Fundamentals of Investment

bbsfourth year

This course deals with the investment environment, principles, and process of investing in securities. It also provides students opportunities to learn techniques for analyzing securities and forming portfolios.

Chapter Wise Notes Question Banks Syllabus Chapter Wise Questions

Faculty of Management

2080

Bachelor of Business Studies

Fundamentals of Investment

FIN 253

Full Marks: 100

Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.

"Section A"

Brief Answer Questions : Attempt All questions .

[10*2=20]

Distinguish between investment and speculation.

[2]

Who is an issue manager? List any three functions of issue manager.

[2]

What is long purchase? Illustrate with an example.

[2]

What is the expected return on a stock with a beta of 1.15, a market risk premium of 6 percent and a risk free return of 5 percent?

[2]

Distinguish between cash dividend and stock dividend.

[2]

Assume a share of stock is selling at Rs. 200 per share. You buy 100 shares of stock on margin today. If the initial margin is 60 percent and maintenance margin is 40 percent, compute the margin call price.

[2]

A well-known company has total assets of Rs. 400 million, total debt of Rs. 160 million, and Rs. 40 million of 10 percent preferred stock outstanding. If the company has 10,00,000 shares of common stock outstanding, what is the book value per share?

[2]

Explain why bank discount yield is lower than bond equivalent yield.

[2]

A bond has a Macaulay duration equal to 6 years and a yield to maturity of 9 percent. What is the percentage change in price of a bond if yield to maturity rises to 9.5 percent?

[2]

10.

Write the meaning of derivative securities.

[2]

"Section B"

Descriptive Answer Questions : Attempt any FIVE questions .

[5*10=50 ]

What is investment? Explain different types of investments.

[10]

Assume that you sell short 500 shares of Nabil stock for Rs. 400 per share. The initial margin and maintenance margin requirements are 50 percent and 30 percent respectively.

a. What is the initial value of debt and equity in your margin account?

b. If the stock price increases to Rs. 450 per share, what will be the value of debt and equity in your margin account?

c. Do you receive a margin call if the price of stock increases to Rs. 450?

d. What will your rate of return be if Nabil stock is trading at Rs. 380?

[10]

Consider the following stock price and no. of shares information:

Stock	No. of shares outstanding	Stock prices at the end of 2022 (Rs)	Stock prices at the end of 2023 (Rs)
A	2,000	400	380
B	1,000	150	165
C	5,000	700	720

a. Construct a price-weighted index for 2022 and 2023 and compute the percentage change in series for the period from 2022 to 2023.

b. Construct a market value weighted index 2023 and compute the percentage change in the period from 2022 to 2023.

c. Construct equally-weighted index for 2023 and compute the percentage change in series for the period from 2022 and 2023.

d. Briefly discuss the difference in the results for three stock indexes.

[10]

Consider the following subjective probability distribution of returns on Stock X and Stock Y for a potential investment.

State of economy	Probability	Estimated rate of returns
		Stock X	Stock Y
Strong growth	0.1	-10%	20%
Moderate growth	0.4	5%	15%
Weak growth	0.4	15%	10%
Recession	0.1	30%	-10%

a. Which stock would you select on the basis of expected [return]?

b. Calculate standard deviation of the returns of Stock X and S[tock Y]. What purpose does standard deviation service for an investor?

c. Calculate coefficient of variation for each stock. What purpose does coefficient of variation serve?

[10]

(a) City fund had average daily assets of Rs. 1800 million in the past year. The Fund sold Rs. 600 million and purchased Rs. 500 million worth of stock during the year.

i) What was the portfolio turnover rate?

ii) If City Fund's expense ratio was 1.2 percent and the management fee was 0.8 percent, what were the total fees paid to the fund's investment managers during the year? What were the other administrative expenses?

(b) Assume the average return on portfolio P was 35 percent and that of the market was 28 percent. The beta coefficient of portfolio P was 1.2 and that of the market was 1.0. Standard deviation of portfolio P and the market was 42 percent and 30 percent respectively. The T-bill rate during the period was 6 percent.

i) Calculate the Treynor and Sharpe measures for both portfolio P and the market.

ii) Briefly explain whether portfolio P underperformed, equated, or outperformed the market. Why these two measures may produce conflicting results?

[10]

Assume that risk free rate is currently 6 percent. The expected return on the average stocks in the market is 12 percent. You are evaluating the prospect of ABC stock which is currently paying Rs 20 per share in dividend. The stock has a beta coefficient of 1.5. Currently, the aggressive marketing campaign launched by the company will enhance its earnings significantly. As a result the growth rate of dividends is expected to be 20 percent for the next two year. After this period, the growth rate is expected to slow down to a normal rate of 5 percent indefinitely.

a. Calculate the required rate of return on ABC stock.

b. What is the expected dividends per share on ABC stock for next two years?

c. At what price the stock is expected to sell at the end of year 2?

d. What is the intrinsic value of this stock today?

e. If the stock is currently trading in Rs. 260 per share, is the stock underpriced or overpriced? Would you prefer to buy the stock?

[10]

"Section C"

Analytical Answer Questions : Attempt any TWO questions .

[2*15=30 ]

What is fixed income security? Explain different types of fixed income securities.

[15]

You have been provided the following returns data of three assets for your advice in selecting a portfolio of assets:

Year	Rate of return: Asset A	Asset B	Asset C
2019	10%	18%	10%
2020	12%	16%	12%
2021	14%	14%	14%
2022	16%	12%	16%
2023	18%	10%	16%

You have been told that you can create two portfolios - one consisting of assets A and B, and other consisting of assets A and C - by investing equal proportions in each of the two component assets.

a. Calculate average return and standard deviation for each of the three assets.

b. Calculate the covariance between the returns of assets A and B, and assets A and C.

c. Calculate the return and standard deviation of the portfolios consisting of assets A and B, and assets A and C.

d. Which portfolio do you recommend? Why?

[15]

Assume that you are an aggressive bond trader and therefore, want to speculate on interest rate swing. Market interest rates are currently 9 percent, but you expect the interest rates to fall to 7 percent within a year. You are thinking of buying either a 25-year, zero coupon bond or a 20-year, 5.5 percent bond. Both bonds have Rs. 1000 par values and carry same agency rating.

a. If you want to maximize capital gain income, which of the two bonds should you select? Show your calculation.

b. If you want to maximize total return from your investment, which of the two bonds should you select?

c. Why did one bond provide better capital gains than the other?

[15]

(a) City fund had average daily assets of Rs. 1800 million in the past year. The Fund sold Rs. 600 million and purchased Rs. 500 million worth of stock during the year.

i) What was the portfolio turnover rate?

i) Calculate the Treynor and Sharpe measures for both portfolio P and the market.

ii) Briefly explain whether portfolio P underperformed, equated, or outperformed the market. Why these two measures may produce conflicting results?