Bus 329 Investment Analysis January Trimester 2020 Final Exa

Bus329 Investment Analysis January Trimester 2020final Examination G

Bus329 Investment Analysis January Trimester 2020final Examination G

Cleaned assignment instructions

The exam paper has six questions, each with subsections, totaling 45 marks. It does not include multiple-choice questions. The exam covers all chapters but emphasizes specific topics:

- Chapter 3: Market orders, price-contingent orders, buying on margin, short selling on margin, initial and maintenance margins, margin calls.

- Chapter 4: Open-end and closed-end funds, front-end and back-end loads, NAV, return on NAV.

- Chapter 5: Real and nominal interest rates, equilibrium real interest rate, mean and standard deviation of time series.

- Chapter 6: Risk aversion, utility, risk-free assets, portfolio risk and return, capital market line (CML), optimal risky investments.

- Chapter 7: Portfolio of two risky assets, Sharpe ratio, optimal risky portfolio, capital allocation line (CAL).

- Chapter 8: Single-Index model, risk and return.

- Chapter 9: Security Market Line (SML), over/under-priced securities.

- Chapter 20: Options markets—put and call options, premiums, in-the-money and out-of-the-money options, put-call parity.

Use the formula sheet included for calculations such as effective annual rate, capital allocation, Sharpe ratio, portfolio weights, index model metrics, CAPM, and option payoffs.

Paper For Above instruction

Bus329 Investment Analysis January Trimester 2020final Examination G

Bus329 Investment Analysis January Trimester 2020final Examination G

Investment analysis is a crucial field within finance that involves evaluating securities and investments to optimize portfolio performance. The final examination for Bus329, conducted in January 2020, assesses students' understanding of key concepts such as securities trading mechanisms, mutual funds, risk and return measures, portfolio construction, index models, the Capital Asset Pricing Model (CAPM), and options markets. This comprehensive assessment requires students to demonstrate both theoretical knowledge and practical application skills through numerical questions, reflecting the diverse topics covered in the course curriculum.

Introduction

The importance of investment analysis lies in its ability to inform investment decisions, manage risk, and maximize returns for investors. Given the complexity of financial markets, a nuanced understanding of securities trading, fund management, risk measurement, portfolio optimization, and derivatives is essential. The final exam's emphasis on specific chapters underscores the interrelatedness of these topics in constructing efficient investment strategies. For example, understanding market orders and margin requirements (Chapter 3) enables traders to execute trades effectively, while knowledge of mutual funds and NAV calculations (Chapter 4) informs investors about pooling resources for diversified investment. Risk and return concepts (Chapter 5) provide the foundation for portfolio selection and risk management techniques discussed in Chapters 6 and 7.

Market Trading and Fund Investment

Chapter 3 details the mechanics of trading securities, including types of orders such as market orders and price-contingent orders. Market orders execute immediately at current prices, making them suitable for highly liquid securities, whereas limit orders specify price conditions to control execution prices, reducing uncertainty for traders. Margin trading, involving borrowing funds to increase investment capacity, introduces additional risks and requires understanding initial and maintenance margins, with margin calls functioning as alerts for sufficient account balances.

Chapter 4 explores mutual funds and investment companies, differentiating open-end funds, which issue and redeem shares at NAV, from closed-end funds, traded like stocks with potentially varying premiums or discounts. Load fees, both front-end and back-end, affect investor returns, and understanding NAV calculations is vital for assessing fund performance. The return on NAV metric helps investors evaluate the effectiveness of fund management.

Risk, Return, and Portfolio Optimization

Chapters 5 through 7 delve into the quantification and management of risk and return. Chapter 5 discusses real and nominal interest rates, emphasizing the impact of inflation and the determination of equilibrium real rates. The calculation of the mean and standard deviation of time series data enables investors to measure historical returns and volatility, respectively.

Chapter 6 introduces models of capital allocation, emphasizing risk aversion, utility, and the risk-return trade-off. Portfolio construction involves selecting assets that optimize expected returns for given risk levels, incorporating concepts such as the capital market line (CML) and the efficient frontier.

Chapter 7 focuses on the composition of optimal risky portfolios, analyzing the risk-return profile of combinations of two risky assets, with the Sharpe ratio serving as a key metric for evaluating performance. The capital allocation line (CAL) combines risk-free assets and risky portfolios, facilitating strategic investment choices based on investor risk preferences.

Index Models and CAPM

Chapters 8 and 9 analyze asset pricing through index models and the CAPM. The single-index model reduces asset-specific risk into systematic and unsystematic components, enabling investors to identify sources of risk and expected returns. Key measures include beta coefficients, which quantify an asset’s sensitivity to market movements, and the security market line (SML), which depicts the relationship between risk and expected return under CAPM assumptions.

Over- or under-priced securities are identified by their position relative to the SML, guiding investors in selecting undervalued assets for higher-than-expected returns or avoiding overvalued ones.

Options Markets

Chapter 20 covers derivatives, focusing on put and call options. The payoff structures depend on whether options are in-the-money or out-of-the-money. A call option grants the holder the right to buy an asset at a strike price, with premiums reflecting the option’s value. Conversely, put options give the holder the right to sell at the strike price. The put-call parity relationship ties the prices of calls and puts, ensuring arbitrage opportunities are minimized.

Understanding these instruments allows investors to hedge risks or speculate on price movements, contributing to more flexible investment strategies.

Conclusion

The final examination for the Investment Analysis course encompasses vital topics ranging from securities trading to advanced derivatives. Mastery of these areas enables investors to make informed decisions, manage risks effectively, and develop optimized portfolios tailored to their risk appetite and market conditions. Through numerical problems and conceptual questions, students are expected to demonstrate comprehensive knowledge and practical skills essential for professional investment management.

References

  1. Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.
  2. Fama, E. F., & French, K. R. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives, 18(3), 25-46.
  3. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425-442.
  4. Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, 47(1), 13-37.
  5. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77-91.
  6. Hull, J. C. (2018). Options, Futures, and Other Derivatives (10th ed.). Pearson Education.
  7. Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, 13(3), 341-360.
  8. Chen, N., Roll, R., & Ross, S. A. (1986). Economic Forces and the Stock Market. Journal of Business, 59(3), 383-403.
  9. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2014). Modern Portfolio Theory and Investment Analysis. Wiley.
  10. Poterba, J. M., & Summers, L. H. (1988). Mean Reversal in Stock Market Prices. Journal of Economics Perspectives, 2(1), 67-80.

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