Exam: Investments and Financial Markets - PRIFYSGOL Aberystwyth University, May/June 2009, Exams of Investment Management and Portfolio Theory

Download Exam: Investments and Financial Markets - PRIFYSGOL Aberystwyth University, May/June 2009 and more Exams Investment Management and Portfolio Theory in PDF only on Docsity! 1 PRIFYSGOL ABERYSTWYTH UNIVERSITY DEGREE EXAMINATIONS – May/June 2009 ARHOLIADAU GRADD – Mai/Mehefin 2009 SEMESTER 2 AC30420 – INVESTMENTS Time Allowed: THREE hours Answer THREE questions Any necessary assumptions introduced in answering a question are to be stated. Workings should be submitted for all questions requiring calculations. Casio FX83ES or FX85ES calculators only may be used. Some formulae: σ 2 p = x 2 1σ 2 1+ x 2 2σ 2 2 + 2x1x2ρ1,2σ1σ2 E[Rp] = RF + [(E[RM]RF) / σM]σp E[Ri] = RF + (E[RM] RF)βi βi = Cov (Ri, RM) / σ 2 M ρx,y = Cov (x, y) / (σx σy) TURN OVER 2 Question 1. a) Explain the properties of arithmetic and logarithmic returns. (20 marks) b) Explain how the availability of more than two risky assets and a risk-free asset enables the ‘capital asset pricing model’ (CAPM) representation of risk-return optimisation. (40 marks) c) Analyse the application of the CAPM in the context of the ‘security market line’ and the ‘characteristic line’. (40 marks) (Total 100 marks) Question 2. a) Analyse the payoff structures of call and put options. (20 marks) b) Explain the principles of the binomial method for option pricing. (50 marks) c) Using an example, explain how both parties can achieve reduced borrowing costs in an interest rate swap. (30 marks) (Total 100 marks) Question 3. a) Consider the following three bonds: Bond 1 Bond 2 Bond 3 Par Value £1,000 £1,000 £1,000 Coupon 9% Zero Zero Time to Maturity 3 years 3 years 4 years Required Yield 11% 11% 11% i) Calculate the present values of each bond. (25 marks) ii) Calculate the Macaulay Duration and Modified Duration for each bond.(25 marks) iii) Explain how investors use information on duration in managing bond portfolios. (25 marks) b) Discuss three viewpoints on the shape of yield curves (the term structure of interest rates). (25 marks) (Total 100 marks) TURN OVER