Portfolio Management BU207 Final Exam
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Portfolio Management BU207
Final Exam
(1) A single payment security matures in 100 days and has a maturity value of $50,000. What would be price be if:
(a) A discount rate of 3% is applied
(b) A discount rate of 8% is applied
Assume that this is a U.S. security, so Days in a Year (diy) is 360. (8%)
(2) Explain the key differences between the primary and secondary markets for equities. You are encouraged to provide examples. (8%)
(3) Consider the Efficient Market Hypothesis
(a) What are the three forms of efficiency in the Efficient Market Hypothesis? What are the definitions? (6%)
(b) For each type that you identify in part (a) provide two examples of situations which show that the market is that form efficient (6%)
(c) For each type that you identify in part (a) provide two examples of situations which show that the market is not that form efficient (6%)
(4) Illustrate using a simple share price graph what happens when there is an item of unexpected negative news. Why is it important that the news is unexpected? (8%)
(5) Aussteak is a company which enjoys good sales during boom times but struggles when people cut back on their luxuries in a recession. Returns in boom times are 50% but during recessions fall to 25%. Ausspam by contrast is more resilient showing returns of 20% in the boom and 18% in the recession. An investor holds a portfolio comprising 260 shares in Aussteak and 380 shares in Ausspam. The correlation between returns of the two firms is just 0.15. If the probability of recession is 0.3, calculate the expected return and variance of the portfolio. (20%)
(6) Why should investors diversify their portfolios? When writing your answer consider which risks can be avoided. You are encouraged to provide examples. (12%)
(7) What are the main features of a bond? Provide an example for each. (12%)
(8) A bond pays a coupon rate of 6% annually and a discount rate of 3% is used by investors. The par value is $8000.
(a) If the bond has FOUR years remaining until maturity, calculate the value of the bond today. (6%)
(b) Now assume that the discount rate changes for the THIRD year and the FOURTH year to be 9%, calculate the value of the bond today. (8%)
2022-07-22