END-OF-SEMESTER EXAMINATION

SEMESTER 2, 2016/2017 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme : ISFIN/BACC/BBA/BECS Level of Study : 2–4

Time : 9.00 AM – 12.00 PM Date : 31.5.2017

Duration : 3Hr (s) 0 Min(s)

Course Code : FIN 4020 Section : 1, 2, 3

Course Title : INVESTMENT ANALYSIS

(This Question Paper Consists of 12 Printed Pages)

INSTRUCTION(S) TO CANDIDATES
DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

Section A 50 marks Answer all twenty-five (25) multiple choice questions in the MCQ
answer sheet provided.

Section B 50 marks Answer ALL FOUR (4) questions in the answer booklet provided.

ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS

OFFENCE WHICH MAY LEAD TO DISMISSAL

APPROVED BY:
PART A 50 marks Please answer all twenty-five (25) multiple choice
questions in the MCQ answer sheet.

1. Type of financial securities that matures in less than a year are classified as
A. money market securities
B. capital market securities
C. saving intermediaries
D. discounted intermediaries

2. Which of the followings is not the function of Securities Commission in Malaysia?

A. providing underwriting functions for firms.
B. supervising exchanges and clearing houses.
C. approving prospectus and bonds authorization
D. regulating takeovers and mergers

3. In today’s world of technology, even gambling activity is done with aid of statistics
and analysts. The best way to distinguish between gambling and investment will be the
in terms of its ______
A. capital loss
B. element of luck
C. profit
D. activity

4. In Malaysia, the Bursa Malaysia is an example of _____________.

A. capital market
B. exchange market
C. money market
D. secondary market

5. A price weighted index is an arithmetic mean of

A. future prices
B. current prices
C. quarter prices
D. none of these

6. A private placement offering is the ___________

A. initial offering of securities to the public.
B. offering of new securities to current shareholders on a pro-rata basis.
C. sale of newly issued shares of stock to the general public.
D. sale of securities directly to a select group of investors.

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7. Last week, Fininvest stock was selling at RM66 a share when Silvio sold 300 shares of
the stock short. Today Silvio bought 300 shares of the same stock at a price of
RM70.00 share to cover his position. Ignoring trading costs, what is the return on
Silvio's investment?
A. RM1,200
B. -RM400
C. RM400
D. -RM1,200

8. Information that can be found on the Internet at no cost includes

I. P/E ratios.
II. recent news about a company.
III. financial statements.
IV. future earnings and stock prices.

A. I and IV only
B. II and III only
C. I, II and III only
D. I, II, III and IV

9. Assume that the S&P 500 composite stock index closes at 1300. This means that
A. the average stock in the index is selling for $130.00.
B. an investor would have to pay $1,300 to purchase one share of each of the stocks
represented in the index.
C. The average value of a company reflected in the Index is up 30% from when the
Index was at 1000.
D. the share prices of the stocks in the index have risen 13 times since the 1941-1943
base period.

10. Which of the following represent unsystematic risks?

I. the president of a company suddenly resigns
II. the economy goes into a recessionary period
III. a company's product is recalled for defects
IV. the Federal Reserve unexpectedly changes interest rates

A. I, II and IV only
B. II and IV only
C. I and III only
D. I, II and III only

11. Superior portfolio is not basically a collection of individually

A. good portfolio
B. good investments
C. negative securities
D. all of answer correct

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12. When the Capital Asset Pricing Model is depicted graphically, the result is the
A. standard deviation line.
B. coefficient of variation line.
C. security market line.
D. alpha-beta line.

13. The Barbara Company has a beta of 1.09. By what percent will the rate of return on
the stock of Barbara Company increase if the market rate of return rises by 3%?
A. 1.91%
B. 2.75%
C. 3.27%
D. 4.09%

14. Which of the following are generally considered to be good investment guidelines?
I. Sell any security that has become riskier than anticipated.
II. Hold all securities until they produce the highest profit attainable.
III. Sell securities only if the profit can be offset with a tax loss.
IV. Sell any security that no longer meets the needs of the investor.

A. I and IV only
B. I and III only
C. I, II and IV only
D. I, II, III and IV

15. The following table pictures the ___________ types of asset allocation strategy when
facing with shifts in market condition

Category Initial Allocation (%) New Allocation (%)

Common stock 30 45
Bonds 40 40
Foreign Securities 30 15
Total Portfolio 100 100
A. flexible weightings
B. tactical weightings
C. portfolio weightings
D. fixed weightings

16. Unit trust can benefits from economic of scale because of ____________.
A. Portfolio diversification
B. Risk reduction
C. Large volume of trade
D. Higher rate of return

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17. Investors are generally well advised to avoid unit trust with
A. highly rated fund managers.
B. low fees and high tax efficiency.
C. consistently poor historical performance.
D. good performance in both up and down markets

18. Which of the following characteristics apply to closed-end unit trust?

I. unlimited number of outstanding shares
II. transactions between shareholders
III. Market prices may be higher or lower than NAV.
IV. Fund will repurchase shares at any time.

