A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

Birmingham Business School

BSc Accounting and Finance 07 22682 Advanced Finance Winter Examination 2012 Time Allo ed! 2 hours Ans er A"" Sections

Ans er A"" #uestions

All $uestions Sum to 100%

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Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

SE&T'() 1 Answer ALL parts of the question in this section

T(TA" 20 *A+,S

For parts a to p inc usi!e" write the etter correspon#in$ to %our answer c ear % in the wor&'oo&( 1( a( Tactica asset a ocation )TAA* is carrie# out throu$h+ a( Technica ana %sis of asset c asses( '( ,ntra-#a% tra#in$ that a#.usts the portfo io to un#er!a ue# assets( c( A 'e ief in efficient /ar&ets( #( Acti!e short an# /e#iu/-ter/ !ariations aroun# the on$-ter/ asset a ocation( )1(20 /ar&s*

'( 1hat is the /ost correct #escription a'out the e2pecte# return an# require# return for a sin$ e in!est/ent+ a( E2pecte# return is an equi i'riu/ con#ition an# require# return is a #isequi i'riu/ con#ition( '( The e2pecte# return is the a/ount of return esti/ate# '% an asset pricin$ /o#e 'ase# on the ris& of the in!est/ent an# the require# return is the a/ount of return the in!estor ca cu ates is achie!a' e( c( The e2pecte# return is the a/ount of return esti/ate# '% an asset pricin$ /o#e 'ase# on the ris& of the in!est/ent an# the require# return is the a/ount of return the in!estor recei!es( #( The e2pecte# return is the a/ount of return the in!estor ca cu ates is achie!a' e an# the require# return is the a/ount of return esti/ate# '% an asset pricin$ /o#e 'ase# on the ris& of the in!est/ent( )1(20 /ar&s*

c( 3ou wou # use a 'ootstrap technique to /o#e e2pecte# returns on an asset c ass if %ou+ a( 1ere on % intereste# in the /ean an# stan#ar# #e!iation of the sa/p e( '( 4e ie!e# there was itt e or no infor/ation in past returns( c( 4e ie!e# there was si$nificant infor/ation in past returns( #( 4e ie!e# there was si$nificant infor/ation 'oth in past returns an# the sequence in which the% occur( )1(20 /ar&s*
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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

#( Asset a ocation is east i&e % to he p+ a( 4eat inf ation( '( Re#uce ris&( c( 5i$nificant % increase e2pecte# return( #( 6ain e2posure to /ar&et ris& pre/iu/s( )1(20 /ar&s*

e( 1hich of the fo owin$ is not an assu/ption of the 7ar&owit8 portfo io /o#e + a( ,n!estors esti/ate ris& on the 'asis of the !aria'i it% of e2pecte# returns( '( ,n!estors are ris& a!erse( c( 7ar&et prices are efficient( #( ,n!estors thin& a'out in!est/ents in ter/s of their pro'a'i it% #istri'ution of e2pecte# returns o!er a particu ar future ti/e hori8on( )1(20 /ar&s*

f( The corre ation coefficient can a so 'e written as+ X ,Y = X ,Y / X 2 y 2 a( '( c( #(

X ,Y = X ,Y X 2 y 2
X ,Y =X ,Y / X y

X ,Y =X ,Y X y

( 1here9 X ,Y : the corre ation coefficient of securit% 2 an# %

X ,Y : the co!ariance of securit% 2 an# %

: the stan#ar# #e!iation 2 : the !ariance

)1(20 /ar&s*

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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

$( The capita asset pricin$ /o#e assu/es there are how /an% sources of asset returns+ a( One( '( Two( c( Three( #( Four( )1(20 /ar&s*

h( The capita asset pricin$ /o#e );A<7* su$$ests that+ a( A in!estors wi ho # so/e co/'ination of a 'roa# 'ase# /ar&et in#e2 an# the ris&-free asset( '( Less ris&-a!erse in!estors wi o!erwei$ht hi$h-'eta stoc&s re ati!e to the /ar&et portfo io( c( 7ore ris&-a!erse in!estors wi un#erwei$ht hi$h-'eta stoc&s re ati!e to the /ar&et portfo io( #( Less ris&-a!erse in!estors wi ho # ess of a 'roa# 'ase# in#e2 an# /ore of the ris&-free asset( )1(20 /ar&s*

i( The s ope of the re$ression of a securit%=s in!est/ent returns a$ainst the /ar&et=s returns is equa to+ a( ,#ios%ncratic ris&( '( The stan#ar# #e!iation( c( 4eta( #( The ris& pre/iu/( )1(20 /ar&s*

.( 1hich of the fo owin$ is not a factor in the /u tifactor ;A<7 asset pricin$ /o#e + a( Le!era$e( '( 7o/entu/( c( 5i8e( #( 4eta( )1(20 /ar&s*

