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Portfolio Management – What are the mean returns and risk of a portfolio if the investment manager invests

Consider the following information about three assets:
Stock                                 Mean Return                                 Standard Deviation
Moose                                   10.00%                                               5.20%
Gnu                                        8.00%                                                 2.70%
Wildebeest                           12.00%                                               6.50%
a) What are the mean returns and risk of a portfolio if the investment manager invests in:
i. 25% in Moose and 75% in Gnu if the correlation between Moose & Gnu is 0.2?
ii...

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Dividend Discount Model – Share Price Risk – Technical Analysis

Dividend Discount Model (DDM)
(a) Company A pays an annual dividend of 35p per share. The required rate of return is 11% p.a.

(i) If that level of dividend payment is expected to be constant into the future what is the intrinsic value (or fair price) of the share?
(ii) If the next dividend payment is expected to be 7% higher than the last, and if this rate of dividend growth is expected to be maintained over time, what is the intrinsic value of the share?

(b) Company B is a new company that is currently enjoying rapid growth. It is estimated that dividends will grow at an annual rate of 12% over the next four years. After that, the growth rate will fall to 6% p.a. and remain at that rate. The directors have just paid an annual dividend of £1.25.
Calculate the intrinsic value of the share ...

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Bond Pricing the RCY and bond management – Forward Rates and the Term Structure

Bond Pricing the RCY and bond management


(a) What are ‘bond characteristics’? Explain how these influence the way that a bond price changes in response to changes in market interest rates?

(b) Using the following UK government gilts currently in issue:
Treasury 8% 31st December 2015
Treasury 8% 31st December 2021
Treasury 6% 31st December 2028
Estimate the fair price of these £100 semi-annual bonds for a yield of 3% p.a. as at 31st December 2011 (it can be assumed that the yield curve is flat).
(c) If yields increase to 3.5% p.a. estimate the new fair price of the bonds in (b) above.

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(d) A 4 year bond of £100 face value has a coupon of £9 that is paid once per year. If the expected interest rates are 8% 7% 6% and 5% respectively for the next 4 years...

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Investment Analysis – Duration, Convexity and Risk Immunisation

Duration, Convexity and Risk Immunisation

(a) Estimate the duration of a 7-year £100 par bond with a 6% annual coupon yielding 4% p.a.
In addition, estimate the percentage change in the bond price and also the new bond price if the yield increases to 4.20% p.a. The convexity is 55.9.
(30 marks)
(b) Using the following data, estimate the new bond prices of each of the 3 bonds if their yields (interest rates) increase by 0.25%. You should take into account both duration and convexity.

Duration, Convexity and Risk Immunisation

Duration, Convexity and Risk Immunisation

(c) Discuss the techniques that could be used by a bond portfolio manager to immunise their portfolio against risk.
Does the fact that many European countries have lost their AAA bond rating make it more difficult for fund managers investing in government bonds to immu...

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Explain why commodity futures markets need to be liquid to function effectively and how speculators can help increase the degree of liquidity

Question 1
(a) For any one specific commodity market which has a related futures market, explain briefly:
i. What factors have influenced commodity prices in recent years?
ii. How the pattern of futures prices relate to spot prices (eg contango or backwardation), giving reasons for this pattern.

(b) Outline a trade that a producer, consumer or speculator in this market may wish to engage in, constructing a numerical example using realistic quantities and prices. Using your own suggested figures for price changes, calculate the net outcome of this trade.

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Question 2

(a) Explain why commodity futures markets need to be liquid to function effectively and how speculators can help increase the degree of liquidity.
(b) How does the open interest measure attempt to se...

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International Commodity Trading – The differences between a forward contract for a commodity and a commodity futures contract

Question 1
Explain each of the following.
(a) The differences between a forward contract for a commodity and a commodity futures contract.
(b) Why commodity producers and consumers may wish to use these forms of contract rather than deal solely in the spot market for a commodity.
(c) What the relative merits and limitations of these two forms of contract are.