A. I and IV only
B. II and III only
C. I, II and III only
D. II, III and IV onlY

19. An efficient market reflects

A. only historical information.
B. only the information related to events that have already occurred.
C. all public information related to past events and announced future events.
D. all information including predictions about future information

20. Which one of the following statements about the random walk hypothesis is correct?
A. Stock price movements are predictable but only over short periods of time.
B. Random price movements support the weak form efficient market
hypothesis.
C. Stock prices follow repetitive patterns but the actions of individual investors
are random in nature.
D. Random price movements indicate that investors can earn abnormal profits on a
routine basis

21. Which of the following are included in technical analysis?

I. charting price movements
II. tracking trading volume
III. determining the investor's risk tolerance
IV. monitoring odd-lot trading

A. I and II only
B. II and III only
C. I, II and III.
D. I, II and IV

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22. Which of the following are used as indicators of a strong market in the future?
I. The advance-decline spread is increasing at a time when the advances outnumber
the declines.
II. The level of short interest is relatively high.
III. The net difference of odd-lot purchases minus odd-lot sales begins increasing.
IV. The trading volume increases in a declining market.

A. I and II only
B. III and IV only
C. I, II and III only
D. I, II, III and IV

23. Which one of the following statements concerning interest rates is correct?
A. A decrease in the money supply will cause interest rates to decline.
B. A federal budget surplus will cause interest rates to decline.
C. Economic expansions will cause interest rates to decline.
D. Rising interest rates in foreign countries will cause U.S. interest rates to decline.

24. Yield-to-call is
A. calculated using the time to call and the par value of the bond.
B. commonly used for bonds with deferred-call provisions.
C. based solely on the call premium and ignores interest payments.
D. always less than the yield-to-maturity.

25. A bond matures in 30 years, has a 20 year duration and a yield to maturity of 9.32%.
The change in the level of the market interest rate is 0.47%. The modified duration is
________ and the percentage change in price is ________.
A. 9.4 years, -.47%
B. 14. years, 4.7%
C. 18.29 years., -8.6%
D. 18.29 years., 8.6%

[Total : 50 marks]

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PART B 50 marks Please answer all four (4) questions in the answer booklet.

Question 1

Consider a world with only two risky assets, A and B, and a risk-free asset. The two risky
assets are in equal supply in the market, i.e., the market portfolio M = 0.5 A + 0.5 B . It is
known that r M = 11%, σ A = 20%, σ B = 40% and ρ AB = 0.75. The risk-free rate is 2%.
Assume CAPM holds.

(a) What is the beta for each stock?

(10 marks)

(b) What are the values for r A and r B ?

(5 marks)

[Total : 15 marks]
Question 2

The following table is the data summarizing performance of selected stocks in 2016.

Maxis Nestle KLK Genting FGV

Average return 25% 8% 36% 30% -22%
St. Deviation 30% 12% 40% 25% 20%
Correlations coefficients between:
Maxis 1.00 0.60 -0.45 -0.80 0.25
Nestle 0.60 1.00 -0.30 0.50 0.65
KLK -0.45 -0.30 1.00 -0.75 0.45
Genting -0.80 0.50 -0.75 1.00 0.10
FGV 0.25 0.65 0.45 0.10 1.00

(a) On the basis of risk-return trade-off, which stock is the most desirable?

(5 marks)

(b) What is the volatility of a portfolio with

i. equal amounts invested in Maxis and Nestle?
ii. 20% invested in KLK and 80% invested in Genting?
iii. 80% invested FGV and 20% invested in Maxis?

(10 marks)

[Total : 15 marks]
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Question 3

Available are three zero-coupon, RM1,000 face value bonds. All of these bonds are
initially priced using a 12-percent interest rate. Bond A matures one year from today,
bond B matures five years from today, and bond C matures 10 years from today.

(a) What is the current price of each bond?

(4.5 marks)

(b) If the market rate of interest decreases to 10%, what are the prices of these bonds?

(4.5 marks)

(c) Which bond experienced the greatest percentage change in prices?

(1 mark)

[Total : 10 marks]

Question 4

Kurnia Electronics Inc., expects to earn RM100 million per year in perpetuity if it does
not undertake any new projects. The firm has an opportunity that requires an investment
of RM15 million today and RM5 million in one year. The new investment will begin to
generate additional annual earnings of RM10 million two years from today in perpetuity.
The firm has 20 million shares of common stock outstanding, and the required rate of
return on the common stock is 15%.

(a) What is the price of a share of the stock if the firm does not undertake the new
project?

(2 marks)

(b) What is the value of the growth opportunities resulting from the new project?

(5 marks)

(c) What is the price of a share of the stock if the firm undertakes the new project?

