INSTRUCTION TO CANDIDATES: This paper is made up of THREE (3) Sections: Section A, B and C. Attempt all questions in each Section. The total marks for this paper is 120.

SECTION A (48 marks) Answer EIGHT (8) questions from this Section.

1. What is an investment? Explain the overall purpose people have for investing. (6 marks)

2. What is securitization? Illustrate with one real life example. What is the possible damaging effect of securitization? Illustrate with a real example. (6 marks)

3. Differentiate between real asset and financial asset. Illustrate with an example each. (6 marks)

4. What are essential differences between primary market and secondary market in the context of investment? Provide an example for each market. (6 marks)

5. The three major classes of assets are market instruments, bonds, and equity. Differentiate between these three asset classes. Illustrate with an example each. (9 marks)

6. What is meant by asset allocation in the context of investment? What is the main purpose of asset allocation? Provide two reasons that cause Malaysian investors to consider including various global securities in their portfolio. (6 marks)

7. Among the arrangements normally initiated between the issuing company and an investment bank through 'underwritten' and "best efforts". What are the essential differences between the two arrangements? (6 marks)

8. Why normally investors initiate short sales of stocks? Is short sale of stock permissible by Bursar Malaysia? (6 marks)

9. In addition to the general orders, there are other special types of market orders: a stop loss order, limit buy order, and limit sell order. Define these order and illustrate with a numerical example. (6 marks)

10. Briefly explain the uses of security-market index. What are the factors that need to be considered when constructing a market index? (6 marks)

11. What is a fully diversified portfolio? What are the purposes investors hold diversified portfolios? (6 marks)

12. What are unit trusts? What are the advantages of investing in unit trusts? How unit trusts valuation is done? Illustrate with a numerical example. (6 marks

Question 2 (24 marks)

a. KTM Malaysia Berhad's stock is currently selling for RM2.00 per share. You have invested RM100,000 in the company stock. You intend to purchase the company's stock using margin financing. You pay RM100,000 cash for the stock, and you buy it using maximum leverage. The initial margin requirement is 50%. Ignoring taxes and commission, show in detail the impact on your margin and rate of return if the stock price (show your calculations): i. rises to RM2.20 a share, and ii. declines to RM1.80 a share. iii. If the maintenance margin is 40%, how far can the stock price fall before a margin call? (6 marks)

b. If you anticipate the company stock to drop to RM1.50 in the very near future, using a total cash of RM100,000, how could you initiate short sale? However, the price does not really drop to RM1.50 per share, instead it rises to RM2.10. What would happen to your equity margin? Show your calculations? Is short sale of stocks permissible by Bursar Malaysia? (6 marks)