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Question 2

If a commodity has a “contango” pattern of futures prices:
(a) What does this mean?
(b) What are the main reasons for this sort of pattern of futures prices?
(c) Why may an element of “convenience yield” cause the basis to be below the full cost of carry?
(d) How may events that disrupt supply and cause uncertainty, such as the impact on the cocoa market of the 2002 conflict in the Ivor...

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Financial Services – Explain the difference between ‘defined benefit’ and ‘defined contribution’ pension schemes

Question 1

a) Explain the difference between ‘defined benefit’ and ‘defined contribution’ pension schemes.
b) Compare them from the perspective of a member of a pension scheme.

Question 2
a) Explain Heuristic Simplification.
b) Give an example in support of the explanation.
c) Describe the benefits of understanding this aspect of Behavioural Finance.

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Question 3

a) In relation to investment decision making, describe the practice of Asset Allocation.

b) Explain the key considerations when designing an asset allocation strategy for a client.

Question 4
A first-time home buyer makes an offer on a property of £165,000, which has been accepted by the vendor...

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Oak Plc has a cost of capital of 12%. It has considerable cash reserves and is reviewing the following possible investment projects

Question 1

Oak Plc has a cost of capital of 12%. It has considerable cash reserves and is reviewing the following possible investment projects which are not mutually exclusive.

Oak Plc

Oak Plc

a) Using the information above and your knowledge of project appraisal techniques, calculate the 4 missing values (as indicated by the ?s) from the table below.

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Oak Plc

Oak Plc

b) Assuming Oak Plc has limitless funds and the projects are not mutually exclusive, what is the maximum NPV Oak Plc can achieve from these investments?
c) Explain what is meant by the term “capital rationing”.
d) What is the maximum NPV Oak can achieve if it has a maximum of £900m to invest? You can assume the projects are fully divisible.
e) Outline the advantages and disadvantages of Discounted Payback ...

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Principles of Financial Investments – Finance theory argues that the primary objective of the firm should be to maximize shareholder wealth

Question 1

a) Finance theory argues that the primary objective of the firm should be to maximize shareholder wealth. Discuss the arguments for and against this primary objective in comparison to other possible objectives.

b) Explain what a stock market index is. Your answer should include examples and also discuss the information investors need to know about an index in order to properly interpret it.

c) Outline the Efficient Market Hypothesis (EMH) and distinguish between the three levels of market efficiency.

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Question 2

Cedar Plc is listed on the London Stock Exchange. It has 25 million ordinary shares in issue that have a nominal value of £1 each and a market value of £3...

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Principles of Financial Investments – Maple Plc has never paid a dividend, however it has just announced that it will pay an annual dividend

Question 1

Maple Plc has never paid a dividend, however it has just announced that it will pay an annual dividend of 5p next year, 8p the year after and 10p the year after that. From then on the firm expects dividends to grow at 4% per year.

Earnings per share next year will be 8p. The firm has 10 million shares currently in issue and beta of the firm’s shares is 1.5. The current riskless rate in the economy is 3% and the expected return on the stock market is 10%.

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a) Calculate the expected return (i.e. cost of capital) for equity holders in Maple Plc.
b) What will the plow back ratio of the firm be next year?
c) Calculate the current share price of the firm.
d) If an investor had bought the share for £1...

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Introduction to Personal Finance – What are the factors individuals need to consider when budgeting

1. Describe the different types of pensions arrangements individuals could contribute to for saving towards their retirement. Explain the pro’s and con’s of arrangement and the purpose of each for individuals.
2. Describe the different types of mortgages an individual can take and what types of products and features individuals need to be aware of?

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3. John age 35, has recently inherited a lump sum from his late grandfather of £50,000. He is considering investing this for his future. Discuss what his investment options are and explain their advantages and disadvantages.
4. Savings are increasingly becoming a concern for many households in the UK, an issue the UK Government have highlighted...

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The following trial balance was extracted from the books of Challenor Limited

The following trial balance was extracted from the books of Challenor Limited on 31.3.2012.

Financial Accounting Foundations

Financial Accounting Foundations

At t...

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