Question 1 (10 marks):
a. Why are money market securities sometimes referred to as “cash equivalents”?
b. Give an example of two financial intermediaries and explain how they act as a bridge between
small investors and large capital markets or corporations.
Question 2 (10 marks):
a. The Closed Fund is a closed-end investment company with a portfolio currently worth
$200 million. It has liabilities of $3 million and 5 million shares outstanding. What is the
NAV of the fund?
b. Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV
equaled $12.10. The fund paid year-end distributions of income and capital gains of
$1.50. What was the (pretax) rate of return to an investor in the fund?
Question 3 (5 marks): Consider a portfolio that offers an expected rate of return of 11% and a
standard deviation of 18%. T-bills offer a risk-free 6% rate of return. What is the maximum level
of risk aversion for which the risky portfolio is still preferred to T-bills?
Question 4 (15 marks):
You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of
28%. The T-bill rate is 9%. Your client chooses to invest 70% of a portfolio in your fund and 30%
in an essentially risk- free money market fund.
a. What is the expected value and standard deviation of the rate of return on his portfolio?
b. Without calculation what can you say about reward-to-volatility (Sharpe) ratio (S) of
your risky portfolio? Your client’s?
c. Your client’s degree of risk aversion is A = 3.5. What proportion, y, of the total investment
should be invested in your fund?
Question 5 (10 marks)
Stock A B C
Standard Deviation (%) 20 30 30
Correlations of Returns
Stock A B C
A 1.00 -0.80 0.9
B 1.00 0.10
C 1.00
Using only the information provided in the tables, and given a choice between a portfolio made up
of equal amounts of stocks A and B or a portfolio made up of equal amounts of stocks A and C,
which portfolio would you recommend? Justify your choice.
Question 6 (10 marks)
Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20%
for 3 years and then at 5% thereafter. The required return for Deployment Specialists is 8.5%.
a. Calculate dividends of year 1, 2, and 3
b. What is the intrinsic value of its stock?
Question 7: (10 marks)
Find the duration of a 8% coupon bond making annual coupon payments if it has three years until
maturity and a yield to maturity of 9%.
Question 8 (5 marks)
Tri-coat Paints has a current market value of $44 per share with expected earning at the end of the
year of $3.96. What is the present value of its growth opportunities (PVGO) if the required return
is 9%?
Question 9: (5 marks)
A bond makes semi-annual interest payments at a coupon rate of 4.8% per year on 15 January and
15 July each year. What is the accrued interest (per $1,000 of face value) if the bond changes hands
on 15 March 2020? (Give your answer to 3 decimal places.) Convention: 30/360
Investment & Portfolio Management – Page 1
Question 10 (5 marks)
In what case, the PVGO equal to zero? Explain.
Question 11: (10 marks)
Currently, in the market, you observe two call options for stock A. One option has a strike price
of $100, and the other has a strike price of $105. Both options have the same premium. Show a
strategy to exploit this mispricing and profit from it.
Question 12: (5 marks)
FINALE Corp’s share price and dividend history are as follows:
Beginning-of-year price Dividend paid at year-end
2016 $100 $4
2017 $110 $4
2018 $90 $4
2019 $95 $4
An investor buys three shares of FINALE Corp’s at the beginning of 2016, buys another two shares
at the beginning of 2017, sells one share at the beginning of 2018 and sells all four remaining
shares at the beginning of 2019. What are the arithmetic and geometric average time-weighted
rates of return?
Investment & Portfolio Management – Page 2
FORMULA SHEET
𝐸 (𝑟! ) = 𝑤" 𝐸 (𝑟" ) + 𝑤# 𝐸(𝑟# )
𝜎!$ = (𝑤" 𝜎" )$ + (𝑤# 𝜎# )$ + 2(𝑤" 𝑤# )(𝜎" 𝜎# )𝜌"#
𝐶𝑜𝑣(𝑟% , 𝑟' )
𝜌%,' =
𝜎% ∗ 𝜎'
𝑅% = 𝑅( + 𝛽% ∗ (𝑅) − 𝑅( )
𝐷+
𝑃* =
𝑟, − 𝑔
𝐸+
𝑃* = + 𝑃𝑉𝐺𝑂
𝑟,
1 1 𝑃𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑢𝑝𝑜𝑛 × G1 − H +
𝑌𝑇𝑀 (1 + 𝑌𝑇𝑀)- (1 + 𝑌𝑇𝑀)-
-
𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 (𝐷) = L 𝑡 × 𝑤.
./+
𝐷 ∗ = 𝐷N(1 + 𝑦)
Δ𝑃
= −𝐷 ∗ × Δ𝑦
𝑃
-
1 𝐶𝐹.
𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 = L (𝑡 $ + 𝑡)
𝑃 × (1 + 𝑦) $ (1 + 𝑦 ) .
./+
Δ𝑃
= −𝐷 ∗ × Δ𝑦 + 1N2 × 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 × Δ𝑦 $
𝑃
𝑋
+ 𝐶 = 𝑃 + 𝑆*
(1 + 𝑟( )-
𝐹* = 𝑆* (1 + 𝑟 − 𝑑)-
𝐸 (𝑟! ) − 𝑟(
𝑆ℎ𝑎𝑟𝑝𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝜎!
𝛼! = 𝑟̅! − W𝑟̅( + 𝛽! (𝑟̅) − 𝑟̅( )X
𝛼!
𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 =
𝜎(𝑒! )
𝑟! − 𝑟(
𝑇=
𝛽
Investment & Portfolio Management – Page 3
