IMT 09 Security Analysis and Portfolio Management M3

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IMT 09 Security Analysis and Portfolio Management M3

SECTION – A

Question 1: Define the term ‘investment’ as it relates to securities investments.

Question 2: How do operations on a stock exchange affect the economic life of a nation?

Question 3: Explain the term ‘New Issue Market’. How does it differ from the ‘secondary market’?

Question 4: What is meant by ‘listing of securities’? What are the advantages form the point of view of a company?

Question 5: What is a market index? Outline its utility for security analysis.

SECTION – B

Question 1: Why it is said IPOs are underpriced compared to the price at which they could be marketed?

Question 2: What are the main determinants of the level of interest rates (real and nominal rates)?

Question 3: How do we compute expected return, variance and standard deviation using time series of historical (past) rates of return?

Question 4: Describe the main differences in the historical performance of returns on equity and long-term bonds.

Question 5: Describe how we measure risk with non-normal distributions. What is the meaning of the term “fair game”?

SECTION – C

Question 1: Explain the capital allocation choice across risky and risk-free portfolios.

Question 2: Explain the simplifying assumptions of the basic version of CAPM.

Question 3: Explain the trade-off between liquidity and expected returns.

Question 4: Explain the role of diversification in eliminating the portfolio risk.

Question 5: Explain the role of Security Market Line (SML).

CASE STUDY – 1

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $50,000 or $150,000 with equal probabilities of .5. The alternative risk-free investment in T-bills pays 5 percent per year.

a. If you require a risk premium of 10 percent, how much will you be willing to pay for the portfolio?

b. Suppose that the portfolio can be purchased for the amount you found in.

(a). What will be the expected rate of return on the portfolio?

c. Now, suppose that you require a risk premium of 15 percent. What is the price that you will be willing to pay?

d. Comparing your answers to (a) and (c), what do you conclude about the relationship between the required risk premium on a portfolio and the price at which the portfolio will sell?

CASE STUDY – 2

Consider the limit-order book depicted in Table below. The last trade in the stock took place at a price of $50.

Limit – Buy Order

Limit-Sell Order

Price ($)

Shares

Price ($)

Shares

49.75

500

50.25

100

49.50

800

51.50

100

49.25

500

54.75

300

49.00

200

58.25

100

48.50

600

a. If a market-buy order for 100 shares comes in, at what price will it be filled?

b. At what price would the next market-buy order be filled?

c. If you were the specialist, would you desire to increase or decrease your inventory of this stock?
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