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UNIVERSITY OF ESWATINI
DEPARTMENT OF ACCOUNTING AND FINANCE
ASSIGNMENT PAPER - ACADEMIC YEAR 2020/2021
ASSIGNMENT TWO (2)
PROGRAMME OF STUDY : Master of Business Administration
YEAR OF STUDY : Year 1 (Part Time)
TITLE OF THE PAPER : Investment Analysis and Portfolio Management
COURSE CODE : ACF 624
LECTURER : Dr H.Matsongoni
DUE DATE : 19 September 2021
INSTRUCTIONS
1. There are TWO (2) questions, ANSWER ALL.
2. Begin the solution to each question on a new page.
3. The marks awarded for a question are indicated at the end of each question.
4. Show your necessary workings.
NOTE: You are reminded that in assessing your work, account will be taken of accuracy of the language
and the general quality of expression, together with layout and presentation of your answer.
SPECIAL REQUIREMENT: FINANCIAL / SCIENTIFIC CALCULATOR
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ANSWER ALLTHE QUESTIONS
QUESTION ONE XXXXXXXXXXMarks)
1.1 Consider the following information in Table 1.1 for stock A and B.
Stock Expected return Beta (β)
A 12% 1
B 13% 1.5
XXXXXXXXXXTable 1.1
The market’s expected return and the risk free rate are 11% and 5% respectively.
1.1.1 According to CAPM, what is the expected return of each stock? XXXXXXXXXXMarks)
1.1.2 Calculate the alpha of each stock and comment on the pricing of these two stocks.
XXXXXXXXXX4 Marks)
1.1.3 Plot each stock’s risk-return point on the Security Market Line (SML) and show
oth alphas on the SML graph XXXXXXXXXXMarks)
1.2 Ben Carson’s portfolio has the following data shown in Table 1.2 for a particular sample
period.
Data for Ben Carson’s portfolio for a particular Sample Period
Portfolio Market T-Bill (Risk-Free)
Average 35% 28% 6%
Beta (β XXXXXXXXXX
Standard deviation 42% 30% 0
XXXXXXXXXXTable 1.2
XXXXXXXXXXCalculate Sharpe, Jensen (Alpha) and Treynor measures of Performance for Ben’s
portfolio and the market XXXXXXXXXXMarks)
1.2.2 Indicate the measures by which Ben’s portfolio outperformed the market?
XXXXXXXXXX2 Marks)
1.3 Using the information below in Table 1.3, calculate Sharpe and Treynor ratios for
portfolio A and B. Which portfolio do you prefer under each measure? XXXXXXXXXXMarks)
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Expected Rate of
Return (%)
Standard
Deviation (%)
Beta
Portfolio A XXXXXXXXXX
Portfolio B XXXXXXXXXX
Market Index XXXXXXXXXX
Risk-free Assets XXXXXXXXXX
XXXXXXXXXXTable 1.3
QUESTION TWO XXXXXXXXXX25 Marks)
Several discussion meetings have provided the following information about one of your firm’s new
advisory clients, a charitable endowment fund recently created by means of a one-time E10 million
gift.
Objectives
Return requirement: Planning is based on a minimum total return of 8% per year, including an
initial cu
ent income component of E500,000 (5% on beginning capital). Realizing this cu
ent
income target is the endowment fund’s primary return goal.
Constraints
Time horizon. Perpetuity, except for requirement to make an E8,500,000 cash distribution on
June 30, 2025.
Liquidity needs. None, of a day –to –day nature until 2025. Income is distributed annually after
year-end.
Tax consideration. None, this endowment fund is exempt from taxes.
Legal and regulatory consideration. Minimal, but the prudent investor rule applies to all
investment actions.
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Unique needs, circumstances and preferences. The endowment fund must pay out to another tax-
exempt entity the sum of E8,500,000 in cash on June 30, 2025. The assets remaining after this
distribution will be retained by the fund in perpetuity. The endowment fund has adopted a
‘spending rule’ requiring a first-year cu
ent income payout of E500,000; thereafter, the annual
payout is to rise by 3% in real terms. Until 2025, annual income in excess of that required by the
spending rule is to reinvestment. After 2025, the spending rate will be reset at 5% of the then-
existing capital.
With this information and information found in other publications, do the following:
2.1.1 Formulate an appropriate investment policy statement for the endowment fund.
XXXXXXXXXX7 Marks)
2.1.2 Identify and
iefly explain three major ways in which your firm’s initial asset allocation
decisions for the endowment fund will be affected by the circumstances of the account.
XXXXXXXXXX8 Marks)
2.2 Desmond Tutukhile, is evaluating his investment alternatives in Ytel Incorporated by
analyzing a Ytel convertible bond and Ytel common equity. The characteristics of the
two securities are given in the following Table 2.1:
Characteristics Convertible Bond Common Equity
Par value E1,000 -
Coupon (annual payment) 4% -
Cu
ent market price E980 E35 per share
Straight Bond Value E925 -
Conversion ratio 25 -
Conversion option At any time -
Dividend - E0
Expected Market Price in 1 Year E1,125 E45 per share
Table 2.1
Required.
2.2.1 Calculate the market conversion price for the Ytel convertible bond XXXXXXXXXXMarks)
2.2.2 Calculate the Expected one-year rate of return for the Ytel convertible bond.
(2 Marks)
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2.2.3 Expected one-year rate of return for the Ytel common equity XXXXXXXXXXMarks)
2.3 One year has passed and Ytel common equity price has increased to E51.00 per share.
Also, over the year, the yield to maturity on Ytel’s non-convertible bonds of the same
maturity increased, while credit spreads remain unchanged.
Name two components of the convertible bond’s value. Indicate whether the value of
each component should decrease, stay the same, or increase in response to the:
2.3.1 Increase in Ytel’s common equity price XXXXXXXXXXMarks)
2.3.2 Increase in bond yield XXXXXXXXXXMarks)
‘
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APPENDIX 1
HPR:=
])([)( FMiFi RRERRE
Sharpe measure =
Treynor measure =
Jensen (Alpha) p =