UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY 2018

BSc (Hons) Banking and Finance

BSc (Hons) Finance
PROGRAMME BSc (Hons) Finance (Minor: Law)
BSc (Hons) International Business Finance

Level II & Fee-Paying

MODULE NAME INVESTMENT AND SECURITY ANALYSIS

Wednesday
DATE 09 May 2018 MODULE CODE DFA2034Y (3)

TIME 13.30 – 16.30 Hours DURATION 3 Hours

NO. OF 7 NO. OF QUESTIONS 5

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 7 questions and 2 Sections.

Section A is Compulsory and carries 70 marks.
Answer ANY ONE (1) question from Section B. Each question carries 30
marks.
Total Marks Allocated: 100 Marks.
 Investment and Security Analysis – DFA2034Y (3)

SECTION A (COMPULSORY)

All questions are Compulsory.

Question 1

Mr Salah has invested Rs1 000 000 on the first of January 2018 in the following units
managed by the Klopp Investment Associates:

Table 1: Mr Salah’s portfolio

Fund A Fund B

Benchmarks All Equities Local Index Fixed Income Index

Correlation of the 0.75 0.50

investment with its
respective benchmark

Value of portfolio at 400000.00 600000.00

1January 2018

Number of Units in the 2000.00 1000.00

portfolio at 1 January 2018

Mr Firminio, the financial analyst of Klopp Investment Associates, reports the following
movement in the selected benchmarks of the respective investments:

Table 2: Movements of selected benchmarks

Jan 1 – 15 January 15 January – 31 Feb 1 – 15 February

2018 January 2018 2018

All Equities Local 5.00% 21.00% 2.00%

Index

Fixed Income Index 5.00% 9.00% 3.00%

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 Investment and Security Analysis – DFA2034Y (3)

Table 3 reports transactions carried out by Klopp Investment Associates on behalf of

Mr Salah.

Table 3: Transactions carried out

Jan 1 – 15 January 15 January – 31 Feb 1 – 15
2018 January 2018 February 2018

Fund A Buy 400 Units Buy 1500 units Sell 3200 Units

Fund B Buy 500 Units Sell 1000 Units Buy 850 Units

Required:

Calculate the value of each unit for each fund as at 15 February 2018.
[14 marks]

Question 2

Mr Pogba, a researcher living in Manchester, provides you with the following information
for two risky assets:

Assets Expected Return Risk

X 0.75 0.2

Y 0.7 0.4

The correlation between the asset returns is -0.35.

a) Given that an individual decides to invest 60% of his wealth in X and 40% in Y,
calculate the expected return and standard deviation of the individual’s portfolio.
[8 marks]

b) Calculate the Efficiency ratio of the individual assets. [4 marks]

c) Assuming that the risk free rate is 2%, calculate the Sharpe ratio of the individual
assets. [4 marks]

d) Calculate the investment proportions of the minimum-variance portfolio for the two
risky assets. [6 marks]

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 Investment and Security Analysis – DFA2034Y (3)

Question 3

You are given the following information:

Name UK Govt bonds 5 %, maturing 20 Oct 2018
Type: Annual coupons
Settlement date: 20 Oct 2014
Denomination: £1000
Yield to 7%
Maturity

(a) Calculate the Macaulay Duration. [4 marks]

(b) Find the PRICE VALUE OF A BASIS POINT (PVBP). [4 marks]

(c) What will be the theoretical price if the yield to maturity falls by 35 basis points?
[3 marks]

(d) Calculate the actual price of the bond if yield to maturity effectively falls by 35 basis
points. [3 marks]

Question 4

Consider the value of a bond portfolio consisting of one 10-year annual 9.25% coupon bond.
The yield to maturity is initially set at 8.60%. One can setup a bond portfolio management,
immunization which is a procedure to immunize a bond investment from subsequent
interest rate changes. In this respect, you are required to calculate the followings;

(a) The bond price in Year 3 following a 100 basis point increase in interest rates
[5 marks]
(b) The total amount of re-invested coupons in Year 3 following a 100 basis point
decrease in interest rates.
[5 marks]
(c) The Portfolio value in Year 3 following a 100 basis point increase in interest rates.
[5 marks]
(d) The total amount of re-invested coupons in Year 4 following a 25 basis point increase
in interest rates. [5 marks]

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 Investment and Security Analysis – DFA2034Y (3)

SECTION B

Answer ANY ONE (1) question from this section.

Question 5

“Indeed there are a number of active portfolio management strategies which simply aims at
outperforming the market. However, the benefits of active portfolio management may be
outweighed by some drawbacks.”

Discuss. [30 marks]

Question 6

“The bond market of a country can only be classified by the type of issuer”. Discuss with
supported examples. [30 marks]

Question 7

“With perfectly negatively correlated assets it is possible to create a two asset portfolio with
almost no risk”. Discuss with regards to the Portfolio Risk-Return Plots for Different
Weights. [30 marks]

END OF QUESTION PAPER

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