Question 1

Alex is a young investor with high risk tolerance level and hopes to earn money as fast as he can. Analyse each of the following plans and evaluate which is the most suitable plan for Alex. (12 Marks)

(1) Dollar-cost averaging (2) Constant-dollar plan (3) Constant-ratio plan (4) Variable-ratio plan

Question 2

An investor estimates that next years net income for Hilary Pullman Hotel would be RM 8 million. The company has 0.5 million shares outstanding and decided to pay RM 0.5 million to the preferred stockholders from its net income. Listed companies similar to Hilary Pullman Hotel have been recently reported to have an average price/earnings ratio of 4 times. Given the information, calculate the expected price of the stock and evaluate the problems in using Price/earnings ratio method of valuing the shares of a company. (6 Marks)

Question 3

Two securities PohKeong Gold and Mama Care are currently being considered by Jason. He is considering either to invest 100% in PohKeong Gold or building a portfolio that consist of both security 60% in PohKeong Gold and 40% in Mama Care. The probability distribution of expected returns of these assets are shown in the following table.

State of Economy Probability Return on PohKeong Gold Return on Mama Care Bear 0.30 3% 2% Bull 0.70 18% 10%

(i) Calculate the expected return for each of the two alternatives. (4 Marks) (ii) Calculate the standard deviation of returns of the two alternatives. (6 Marks) (iii) Evaluate the investors decisions, based on the above calculations (4 Marks)

Question 4

Given the following situations, evaluate in each scenario whether the hypothesis of an efficient capital market of semi-strong form is violated.

(i) Through the introduction of an advanced webinar into the analysis of the past share price movements, a brokerage firm is able to predict price movements are able to earn consistent 1% profit more than normal market returns after adjusted for risk.(4 Marks)

(ii) On average, investors in the stock market this year are expected to earn a positive return on their investment. Some investors will earn considerably more than others.(4 Marks)

(iii) You have discovered that the square root of any given stock price multiplied by the day of the month provides an indication of the direction in price movement of that particular stock with a probability of 20%.