QUESTION 1

a) Benchmarks are a useful tool for an investor but they have a number of shortcomings. Identify the problems which can arise in using benchmarks as a means of performance measurement of returns.

b) Describe the use of market indices as a benchmark of measurement

c) Consider the following investments

investment expected return standard deviation

A 5% 10%

B 7% 11%

C 6% 12%

D 6% 10%

You are to advise a friend to invest in at least two of the above investment, which ones would you advise?

d) Chambishi company has a beta of 1.2, the expected risk-free rate is at 4 % and the expected premium for the market as a whole is at 5%. You are required to calculate the expected rate of return of the chambishi company.

e) Consider the following financial securities namely D and E with the following estimates

E(RD)= 8% Standard deviation D = 12% E(R_E) = 13% Standard deviation = 20%

You want to formulate a portfolio with the above securities and you have invested equal amounts in both D and E. consider the correlation to be 0.3 between the two securities. You are required to calculate the standard deviation of the newly formulated portfolio?

QUESTION 2

A) You've recently been employed and you are looking to invest some of your excess funds to buy a house but first you decide to invest in a Bond with a 10-year duration but plan to sell it to buy a house in 5 years. what risks are you exposing yourself to?

B) The $1,000 face value Zambian government bond has a coupon rate of 6%, with interest paid semi-annually, and matures in 5 years. If the bond is priced to yield 8%, what is the bond's value today?

C) Explain the relationship between the coupon rate and the yield to maturity

D) Give four reasons why derivatives may be effective in efficient portfolio management.

E) Write briefly on the portfolio management process .