M COM 2ND A/2016

INVESTMENT & PORTFOILO MANAGEMENT

Q:1 Define investment and explain various investment

instrument (opportunities) available for investment in
Pakistan

Q:2 Explain the difference between following concepts

Forward contract Vs Future contract
Long position Vs short position
Bearish market Vs Bullish market
Put option Vs Call option
Security market line Vs Capital market line

Q:3 Explain the following concepts

Market portfolio
International diversification
Short sale
Yield to maturity
Assets allocation decision
Margin call
Efficient portfolio
Diversifiable risk
Mortgage backed securities
Market risk

Q:4 You have been asked for your advice in selecting a

portfolio of assets on the basis of return and risk
analysis by using following data
 HISTORICAL RETURNS
Years Asset A Asset B Asset C
2013 10% 14% 10%
2014 12% 12% 10%
2015 14% 10% 10%

You have been told that you can create two portfolio-
one consisting of A and B and the other consisting of
assets A and C- by investing equal proportion of funds in
each assets
I. Identify risky and risk free asset by changing the
variation in return of asset A,B and C over the
period of three years
II. What is direction of correlation between asset A and
Bs return asset A and Cs return ? Answer just by
observing the co-moment of return
III. What is the expected return of each portfolio?
IV. What is the standard deviation and coefficient of
variance ( CV ) of each portfolio?
V. Which portfolio of asset do you recommend to risk
averse investor ?Explain

Q:5 Part ( A ) Briefly explain the procedure that is

followed by investor while purchasing and selling
Securities in secondary market

Part ( B ) From the following calculate expected risk (

standard deviation and coefficient of variation ) of a
portfolio that consists of three stocks i.e M, N and O
Assume investment strategy is to invest equally in three
stocks
M-Stock N-Stock O-Stock
Expected return 12% 18% 16%
Expected standard 11% 20% 14%
Deviation
Coefficient of correlation between M , N and O is -0.70
between M and OS return is 0.30 and between N &O IS
Zero

Part ( C ) Mr. Abdullah was short 100 shares of Hi-Noon

Laboratories Ltd on October 22 , 2016 and borrowed for
short sale at Rs 100 shares per share his broker had a
50% initial margin and a 40% maintenance margin on
short sales
Required
I. Calculate the value of stock borrowed that was sold
short
II. Draw the balance sheet Mr. Abdullah account to
indicate the position of his account with broker on
October 22 , 2016

Q:7 Part ( A ) List major sources of information used

by security analyst in evaluating common stock ?

Part ( B ) ABC index was established on December 15,

2015 and stated working on January 1 , 2016 with
1000 points. Three companies namely A, B and C were
initially listed on it. This is a capitalization weighted
stock index and January 1, 2016 is its base day .
Consider the trading information of company A, B and C
in the following data

Trading day Company Shares outstanding Market price

Jan1,16 A 2.0 million Rs 200

B 1.5 million Rs 100
C 1.0 million Rs 150
Jan2,16 A 2.0 million Rs 210
 B 1.5million Rs105
C 1.0 million Rs 140
Jan3,16 A 2million Rs 205
B 1.5million Rs 120
C 1.0million Rs145
I. Assume January 1 , 2016 as base day and compute
the index value on January , 1 and January 2 , 2016
II. A-Company has declared Cash dividend per share
and if January 3, 2016is the book closure day. Then
compute the index value January 3, 2016
III. Comment on the value of index computed in part I
and ii above

Q:6 Explain the following diagram of security market

line ( SML ) and answer the questions

Rm is the market return. Rt is the required return on

assets Z and Rf is the risk free asset bRF . is beta
for risk free asset ,bm is beta for market and bz is
beta for asset Z
I. If overall stock market becomes more risk averse
and market prmium is increased by 3% What will be
its effect on the position of SML , return on asset Z
and return on risk free asset ?
 II. If inflation on the economy is expected to fall by
2%.What will be its effects on the position of SML
,required return of asset Z and return on risk free
asset ?
III. If beta of asset Z increased by 1.5 to 2 then what be
its impact on the required return of asset Z .Liast
possible reasons for increase in the beta of asset Z