Question One

a)Term structures are continuously changing and though the resulting yield curve is normal, it can also be flat and inverted. Discuss three interest rates term structure theories that help explain the shape of the resultant yield curve.

b)The Kenyan Government has issued a bond with an initial value of Ksh.10,000 and a coupon rate of 5% while it's time to maturity is stated as 10 years. You as financial investment advisor are expected to advise client X on whether to hold the bond to maturity based on your calculations on determining the bond's duration

c)Analysts and investors use two alternative approaches for their fundamental analysis whose content is based on the E-I-C analysis. Discuss this statement and exhaustively highlight the contents of the analysis

Question Two

a)Describe the key assumptions underlying CAPM

b)If the risk free rate of return is 6% and the return on the market portfolio is 10%, what is the return of an asset having a Beta of 1.4, according to CAPM,

c)The concept of market efficiency was proposed by Eugene Fama in 1965, through his article "Random Walks in stock prices". Discuss what an efficient market means by highlighting the three forms of market efficiency under efficient market hypothesis

Question Three

a)XYZ and ABC are two mutual firms. XYZ has a sample mean of success of 13% and firm ABC has a success mean of 18%. The riskier fund ABC has a Beta of 2.0 which is double the risk fund of XYZ. The respective standard deviations are 15 % for ABC and 19% for XYZ. The mean return for market is 12% and risk free return is 8%. Required

i)Complete the Jensen's index for each firm

ii)Compute Treynor's index for the fund, interpret, interpret the result and compare it to Jensen's index

iii)Compute Sharpe's index for the firm and market

b)An optimal portfolio does not always remain so hence the importance of continuous revision. There are two major strategies embraces during portfolio management and revision. Discuss

Question Four

a)International investments can be included in an investment portfolio to provide diversification and growth opportunities. Discuss the term international investing and the various risks it presents to the potential investors

b)Financial markets are an important component of the investment environment and they have distinctive characteristics. Discuss the types of financial markets with reference to their characteristics

Question Five

Your managing director has just returned from a business school seminar on market

efficiency. He is puzzled as he was told in the seminar that if markets are efficient all

investments have an expected NPV of zero, yet his finance director has told him that it is

essential for the company to maximise its expected NPV. He also wonders how recent stock market volatility can be explained if the market is efficient.

Required

You have been asked to produce a report for the managing director discussing his concerns and the importance of market efficiency to capital investment decisions.