SCHOOL OF BUSINESS AND ECONOMICS
DEPARTMENT OF COMMERCE
END SEMESTER EXAMINATION
SEMESTER: MAY - AUGUST 2013
CODE: BUS 324X				UNIT – INVESTMENTS
INSTRUCTIONS
Answer ALL questions
Time 2½ hours
Question one
a.	Sorbonne Industries have a beta of 1.45. The risk free rate is 8% and the expected return on the market portfolio is 13%. The company currently pays a dividend of sh 2 per share and investors expect it to experience a growth of 10% in the near future. 
Required
1.	Using capital asset pricing model (CAPM), what is the required rate of return?		(3 marks)
2.	What would happen to the required rate of return if the beta was changed to 0.8, assuming all else remains the same?										(3 marks)

b.	Differentiate between a financial asset and a real asset using relevant examples.		(4 marks)

c.	Explain five reasons why people invest.							(10 marks)

d.	Compare and contrast fundamental and technical analysis.					(5 marks)
Question two
a.	The data below show percentage returns on the market NSE sensitivity index and the shares of Success Ltd for the past 5 years;
Year	Market return (%)	Jay ltd return (%)	
2008	15.2	19.1	
2009	-12.7	-32.4	
2010	43	53	
2011	-21.9	-8.6	
2012	-17.87	-12.95	

Required
Using the above information, calculate the beta of Success Ltd returns.			(10 marks)

b.	You have been invited to facilitate in a seminar on investment. One of the areas that you are expected to guide the participants is on the process they should follow when making investments. Explain the process that an investor should follow when investing.				(12 marks)

c.	Illustrate three ways in which investors can manage investment risks.			(3 marks)
Question three
a.	An ideal financial market is one which is informationally efficient. However this is not always the case as the level of efficiency in the financial market varies. Explain three forms of financial markets efficiency.											(6 marks)

b.	Briefly outline two methods that can be used to value bonds.					(4 marks)

c.	A sh 100,000 perpetual bond is currently selling at sh 106,000. The coupon rate of interest is sh 12.7% and the discount rate is 14% 
Required

Calculate;
1.	The value of the bond, should the bond be bought? 						(2 marks)
2.	Calculate its yield to maturity?								(3 marks)

d.	Write short notes on the following asset valuation models;
i.	Modern portfolio theory (MPT)								(2 marks)
ii.	Arbitrage pricing theory (APT)								(2 marks)

e.		Discuss three types of risks that affect investments in Kenya.				(6 marks)
Question four

a.	 Critically evaluate the relationship between risk and return. 				(5 marks)

b.	Neema, a manager at Upscale Holdings has approached you seeking advice on a product the company intends to introduce in the market. She is seeking advice on an investment life cycle. Using an appropriate diagram, explain to her the possible phases that an investment might go through from acquisition of the investment to final disposition.						(10 marks)
c.	A stock is currently worth Sh 600. You purchased the stock exactly three years ago for Sh 500. 

Required
i.	Calculate its holding period return? 						(2 marks)
ii.	Calculate its holding period yield?						(2 marks)
iii.	What is the annual holding period return?					(2 marks)
iv.	What is the annual holding period yield?					(2 marks)
v.	What would be the holding period return if the stock has received a dividend of sh 20 over the course of the third year? 						(2 marks)