Portfolio Management

Transcription

1 Subject no. 57A Diploma in Offshore Finance and Administration Portfolio Management July 2012 Friday afternoon 13 July 2012 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. ICSA, 2012 Page 1 of 6

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) Short-dated low-coupon gilts would be an ideal purchase for which type of taxpayer? A. UK basic-rate B. UK higher-rate C. UK non-taxpayer D. UK non-domiciled taxpayer (ii) If the risk-free rate of return is 8% and the market is expected to return 12%, what annual return would a diversified investor expect from an investment with a of 1.5? A. 10% B. 12% C. 14% D. 16% (iii) A situation where there is an equal annual flow which will continue indefinitely is known as: A. A reverse yield gap B. Optimisation C. Equalisation D. Perpetuity (iv) What does UCITS stand for? A. Universal Collective Instruments in Transferable Securities. B. Undertakings for Collective Investments in Trading Securities. C. Undertakings for Collective Investments in Transferable Securities. D. Universal Collective Investments in Trading Securities. ICSA, 2012 Page 2 of 6

3 (v) An investment manager should use floating rate borrowings where a forecast of interest rates is: A. Above the implied yield curve. B. Below the implied yield curve. C. Flat against the implied yield curve. D. Below the security market line. (vi) The responsiveness of an individual security or portfolio to market movements is: A. The correlation coefficient. B. The Beta factor. C. The Alpha factor. D. An efficient frontier. (vii) OATs are issued by which country? A. Germany B. France C. Japan D. Netherlands (viii) In a money market fund, the maximum amount that can be invested in transferable securities is: A. 70% B. 75% C. 80% D. 85% (ix) In a takeover situation, the offeror can compulsorily acquire the outstanding shares when his holding has reached at least: A. 51% of the shares. B. 60% of the shares. C. 75% of the shares. D. 90% of the shares. ICSA, 2012 Page 3 of 6

4 (x) The measurement of weighted-average maturity stated in present value terms is known as: A. Net present value B. Duration C. Maturity gap modelling D. Simulation analysis Section B Answer all ten questions. (Total: 10 marks) 2. Explain how specific (or unsystematic ) risk may arise and how it might be managed. 3. Give reasons why a sole agency system might be less effective, as in the case of the Financial Services Authority in the UK. 4. State and describe four classes of shares issued by split capital investment trust companies. 5. Give two reasons why the accounting rate of return may be employed in investment appraisal. 6. Explain what is meant by the reverse yield gap and the circumstances under which it might arise. 7. Define the concept of negative correlation and, in the context of index tracking funds, describe what is meant by tracking error. 8. What is a money weighted return? Explain why it is not generally used as a means of portfolio measurement. 9. Explain the two general conditions that must be satisfied before derivatives may be effective in efficient portfolio management. Give two reasons why such derivatives may be used. 10. Why might investors in investment trusts benefit from unitisation? Give two potential disadvantages of unitisation to an individual investor. 11. Explain the difference between residence and domicile. (Total: 40 marks) ICSA, 2012 Page 4 of 6

5 Section C Answer two questions only. 12. The current financial crisis has shown that the concept of a risk-free rate is now questionable. State the underlying assumptions and limitations which have led to the validity of the Capital Asset Pricing Model being questioned. (25 marks) 13. The Global Airports Authority is considering investing in new baggage systems at each of its airports. These are the Western India National Airport, the Saudi National Airport and the South China National Airport. The cost of feasibility studies at each of the airports has already reached 100m. These costs will be expensed over the next five years using a straight-line approach. The Global Airports Authority obtains its revenues from landing charges as well as baggage facility fees from airlines that use the airports. Investment costs, payable immediately, for each of the airports in millions of pounds, have been estimated for each project as follows: 000 Western India National Airport 800 Saudi National Airport 800 South China National Airport 740 Each baggage handling system will generate new revenues and costs for Global Airports Authority, Revenue and cost projections are as follows. Revenues 000 Labour Costs 000 Other costs 000 Western India National Airport 1, Saudi National Airport South China National Airport At all three airports, the baggage system is expected to last four years; after four years the systems will be obsolete. Depreciation is charged on a straight-line basis. Ignore taxation. Current base rates are 5.75%. The firm can achieve 5.6% from cash deposits. The firm s cost of capital is 12%. All cash flows arise at the end of the year. Global Airports Authority applies a payback period of three years to all projects but also uses net present value procedures to appraise investments. (a) Calculate the net present value (NPV) and payback period for each of the projects and recommend which project(s) should proceed. Note: In your answer, show all workings and calculations. (15 marks) (b) Explain the purpose of country risk analysis (CRA) and how it can be used to evaluate and assess direct foreign investment projects. (10 marks) (Total: 25 marks) ICSA, 2012 Page 5 of 6

6 14. If a company seeks to gain control of another company, the bidder generally requires more than 50% of the target company s voting shares. (a) List and discuss the rules and stages for carrying out a successful takeover of a UK registered company. (18 marks) (b) Describe the bid timetable for a successful takeover. (7 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, 2012 Page 6 of 6

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