a. Distinguish between the following: i. Primary market and secondary market ii. Money market and capital market iii. Fixed income security and convertible security iv. Systematic risk and Unsystematic risk
Question 1
a. Distinguish between the following:
i. Primary market and secondary market
ii.
iii. Fixed income security and convertible security
iv. Systematic risk and Unsystematic risk
b. You are an investment advisor and you are asked to guide a new investor to trade shares on the Ghana Stock Exchange (GSE). Explain any six (6) of the listing requirement of GSE that are to be met before the company can start trading on the market.
Question 2
a. 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(benchmark)
|
16.18 | 10 | 1.0 |
Required:
Estimate and compare the performance of the funds with the market using:
i. Treynor’s measure
ii. Sharpe’s measure
iii. Jensen’s Measure
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.
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
Question 3
a. Enumerate four (4) factors to consider in analyzing the domestic economy as part of fundamental analysis.
b. Distinguish between time limit orders and Limit orders
c. Explain the following Investment ratios and indicate how they are computed:
Earnings per share (EPS) and Price/Earnings ratio (P/E).
d. What is
e. Next Pharmacy Ltd, an all equity finance company has started the production of a vaccine against COVID-19. The popularity of the vaccine is such that it expects to pay its shareholders dividends of ȼ150 which grows steadily at 10%. The company has a beta of 1.75. The risk-free rate is 5% and the expected return on the market is 18.34%.
Required: Calculate the stock’s required
Question 4
a). Gold Coast Securities Ltd is considering two investment opportunities, purchasing stocks or corporate bond. Consider the following information on the two investments:
| Probability | Return on Stocks (%) | Return on Bonds (%) |
| 0.3 | 30 | 5 |
| 0.4 | 25 | 15 |
| 0.2 | 20 | 28 |
| 0.1 | 10 | 35 |
Required:
a). Compute the following:
i). Expected return of the two investments.
ii).The standard deviation of the two investments.
b). In order to minimize its exposure, Java Ltd has been thinking about diversifying along two options shown below:
i). Portfolio I: invest 40,000 cedis in shares and 60,000 cedis in bonds.
ii). Portfolio II: invest 55,000 cedis in shares and 45,000 cedis in bonds.
Compute the expected return and standard deviation of each portfolio if the correlation coefficient of the return of the two investments is -0.35.
c). Which portfolio would you recommend to Gold Coast based on risk and returns?
Question 5
You have been approached by Onua Do Ltd who wants to know how their portfolio is fairing. The Company has over the years spread their funds in this order: 30% stock in A, 50% stock in B and the rest in stock C.
| State of Economy | Probability | Stock A Return | Stock B Return | Stock C Return |
| Boom | 0.10 | 24% | 5% | 14% |
| Normal | 0.70 | 11% | 6% | 9% |
| Recession | 0.20 | -30% | 7% | -5% |
a). What is the standard deviation of their portfolio?
b). Explain the following and analyze how they affects trading decision(s) making and analysis of investments:
i) Snakebite effect
ii) House-money effect
iii) Endowment effect
iv) Disposition effect
v) Overconfidence
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