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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

&( 1hich of the fo owin$ is east i&e % to 'e a factor in a fun#a/enta /u tifactor /o#e of asset pricin$+ a( >i!i#en# %ie #( '( 5toc& !o ati it%( c( ,nf ation( #( 7o/entu/( )1(20 /ar&s*

( 1hich of the fo owin$ /ost contra#icts the h%pothesis of wea& for/ stoc& /ar&et efficienc%+ a( O!er 20? of /utua fun#s outperfor/ the /ar&et on a!era$e( '( ,nsi#ers earn a'nor/a tra#in$ profits( c( E!er% @anuar%" the stoc& /ar&et earns a'nor/a returns( #( A /ost a the price response to si$nificant co/pan% news ten#s to occur in the first 1A /inutes of the announce/ent( )1(20 /ar&s*

/( 1hich of the fo owin$ is not true of an infor/ationa % efficient /ar&et+ a( <rices are i&e a casino( '( 3ou cannot 'eat the /ar&et so %ou /a% as we ho # the /ar&et portfo io( c( <urposefu stoc& se ection wi not %ie # a return that is statistica % #ifferent fro/ $uessin$ stoc& se ection( #( 7o!e/ents in the prices of shares are not pre#icta' e( )1(20 /ar&s*

n( Bei#i se s a stoc& an# then a!oi#s fo owin$ it in the /e#ia" afrai# that it /a% su'sequent % rise in price( 1hat 'eha!ioura characteristic is this consistent with+ a( ;hoice o!er oa#( '( ,nertia( c( Fear of re$ret( #( 7enta accountin$( )1(20 /ar&s* o( 4ar'er an# O#ean )2AAA* ran& portfo ios '% turno!er an# report that the #ifference in return 'etween the hi$hest an# owest turno!er portfo ios is 7? per %ear( The% attri'ute this to+
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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

a( '( c( #(

O!erconfi#ence( Fra/in$( Re$ret a!oi#ance( 5a/p e ne$ ect( )1(20 /ar&s*

p( For technica ana %sis tra#in$ to pro#uce after cost returns that are consistent % superior to a 'u%-an#-ho # strate$%" the /ar&et wou # ha!e to 'e+ a( Risin$( '( Fa in$( c( ,nefficient( #( Un#er!a ue#( )1(20 /ar&s*

SE&T'() 2 T(TA" -0 *A+,S 2( List three criteria use# in the se ection of ris& factors within /u ti factor asset price /o#e s+ )0 /ar&s*

3( List three techniques for constructin$ an in#e2 portfo io( )0 /ar&s*

C( 1hat is /eant '% the $ o'a e!e of s%ste/atic ris&" an# what factors /i$ht it inc u#e+ )D /ar&s*

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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

0( The ta' e 'e ow reports in#e2 !a ues an# returns on a UE ar$e co/pan% equit% in#e2( The stan#ar# #e!iation of the /onth % returns is A(ACC( The ris& free rate for the perio# of ti/e is 1?( 'ndex /end month closing +eturn .ear *onth values0 s >ec 1AA 2AAF @an F9 -A(11A Fe' 93 A(AC0 7ar 91 -A(A22 Apr 1A3 A(132 7a% 1AF A(AC9 @un 1AC -A(A37 @u 1A3 -A(A1A Au$ 1A0 A(A19 5ep 1AF A(A29 Oct 1A9 A(AA9 No! 11A A(AA9 2AA9 >ec 11C A(A3D @an 117 A(A2D Fe' 110 -A(A17 7ar 11D A(AA9 Apr 113 -A(A2D 7a% 11C A(AA9 @un 11D A(A1F @u 119 A(A2D Au$ 12A A(AAF 5ep 121 A(AAF 5tan#ar# #e!iation of /onth % returns : A(ACC" or C(C?

i( ii( iii(

;a cu ate the annua ise# return on the in#e2( 5how a wor&in$s( ;a cu ate the annua ise# stan#ar# #e!iation of returns( 5how a wor&in$s( ;a cu ate the 5harpe ratio( 5how a wor&in$s( )D /ar&s*

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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

D( A ris& /ana$er has co ecte# the fo owin$ historic return o'ser!ations9 -3?" -3?" -3?" -F?" 11?" 1D?" -2F? ;a cu ate C #escripti!e statistics of %our choosin$( )D /ar&s*

