Question 4

[20 Marks]

(a) Critically analyse the potential benefits of investing in options. (9 Marks)

(b) Compare and contrast the risks of investing in futures compared to traditional investments

such as shares and bonds.

(4 Marks)

(c) A three-month call option contract on 100 shares of Demart common share with a strike

price of RM 59 can be purchased for RM 590. Assuming that the market price of Demart

rises to RM 66 per share by the expiration date of the option.

(i)

Evaluate the call holder's profit. (4 Marks)

(ii)

Evaluate the holding period return (3 Marks)

Question 5

[20 Marks]

(a) Evaluate implications of Efficient Market Hypothesis on portfolio management

(8 Marks)

(b) 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%.

(4 Marks)