MULTIMEDIA STUDENT IDENTIFICATION NO

UNIVERSITY I I I 1 I I I I I I

MULTIMEDIA UNIVERSITY

THIRD TRIMESTER FINAL EXAMINATION, 2009/2010 SESSION

BFN2114 - INVESTMENT (All section / Groups)

6 May 2010 9.00 a m - 11.00 am

(2 Hours)

INSTRUCTION TO STUDENT

1. This Question paper consists of THREE pages with FIVE structured questions only.

2. Please answer all the questions.

3. Please print all your answers in the Answer Booklet provided.

BFN2U4 INVESTMENT M A Y 2010

QUESTION 1 (10 MARKS)

a. Why do most investor hold diversified portfolio? (5 marks)

b. What is covariance, and why is it important portfolio theory? (5 marks)

QUESTION 2 (20 MARKS)

The following are the monthly rates of return for Madison Corp. and for General Electric during a six-month period.

Month Madison Corp. General Electric 1 -0.04 0.07

2 0.06 -0.02 3 -0.07 -0.10 4 0.12 0.15 5 -0.02 -0.06 6 0.05 0.02

(i) Compute the following:

a. Average monthly rate of return for each stock. (3 marks)

b. Standard deviation of returns for each stock. (3 marks)

c. Covariance between the rates of return. (3 marks)

d. The correlation coefficient between the rates of return. (3 marks)

(ii) What level of correlation did you expect? How did your expectation compare with the computed correlations? Would these two stocks offer a good chance for diversification? Why or Why not?

(8 marks)

QUESTION 3 (30 MARKS)

The following are monthly percentage price changes for four market indexes.

Continued...

MN/K page 1 of 3

BFN 2114 INVESTMENT M A Y 2010

Month DJIA S&P 500 Russell 2000 Nikkei 1 0.03 0.02 0.04 0.04 2 0.07 0.06 0.10 -0.02 3 -0.02 -0.01 -0.04 0.07 4 0.01 0.03 0.03 0.02 5 0.05 0.04 0.11 0.02 6 -0.06 -0.04 -0.08 0.06

Compute the following.

a. Average monthly rate of return for each index. (5 marks)

b. Standard deviation for each index. (5 marks)

c. Covariance between the rates of return for the following indexes: DJIA and S&P 500, S&P 500 and Russell 2000, S&P 500 and Nikkei, Russell 2000 and Nikkei.

(7 marks)

d. The correlation coefficients for the same four combinations. (5 marks)

e. Using the answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S& P and the Russell 2000 and (2) the S&P and the Nikkei. Discuss the two portfolios.

(8 marks)

QUESTION 4 (20 MARKS)

Discuss the rationale for expecting an efficient capital market. What factor would you look for to differentiate the market efficiency for two stocks?

QUESTION 5 (20 MARKS)

Four years ago your firm issued RM1, 000 pars, twenty-five year bonds, with a 7 percent coupon rate and a 10 percent call premium.

a. If these bonds are now called, what is the approximate yield to call for the investors who originally purchased them at par?

(7 marks) b. If the bonds are now called, what is the actual yield to call for the investors who

originally purchased them at par? Quote it both on a nominal and an effective annual yield. (7 marks)

Continued...

MN/K page 2 of 3

c. If the current interest rate is 5% and the bonds were not callable, at what price would each bond sell?

(6 marks)

TOTAL: 100 MARKS END OF PAGE