7( 7rs 7c>ona # !o unteers in a oca town /useu/( The /useu/ is quiet so she chats to another !o unteer" 7rs <otts( ,n con!ersation" 7rs <otts /entions that her ne2t #oor nei$h'our" 7r Tans'ur%" who is ;EO of Teaspoon 5u$ar <L;" has cancer( 7rs 7c>ona # te s her hus'an# that e!enin$" who #eci#es this cannot 'e $oo# for his in!est/ents in Teaspoon 5u$ar <L;( The ne2t /ornin$ he instructs his 'an& to se his entire ho #in$ in Teaspoon 5u$ar <L;( Three #a%s ater Teaspoon 5u$ar <L; announces that its ;EO wi step #own with i//e#iate effect #ue to hea th reasons( The price of Teaspoon 5u$ar=s shares fa s sharp % on the news( Appraise this situation in ter/s of the efficient /ar&et h%pothesis( )D /ar&s*

F( The ta' e 'e ow $i!es factors" e2posures an# returns for stoc& A( Stoc1 A Factors Ris& Free 5i8e Vo ati it% Le!era$e Va ue 6rowth i( ii( Factor Ex2osures A(72C -A(22 -A(ACC 1(01 -A(AC2 Factor +eturns A(A1? -1(0A? -A(0A? C(AA? -1(AA? 1(DA?

1hat is the e2pecte# return for stoc& A+ 5how a wor&in$s( ,n what currenc% is 'eta an# other factors ca cu ate#" an# wh%+ )D /ar&s*

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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

SE&T'() 3 Answer ALL questions in this section(

T(TA" -0 *A+,S

9( An ana %st has co ecte# the fo owin$ #ata for two equities" A an# 4( E2pecte# Return 5tan#ar# #e!iation of returns 4eta A 9? 2C? 1(C 4 7? 2A? 1(1

The e2pecte# return on the equit% /ar&et is D percent an# on Treasur% 4i s 1(0 percent( The stan#ar# #e!iation of the returns on the /ar&et is 1C percent( i( ii( iii( i!( !( Are equities A an# 4 un#erprice#" o!erprice# or correct % price# accor#in$ to the capita asset pricin$ /o#e + 5how a wor&in$s( On a chart" show the ocation of 'oth securities re ati!e to the 5ecurit% 7ar&et Line( Annotate the chart a2es( 1hat is the 5ecurit% 7ar&et Line an# wh% is it he pfu + 1hat is the e2pecte# return when 4eta is 8ero" an# wh%+ The stan#ar# #e!iation of 5toc& A=s returns chan$es to 32 percent( The corre ation coefficient 'etween the returns on 5toc& A an# the /ar&et is 7A percent( 1hat is the new 'eta for 5toc& A+ 5how a wor&in$s( E2p ain wh% the 'eta of 5toc& A /a% ha!e chan$e#( )2A /ar&s*

!i(

1A( 3our ana %st has co ecte# the fo owin$ #ata for wor # equit% an# wor # 'on# asset c asses9
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A27139

Calculators may be used in this examination provided they are not capable of being used to store alphabetical information other than hexadecimal numbers No Dictionary permitted in this examination

1or # Equit% !ariance stan#ar# #e!iation Annua ise# returns A(A2D A(1D F(DA?

European 4on# A(A1C A(12 3(FA?

;orre ation 1or # equit%9 European 'on# : A(3

The ana %st su$$ests the fo owin$ asset /i2es for constructin$ a portfo io 'ut ea!es %ou to #eci#e which is opti/a ( <ortfo io 1 2 3 i( ii( iii( i!( !( !i( 1or # Equit% 1ei$ht 7A? 0A? 3A? European 4on# 1ei$ht 3A? 0A? 7A?

1hich of the 3 asset /i2es has the owest portfo io ris&+ 5how a wor&in$s( On a chart with ris& /easure# on the 2-a2is an# return /easure# on the %a2is" #raw the ine that shows the #ifferent asset /i2es" an# 1AA? European 'on#s an# 1AA? wor # equities( La'e the part of the ine which represents the efficient frontier( Annotate %our answer( E2p ain what the efficient frontier te s us as in!estors+ ,f the ris& free rate is 3?" #raw the capita /ar&et ine on the chart( >escri'e the portfo io co/'ination %ou wou # se ect as the /ar&et portfo io( @ustif% %our answer( >escri'e the asset /i2 that a hi$h ris& to erance an# a ow ris& to erance in!estor wou # se ect+ )2A /ar&s*

End o4 Exam 2a2er

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A27139

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Formulae
2 2 2 2 2 p = wA A + wB B + 2 wA wB AB A, B

1here9 2 : the !ariance w : the wei$ht : the stan#ar# #e!iation

: the corre ation coefficient

(rp - rf )/ p
1here9 rp : the return on the portfo io rf : the ris& free rate p : the stan#ar# #e!iation

i , M i / M

1here9 : the corre ation coefficient i : the stan#ar# #e!iation of stoc& i 7 : the stan#ar# #e!iation of portfo io return

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