MODULE CODE: ABF305 TITLE OF PAPER: Investment Management. STUDY AND REVISION QUESTIONS

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In what ways can factor models of share returns be held to be an advancement over the Markowitz model? Demonstrate with an example where possible. (15 marks) b. A fund manager is considering inves... ting in two equity portfolios, one invested in mining stocks (M) and one in bank stocks (B). E(rM) = 14%, E(rB) = 19%, SDM = 18%, SDB = 20%. The correlation between the funds is 0.5. She puts 60% of her funds into the mining portfolio and 40% into the bank portfolio. Calculate the expected return and risk of the overall portfolio. (10 marks) 2. a. A woman, about to retire, has the option to convert £3,500 of her pension income into a lump sum of £42,000. She anticipates living for another 25 years and assumes a re-investment rate of 7% p.a. Is converting pension income into a lump sum attractive to her? Explain showing calculations. Ignore tax considerations. (5 marks) b. Vitelli Tyres is expecting earnings on its stock of 16p per share next year. The company has a policy of paying half of its earnings as dividends. Dividends are expected to grow at 6% per annum indefinitely. Stocks with similar risk are currently priced to provide a 15% expected return. What is the intrinsic value of its shares? (5 marks) c. Examine the determinants of a stock’s P/E ratio. Can re-investment of earnings ever destroy firm value? Explain. (15 marks) 3. Lloyd Corporation needs to make pension fund contributions of $10 million per year for the next 8 years. The first payment is in exactly one year’s time. Lloyd decides to fund the payments by investing in zero coupon bonds. The yield curve is flat at 8% pa and 2 year and 6 year zero coupon bonds are available to the company treasurer. a. What is the present value and the duration of the pension payments? (15 marks) b. Lloyd decides to immunise the bond fund against a small change in interest rates. What are the money and the nominal values of the position in each bond? “An efficient market is one in which no one ever profits from having better information than the rest.” Is this statement true, false or uncertain? Explain your answer. [Show More]

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