Professional Documents
Culture Documents
DURATION: 3 HOURS
INSTRUCTIONS TO CANDIDATES
a. Define a primary and secondary market for securities and discuss how they differ.
Discuss why the primary market is dependent on the secondary market.[6]
b. Give an example of an initial public offering (IPO) in the primary market. Give an
example of a seasoned equity issue in the primary market. Discuss which would
involve greater risk to the buyer. [5]
c. Briefly define each of the following terms and give an example:
i. Market order
ii. Limit order
iii. Short sale
iv. Stop loss order [ 4 x 1 mark each]
[ total 15 marks ]
Question 2
Given the variance – covariance matrix for the stocks of CBZ, EWZ, Delta respectively
Required
a) Determine the standard deviation of CBZ, EWZ, and Delta counters? [ 6 marks]
b) Given the weight of CBZ as 20%, EWZ as 50% and Delta as 30% and the available
data calculate the variance and standard deviation of the portfolio.
[ 9 marks]
[Total 15 marks]
Question 3
A pension fund manager is considering three mutual funds. The first is a stock
fund, the second is a long-term corporate bond fund, and the third is a T-Bill
money market fund that yields a rate of 8%. The probability distribution of the
risky fund is as follows
Expected Return
% Standard deviation %
30
15
a. Solve numerically for the proportions of each asset and for the expected return
and standard deviation of the optimal risky portfolio.(10)
b. Find the reward to variability ratio of the CAL supported by T-Bills and
Portfolio P. (2)
[ Total 20 Marks]
Question 4
A portfolio has an expected rate of return of 20% and standard deviation of 20%. Bills
offer a sure rate of return of 10%. Which investment alternative will be chosen by an
investor whose A=3? What if A=10? [5 Marks]
Question 5
Estimate the index model and the total variance when given the following information
about the 6 month performance of the Airplus Corporation and the ZSE Index below.
Comment on the significance of your results and illustrate your answer with a Security
Characteristic Line (SCL). [20]
MARCH 12 9 7.4
APRIL 15 13.4 11
MAY 16 11 12
Question 6
a. Briefly explain the concept of the efficient market hypothesis (EMH) and each of
its three forms—weak, semi strong, and strong—and briefly discuss the degree to
which existing empirical evidence supports each of the three forms of the EMH. [12]
b. Briefly discuss the implications of the efficient market hypothesis for investment
policy as it applies to:
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