Investments & Portfolio Management               

 

EXAMINATION PAPER

Faculty of Business and Law

Trimester 1 2022 Examination

 

Unit Code: MAF707

Unit Name: Investments & Portfolio Management               

Exam Name: Open-book Take Home Online Exam

Maximum Word Count: 2000                  

Anticipated writing time: TWO (2) HOURS

 

Special instructions for Candidates:

  • This examination is OPEN BOOK.
  • This examination is open for 24 HOURS. Within this period, you can select when you complete the exam.
  • This examination constitutes 50% of your assessment in this unit.
  • This examination comprises 4 questions. You are required to answer ALL 4 questions.
  • Save your exam response on your computer using the file name: student ID, unit code and the unit’s name, for example: 216123123_MAF707_Finance
  • You must type your responses into a single Word document and upload the .docx to the Exam Submission Dropbox on the CloudDeakin unit site. Number each question clearly.
  • Late submissions will not be marked.
  • Remember to save your work regularly.
  • It is important that you complete this task individually. Your submission will be reviewed for the purposes of detecting collusion and/or plagiarism.
  • If you encounter any technical issues with CloudDeakin, please contact the IT Service Desk online or via phone (1800 463 888; +61 5227 8888 if calling from outside Australia) and record your ticket number as evidence of technical issues during the examination period.
  • In the unlikely event that you cannot upload your completed exam paper, email it as an attachment to your unit chair [email protected]within the submission time.
  • The breakdown of marks in this exam is:
Question Marks Question Marks
1 12 4 12
2 13    
3 13    
Total Available Marks 50

 

All candidates MUST complete this section

Type your student ID number here: ________________________________

 

Question 1 (this question has three parts, (a), (b) & (c))

 

(a) What is the nature of the relationship between risk and return? Critically evaluate the phrase ‘risk-return trade-off’ in relation to equity asset class.

(4 marks)

(b) Please use Python to plot the yearly dividend bar chart for Rio Tinto (Ticker Symbol: RIO.AX) from 2002 to 2020. You are required to keep the network open.

(4 marks)

(c) Based on the charts below, which share has more systematic risk, and which share has more unsystematic risk? Why?

(4 marks)

(4 + 4 + 4 = 12 Marks)

 

 

 

 

 

 

Question 2(this question has three parts, (a), (b) & (c))

 

(a) If you have a portfolio in which you invest one third of the total money in a long-term US government bond and two thirds of the total money in the S&P500 Index, what the beta of your portfolio should be? Briefly explain your answer.

(3 marks)

(b) You are evaluating the performance of the following portfolio managers. Assume that the risk-free rate of 2.5% is applicable to this situation.

 

Portfolio Return Beta Standard deviation
A 0.13 1.1 0.06
B 0.21 1.7 0.12
C 0.10 0.75 0.04
D 0.15 1.1 0.05
Market 0.11 1.0 0.045

 

(i) Compute the Sharpe measure and Treynor’s composite measure for portfolios A, B, C, D and the Market portfolio.

(5 marks)

(ii) Rank the portfolios using each of the above measures and critically evaluate the cause for any differences you find in the ranking issues or conflicts.

(2 marks)

(5 + 2 = 7 Marks)

(c) Most money managers have a portion of their compensation tied to the performance of the portfolios they manage. Explain how this arrangement can create an ethical dilemma for the manager.

(3 marks)

(3 + 7 + 3 = 13 Marks)

 

 

 

 

 

 

 

Question 3 (this question has three parts, (a), (b)& (c))

 

(a)Why do you think that private limited partnerships have come to dominate the venture capital industry? Can you think of any weakness this organisational form might have as a vehicle for financing  growth companies?

(3 marks)

(b) Lara Williams is interested in purchasing the ordinary shares of Nillahcoote Ltd which is currently priced at $38.45.The company is now on a fast-growth phase and expects its dividends to grow at a rate of 23 per cent for the next 4 years from the initial dividend. The dividends will then settle to a constant-growth rate of 6 per cent. The first dividend will be paid at the end of year 3 and be equal to $4.25. If the required rate of return is 17 per cent,

(i) What is the current value of the share?

(4 marks)

 

(ii) Is this a good buy at the current price? Why or Why not?

(1 marks)

(4 + 1 = 5 Marks)

(c) ABC company retains about half of its earnings each year and pays the rest as a dividend. Recently, the company paid a $3.25 dividend. Investors expect the company’s dividends to grow modestly in the future, about 4 per cent per year, and they require a 9 per cent return on ABC shares.

(i) Based on next year’s earnings forecast, what is ABC’s price/earnings (P/E) ratio?

(2 marks)

(ii) Retaining the original assumption of 4% growth, how would the price/earnings ratio change if investors became convinced that ABC was not very risky and were willing to accept a 7% return on their shares?

(3 marks)

(3 + 5 + 5= 13 Marks)

 

 

 

 

 

 

 

 

 

Question 4 (this question has three parts, (a), (b) & (c))

 

(a) What is market segmentation theory and briefly explain how market segmentation theory contradicts expectations theory?

(3 marks)

(b) Company ABC issued a 5-year bond 1 year ago with a face value of $1000 and a coupon rate of 8% per annum. The bond pays interest semi-annually, if the yield to maturity based on market pricing on this bond is 9%, what is the price of the bond? Is this bond trading at a premium, par or discount? Why?

(6 marks)

(c) If rates are expected to decrease in the future, should rational investors invest in long-term bonds or short-term bonds now (i.e., today)? Justify your response.

(3 marks)

(3 + 6 + 3 = 12 Marks)

 

 

 

 

 

 

END OF EXAMINATION