Portfolio Management

Transcription

1 Subject no. 57A (2) Diploma in Offshore Finance and Administration Portfolio Management July 2013 Friday afternoon 12 July 2013 Time allowed: 3 hours Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room. This examination paper is divided into three sections. You must attempt all parts of Question 1 in Section A, all questions in Section B, and two questions only in Section C. Section A carries 10 marks (1 mark for each part of Question 1). Section B carries 40 marks (4 marks for each question). Questions in Section C each carry 25 marks. You should allow yourself approximately 20 minutes in total to answer the questions in Section A, 70 minutes in total to answer the questions in Section B and 45 minutes for each of the questions attempted in Section C. Note: Unless otherwise specified, you should assume that an Act or an organisation referred to in the questions is a UK Act or organisation. ICSA, 2013 Page 1 of 7

2 Section A Answer all parts of Question 1. Select only one of the options A, B, C or D for each part. 1. (i) In the international money markets, what does the term repo refer to? A. Sale and repurchase agreement. B. Repossession order. C. Revenue posting. D. Refund policy. (ii) An index-linked bond: A. Offers an annual coupon rate of 4%. B. Pays an annual coupon rate of 2% above the London Interbank Offered Rate. C. Matures in five years but is callable after two years. D. Offers an annual coupon rate of 2% above the annual rate of inflation. (iii) Which of the correlation coefficients below, associated with the expected returns on pairs of assets, offers investors the largest prospective risk reduction? A B C. 0 D. 1.0 (iv) Which of the following statements defines the fundamental purpose of financial hedging? A. Investors use financial hedging in the hope of achieving high returns on small outlays. B. Investors use financial hedging to short sell assets they believe to be undervalued. C. Investors use financial hedging to manage the potential impact of effects of interest rate, exchange rate and other price variations on returns. D. Investors use financial hedging to fix asset prices. ICSA, 2013 Page 2 of 7

3 (v) Which of the following statements defines the beta coefficient in the Capital Asset Pricing Model (CAPM)? A. The beta value of an asset is a measure of its total risk. B. The beta value of an asset measures the scale of its systematic risk relative to the risk of the market portfolio. C. The beta value of an asset measures how much its return is expected to exceed that of the market portfolio. D. The beta value of an asset measures how much its return is expected to exceed that of a risk free asset. (vi) The interest rate spread on short-term money market loans and deposits appears in the following form: What is the size of the spread? A B. 10 basis points. C. 1% D. One hundredth of 1%. (vii) A trader purchased a sterling short-term interest rate futures contract priced at and subsequently sold it at Given that short sterling futures contracts are based on a notional sum of 500,000, what is the size of the cash flow accruing to the trader? A. 600 B. 2,400 C. - 2,400 D. 240,000 (viii) A call option: A. Requires the holder to purchase the underlying asset at a predetermined price. B. Gives the holder the right to sell the underlying asset at a predetermined price. C. Offers the holder the opportunity to buy the underlying asset for a price equal to the option premium. D. Gives the holder the right to buy the underlying asset at a predetermined price. ICSA, 2013 Page 3 of 7

4 (ix) Which of the following is known as the dividend payout ratio? A. dividend per share share price B. dividend per share earnings per share C. net dividend per share gross dividend per share D. dividend per share gross profit (x) The Sharpe and Treynor ratios measure: A. The extent to which the return on an investment exceeds the return on the market. B. The extent to which investment decisions produce returns that exceed the returns on a benchmark after adjustment for risk. C. The extent to which the return on an investment exceeds the return on a specified benchmark. D. The extent to which the return on an investment exceeds the return on riskfree assets. (Total: 10 marks) Section B Answer all ten questions. 2. Explain the significance of the assumption, at the heart of financial theory, that investors are risk averse. 3. Define the following concepts associated with exchange-traded derivatives. (c) (d) Margin account. Initial margin. Maintenance margin. Margin call. ICSA, 2013 Page 4 of 7

5 4. The table below presents the monthly returns on a company share over the last six months. Month Company A monthly return (%) Calculate the average monthly return and monthly standard deviation of returns. Annualise the standard deviation of returns. Standard deviation: 5. The dividend valuation model ( DVM ) suggests that share valuation is a function of expected future dividend payments. Explain why DVM is still useful for valuing the equity of non-dividend paying companies. 6. A company is undertaking an issue of commercial paper with notes in 100,000 denominations. The paper matures in 180 days and offers a yield that is 58 basis points above the yield on UK treasury bills. The prevailing yield on sterlingdenominated 180-day treasury bills is 0.46%. Calculate the yield and the purchase price of the commercial paper. The commercial paper was assigned a Prime 2 credit rating by Moody s. Explain the significance of the rating. 7. Explain what is meant by the term financial disintermediation as it relates to the relationship between banks and large corporate borrowers. ICSA, 2013 Page 5 of 7

6 8. Calculate the value of a plain vanilla bond with the following characteristics: A term to maturity of 6 years. An annual coupon rate of 4%. A face value of 100. A yield of 3%. Note: use the formula below or sum the present values of the individual cash flows: 9. Explain the following financial risk factors associated with investment in bonds. (c) (d) Credit risk. Reinvestment risk. Inflation risk. Market risk. 10. Provide two reasons for using CAPM. 11. Explain four differences between private placings and rights issues. Section C Answer two questions only. (Total: 40 marks) 12. Explain the three forms of market efficiency. (12 marks) Discuss the claim that a widespread acceptance of the maxims of market efficiency has encouraged poor investment management practices. (13 marks) (Total: 25 marks) 13. Explain, with examples, the key differences between over the counter and exchange traded financial market procedures in relation to forward currency transactions. (14 marks) Explain the term cost of carry in relation to currency exchange and discuss the significance of the assumption that the cost of carry ought to be governed by interest rate parity. (11 marks) (Total: 25 marks) ICSA, 2013 Page 6 of 7

7 14. An investor owns 6,000 shares in XYZ plc and has received an allotment letter, detailing entitlement under a forthcoming rights issue. The company is offering one new share for every three existing shares at a subscription price of 120 pence each. The current share price is 150p. The investor wishes to maintain the capital value of the investment in XYZ without adding additional money to the investment. Explain how the investor will maintain the capital value of his investment. Note: All workings, ignoring expenses, should be shown. (12 marks) Explain the meaning of the term share buyback and discuss the potential implications of a share buyback for shareholders. (13 marks) (Total: 25 marks) The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental. ICSA, 2013 Page 7 of 7

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