(3 marks)

[Total : 10 marks]

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 FORMULA SHEET

Risk and return

(1 + nom) = (1 + real) (1 + inflation premium)

Ending price − Beginning price + Dividend received

HPR =
Beginning price

R g = [π (Return Relative]1/n - 1
where П (return relatives) is as follows:
(1 + HPR 1 ) (1+ HPR 2 ) …… (1 + HPR n )

R a = Σ HPR
n

σ2 = ∑ (k i – k avg ) 2
n–1

kˆ = Pr1 k 1 + Pr 2 k 2 +  + Prn k n
n
= ∑ Pri k i
i=1

CV = σ i
RA

E (R i ) = R F + ß (R M – R F ) ;

k i = k rf + ß i (k m – k rf ) ;

k port = k rf + ß port (k m – k rf )

β port = w 1 β 1 + w 2 β 2 + w 3 β 3 …+…w n β n

(E) k port = w 1 k 1 + w 2 k 2 + w 3 k 3 …+…w n k n

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 1
Cov(Ri,Rj) = T − 1 Σ(Ri - Ri)(Rj - Rj)

Cov ( Ri , R j )
SD ( Ri ) SD ( R j )
Corr(Ri,Rj) =

σ p = ω A2σ A2 + ω B2σ B2 + 2ω Aω B rABσ Aσ B

σ port = √ w 1 2 σ 1 2 + w 2 2 σ 2 2 + 2W 1 W 2 Cov 1 , 2

σ port = √ w 1 2 σ 1 2 + w 2 2 σ 2 2 + w 3 2 σ 3 2 + 2W 1 W 2 Cov 1 , 2 + 2W 1 W 3 Cov 1 , 3 +2W 2 W 3 Cov 2 , 3

σi β i = Cov (Stock, market ) / VarM

β i = Corr (R i , R M )×
σm

σ B 2 − ρ ABσ Aσ B
WA = 2
σ A + σ B 2 − 2 ρ ABσ Aσ B

Weight on asset B is = 1 – WA .

Bond Valuation

N
INT M
∑ (1 + k ) t
+
(1 + k d ) N
V B = t =1 d

N
INT Call Pr ice
∑ (1 + k
t =1 ) t
+
(1 + k d ) N
V Callable B = d

CY=Annual Coupon Interest ($) / P 0

CGY = (P 1 – P 0 ) / P 0

Market value of bonds = market price of bonds x no. of units of bonds outstanding

∑ C t (t)
D= (1+i)t D mod = D/(1 + YTM/m) %∆ P = - D mod x ∆ YTM
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 ∑ Ct
(1+i)t Convexity Effect = ½ x Price x Convexity x (∆ YTM)2

Stock Valuation

DY=DPS / P 0

CGY = (P 1 – P 0 ) / P 0

^ DPS
P0 =
k

^ DPS 0 (1 + g) DPS1
P0 = =
ks - g ks - g

P 0 = DPS 1 + DPS 2 +….…+ DPS n + P n

(1+k s ) (1+k s )2 (1+k s )n (1+k s )n

Where: P n = DPS n (1+g LT )

(k s –g LT )

FCF t = EBIT(1-T) + Depreciation – CAPEX + ∆(NOWC)

V C = FCF 1 / k a ; where FCF is a perpetuity

V C = FCF 1 / (k a - g); where growth rate of FCF, g, is constant

V C = FCF 1 + FCF 2 +…..+ FCF n + HV n

(1+k a ) (1+k a )2 (1+k a )n (1+k a )n

Where: HV n = FCF n (1+g LT )

(k a – g LT )

FCF = OCF – IOC;

Where: OCF = EBIT – Taxes + Depreciation
IOC = Δ Gross fixed assets + Δ Net operating working capital

V C = V S + V P +V D

EPS = (EBIT - Interest) (1 – tax rate)

No. of common stock outstanding

DPS 0 = Total dividend paid___

No. of common stock outstanding
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P/BVR = Market price per share
BV per share

P/NTA = Market price per share

Net tangible asset backing per share

PER = Market price per share

Earnings per share

Market capitalization = market price of shares x no. of common shares outstanding

g = (Retention rate) (ROE) = (1 – Payout rate) (ROE)

Warrants Valuation

C = S.N(d 1 ) - K e -rt . N(d 2 )

d 1 = In (S/K) + [r+( σ2/2)]T d 2 = d 1 - σ√ T W t = N/ (N/γ + M) x C

σ√ T

Performance Measurement

NAV current = market value of portfolio / no. of units

NAV e =NAV b + Investment income & Gain/(Loss) on Investment – Distributions of

income & realized gain

Annual return = [(Income & capital gain distributions) + End NAV – Begin NAV] /
Begin NAV

Value of investment = Initial Investment (1-Load) (1+return)n (1- recurring fee)n (1 - rear-
end)

α p = R p – [R F + (RM – R F ) ß p ) S = Rp – RF T = Rp - RF
σp ßp

RAP p = R F + (σ m / σ p ) x (R p - R F )

Performance Attribution Analysis

Allocation Effect = ∑ i [(W ai – W pi ) x (R pi – R p )]

Selection Effect = ∑ i [(W ai ) x (R ai – R pi )]

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