You must answer Question 1

Describe the intuition behind the Capital Asset Pricing Model (the CAPM), and explain why it may or may not be useful as an asset pricing model. (10 marks)

What is meant by Value at Risk and how is it used to manage risk? (10 marks)

Describe how indices are constructed, and why they are useful. (10 marks)

Choose 2 out of Questions 2-5 (if you answer more than 2 only the first 2 will be graded)

Question 2

What does it mean to say that markets are efficient, and what factors may cause them to deviate from efficiency? What are the implications of inefficient markets? (20 marks)

What factors are taken into account in an investors Investment Policy Statement (IPS) and how will these affect the construction of their investment portfolio? (15 marks)

Question 3

How can futures or forwards be used to enhance the performance of an investment portfolio? (15 marks)

Give one example of how options can be used to manage a portfolio. (10 marks)

What are seen as the pros and cons of derivative products? (10 marks)

Question 4

How is an efficient frontier constructed and how can it be used to determine the optimal portfolio for an investor? (20 marks)

Stock X has a beta of 0.60 with the relevant market return. The market return is 16%, and the market variance is 12%. Stock X has an average annual return of 13% and its variance is 9%. Using the Single Index Model, calculate the alpha and unique risk for Stock X and comment on how these measures are used in portfolio construction. (15 marks)

Question 5

What are the main factors that affect the prices of bonds trading in secondary markets? (20 marks)

Describe any recent phenomena in the bond markets, for example, why are some bonds trading with negative yields and why is the yield curve being closely watched? (15 marks)