Part B

Answer All questions (30 marks )

Question 1 (6 marks?)

An analysts wants to evaluate Portfolio X, consisting entirely of US common stocks using the Treynor and Share measures.

Average Annual Rate of Return %

Standard Deviation of Returns

Beta

Portfolio X

10

18

0.6

S&P 500

12

13

1.0

T-Bills

6

N/A

N/A

a)Calculate the Treynor and Sharpe measures for both Portfolio X and the S&P. Explain why portfolio X underperformed, equaled or outperformed the S&P on a risk adjusted basis using the Teynor and Sharpe measure.

(3 marks)

b)On the basis of the performance of portfolio X relative to the S&P calculated in the previous part, explain the reason for conflicting results when using the Treynor measure versus the Sharpe measure.

(3 marks?)

Question 2 (15 marks)

Dee Trader opens a brokerage account and buys 300 shares of Internet Dreams at RM40 per share. She borrows RM400O from her broker to help pay for the shares. The broker chares an interest of 8%

a)What is the margin in Dee's account when she first purchases the stock?

(3 marks?)

b)If the share price fall to RM30 per share by the end of the year, what is the remaining margin her account?

(3 marks)

c)If maintenance margin requirement is 30%, will she receive a margin call?

(3 marks)

d)At what price will she receive a margin call?

(3 marks)

e)What is the rate of return on her investment?

(3 marks)

Question 3 (9 marks)

A newly issued bond has the following characteristics.

Coupon

YTM

Maturity

Macauly Duration

8%

8%

15 years

10 years

a)Calculate modified duration using the information above.

(3 marks)

b)Exlpain why modified duration is a better measure than maturity when calculating the bonds sensitivity to changes in interest rates.

(3 marks)

c)Identify the direction of change in modified duration if

i.The coupon of the bond is at 4% instead of 8%

ii.The maturity of the bond is 7 years instead of 8 years

(3 marks

)