Question

INSTRUCTIONS: ATTEMPT ANY FOUR (4) QUESTIONS a. Question 1 A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests in stocks, bonds, short-term money market instruments and other securities. The performance of these mutual funds and the portfolio they build needs to be evaluated as frequently as possible. Evaluating the performance of these mutual funds is important for both existing and potential investors. The Table below provides the average return, standard deviation and betas of selected equity mutual funds over a period of three years. The average risk free rate for the period is estimated at 15%. Portfolio Average return Standard Deviation Beta Portfolio A 27.62 16 1.2 Portfolio B 20.12 15 0.9 Portfolio C 26.25 12 1.05 GSE return 16.18 10 1.0 (benchmark) Required: Estimate and compare the performance of the funds with the market using: i. Treynor's measure (3 marks) ii. Sharpe's measure (3 marks) iii. Jensen's Measure (8 marks) b. The issuing of security goes through a number of processes. Once the SEC has commented on the registration statement and a preliminary prospectus has been distributed to interested investors, the investment bankers organize road shows and undertake book building in the process. Required: Explain the meaning and two (2) purposes of road shows as used in the preamble above. (4 marks) c. You are considering a bond with a coupon rate of 10% per annum. Coupons are paid semiannually. The bond has a face value of ¢1000 and matures in 5 years. The yield to maturity is 11%. What is the value of the bond? Indicated whether the bond is trading at a premium, discount, or at par (7 marks) (Total 25 marks) Question 2 a. Distinguish between the following: Primary market and secondary market (4 marks) ü, Money market and capital market (4 marks) iii. Fixed income security and convertible security (4 marks) Systematic risk and Unsystematic risk (4 marks) b. You are an investment advisor and you are asked to guide a new investor to trade shares on the Ghana Stock Exchange (GSE). Exp any six (6) of the listing requirement of GSE that are to be met before the company can start trading on the market. (9 marks) (Total marks 25) 2 | Page

Answer 1

return Question-1 (a) u Treynor's measure Porfolio risk free rate Beta of the portfolio 10.52% Portfolio A - 27.62-15 1.2 Portfolio B = 5.69% 20.12-15 0.9 11 Portfolio C= 26.25-15 1.05 10.71% Measure in Sharpe's Portfolio return - rist free rate Standard deviation 0.79% Portfolio A 27.62-15 16 = 0.34% 20.12-15 Portfolio B 15 Portfolio C 0.94.1. 26.25-15 12 16.18-15 0 GSE return =

Risk in Jensen's Measure f Beta /Return Portfolio return - (Risk free + free rate rate of market index Portfolio A het market return be 12% [ This may vary] 27.62 - [15+ 1-2 (12-15)] Portfolio B = 20.12 - [15+0.9(12-15)] Portfolio C 26.25-[15+1.05 (12-15)] – 14.44. 16-22°7. 7.82% (6) Road Shows Meaning a roadshow is a series of presentations made in various locations leading up to an initial public offerings. It is the sales pitch to potential investors by underwriting firm and executive management team of company about to go public. Purpose is to influence more and more investors to invest in the company through secuusities to be issued. i To gauge the price range and maturity of the securities to be issued.

F + (16) Value of Band T where, (= Periodic coupon payment y = yeild to maturity face value t = time T = No. og period until the bondo maturity date In the question given, & so [ coupons are paid semi annually, therefore, y = 117/ S.54/ these are divided by ] C = 1000 X 10°%. 2 F = 1000 T= 5x2 = 10 1000 10 10 50 + Value of Bond Ź tai (1+0.055)' (1+0.055) + 50 + 50 + 50 50 so 50 50 (1055)) (1055) + (1,055) + 1.055 (1.055)2 11.055) (1.055) *1.055) 1080 + 50 + (1.055) (1055) (1+0.055)

= 47. 39+ ५५.१2+ ५2.58+ ५0.36 + 38.2.0 + 36 . 26 + 34.37 + 32.58 + 30.88+ 29.27 + 585.43 -962.3