financial accounting

School of Business

EXAMINATION

Sample Final Examinations, Semester 2, 2020

This paper is for St Lucia Campus students.

Writing time: 120 minutes

Buffer: 30 minutes

Exam Conditions:

This is an Online Central Examination

This is an Open Book Examination - all materials permitted

Writing time is 12 minutes, whereas, 30 minutes buffer is for students to upload completed exam to Blackboard taking into account any technical issues like slow internet etc.

This examination paper will be released to the Library

Question 1

Two stocks (A and B) have a covariance of 23. When combined in equal proportions into portfolio Y, the variance of the portfolio is 30.25. Stock A has a variance twice that of Stock B. Another portfolio (X) has an expected return of 17% and a variance of 50.

Additional Information

The expected return on the market is 15% and the risk free rate is 7%

Covariance (A,Market) = 22 and Covariance (B,Market) = 15.5

Variance of the Market is 15

Required:

a) Variance of Stock A and the variance of Stock B.

b) The correlation of Stock A with Stock B

c) Is portfolio Y efficient? Explain.

d) What is the expected return of portfolio Y?

e) Without doing any calculations, is portfolio X efficient? Explain.

f) What are the characteristics of an efficient portfolio? List at least 3 or 4.

Question 2

a) Your portfolio contains 60% of Bond I and 40% of Bond II. Details of the two bonds are given below:

I. 10-year zero coupon government bond, par value $1000, current price = $613.91

II. 10-year zero coupon corporate bond, par value $1000, default premium= 2%

Find the price of Bond II.

Find the convexity of Bond I.

Question 3

You have just secured a portfolio analyst job with a major equity fund. You have found it difficult to focus on more than 30 stocks which have been drawn from several industries. A client has come to you and said to forget about the 30 stocks and concentrate solely on 5 stocks. You need to respond to the client. In your response you must only respond within the context of modern portfolio theory.

Required:

a) Contrast the concepts of systematic risk and firm-specific risk and give examples of each type of risk.

b) Critique the client suggestion. Discuss what factors are most important in selecting stocks for a portfolio.

END OF EXAMINATION

Formula Sheet

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( ) ( ) ú û ù ê ë é - ´ + + ´ + ´ + ú û ù ê ë é + + = å = ) ( 1 ) 1 ( ) 1 ( 1 ) 1 ( 0 1 0 0 l e n e l n s n t t e t s g k k g g D k g D V	( ) ( ) l e l s l e l g k g g H D g k g D V - - ´ ´ + - + ´ = ) ( ) 1 ( 0 0 0
( ) ( ) ( ) ( ) ( ) ( ) n e e e e n n t t e t n e e e e n n e n e e k k ROE E k k E k D k k ROE E k k E k D k D k D E + ÷ ÷ ø ö ç ç è æ - + + + = + ÷ ÷ ø ö ç ç è æ - + + + + + + + + = + = + å 1 1 ) ( year each reinvested Dollars 1 1 1 ) ( year each reinvested Dollars 1 ... 1 1 1 1 1 2 2 1 1
g WACC g FCFF g WACC FCFF V - + = - = ) 1 ( 0 1
( ) V D k V E k WACC d e t - + = 1	( ) ( ) n n n t t t WACC g WACC FCFF WACC FCFF V + - + + = + = å 1 ) 1 ( 1 1
1 1 ) ( ) ( - - ´ - = ´ - = t e t e t t B k ROE B k E RI	( ) ( ) å å ¥ = - ¥ = + ´ - + = + + = 1 1 0 1 0 1 1 t t e t e t t t e t e k B k E B k RI B V
( ) ( ) ( ) ( ) n n n t n t t r Par r r C P r Par r C P + + ú ú û ù ê ê ë é + - = + + + = - = å 1 1 1 1 1 1	2 Par value Price maturity to Term Price - Par value payment Coupon base investment Average year per loss or gain Capital year per Income YTM e Approximat + + = + =
1 1 ) 1 ( ) 1 ( ) 1 ( - - + + = + n n n n n y y f	t w t D T t å = ´ = 1 ( ) 1 Price t t t CFy w + =
y V V V D D - = + - 2 / ) ( 0
å = ´ = m j j i j i r p r E 1 , ) (
()PfPrr	()PfPrr
2*PMMrr	ER b p p R R IR s - =

Venue ____________________

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