during the recent period. Derive for each its return on equity based on the DuPont model.
A B
Net profit margin
Total asset turnover
Total debt/equity
[10 marks]
[Total: 50 marks]
Question 4
a. Suppose you consider buying a share of stock at $65. The stock is expected to pay $5 dividends next year and you expect it to sell then for $71. Determine the expected return of this stock. Round your answer to 2 decimal places. [5 marks]
b. Suppose the rate of return on government securities is about 4.5%, the expected rate of return on the market portfolio is 18%. According to CAPM, determine the expected return of this stock if the stock risk has been evaluated at β = 0.85. Interpret your result and round your answer to 2 decimal places. [15 marks]
c. With reference to the answer in (a) and (b), discuss whether the stock is overpriced or underpriced. Explain your answer. [10 marks]
d. Assuming that a Stock is expected to pay a dividend of $6 in five years’ time, maintaining at this level of dividend forever. If the required rate of return on similar stocks is 12 per cent, determine the price of this stock.
Determine the price of this stock if thereafter the dividend growth is expected to be a constant annual rate of 6 per cent forever. [20 marks]
[Total 50 marks]
2023-03-25