Investment Theory Question

SOUTHEAST UNIVERSITY
School of Business Studies

Final-Term Assignment
Semester: Spring: 2021
Course Code: Fin 6161/661; Course Title: Investment Theory
Section: A
Program: Master of Business Administration Full Marks: 40
Instructions and Information:

Answer all parts of each question consecutively.
 Answer each question from a fresh sheet
Answer the following questions (10*4=40)
Question1 (2+5+3)
a. Explain the implication of Malkiel’s theorems for bond investor following interest rate is
expected to increase.
b. A 9 percent coupon bond has 10years to maturity and discounted semi annually. Its current
market price is Tk.1010, and 1st call price is Tk. 1075, calculate the YTC of the bond (trial
& error approach) and interpret your findings focusing on bond pricing.
c. Briefly explain the role played by mutual fund in stock market development with major
challenges in the context of DSE. Analyze the positive effect of Unit invest trust and ETF in
DSE.
Question2 (4+2+4)
a. A bond with 5 years to maturity and coupon payment is 11 percent and market price is TK.
1045, par value TK. 1000 and expected reinvestment rate of 9 percent. Calculate:
I. Interest on Interest
II. Total Return
III. The realized compound yields for the bond and justify your findings based on
reinvestment risk.
b. Briefly explain implications of (P/E) ratio, ADVENT current P/E ratio 97.27, DGIC P/E
72.55, which stock would you prefer to invest and why?
c. Illustrate the present yield curve in BD economy. Describe any one theory regarding term
structure of interest rate to predict forthcoming interest rate in Bangladesh.
Question3 (4+2+4)
a. DESCO dividend growth rate is13 percent for first 2 years, growth rate assumed 11 percent up
to year 5 and after that growth rate is 8 percent from year 6 to infinity and this year dividend is
TK. 3.70 per share. Investors require a rate of return of 17 percent on this stock. Calculate price
of the stock and justify your decision for investment of this stock. (CMP= Tk. 103).
b. Explain bond immunization with its implications for bond investors to form efficient portfolio.
c. The expected return for the market is 16 percent with a standard deviation of 23 percent. The
expected risk free rate is 5.5 percent. Information available for five mutual funds, all assumed to
be efficient
Corporation SD(%) RRi
GF 13.5 13.50
Pepsi Co 15 14.75
IBM 17.5 17.00
NCNB 20 15.80
EG&G 25 14.00
I. Calculated the expected return for each asset.

II. Assume that an investor using fundamental analysis develops that estimates of expected
return label for these stocks. Determine which stocks are undervalued and which are
overvalued.
III. Do any of the portfolios have the same expected return as the market? Why?
IV. Calculate the slope of CML.
Question4 (7+3)
a. GPHISPAT has following two assets in portfolio and risk and weights of individual assets are
given below:
Textile Bank
Return (%) 18 14
Standard deviation (%) 8.5 10
Correlation coefficient 0.62
Covariance 13.15
Weight 48% 52%
I. Calculate the risk and return for the portfolio using Markowitz Portfolio theory and
interpret findings comparing with efficient portfolio.
II. Demonstrate security market line (SML) to depict the undervalued and overvalued stocks
from your own portfolio and justify investment decision that already taken by you.
III. Draw CML and CAL using data from your own portfolio and justify your answer
comparing with market portfolio. How indifference curve shows investors risk
preference and aversion behavior with utility score?
b. Assume that ROBI has expected return for the market is 19 percent; standard deviation of
market return is 23 percent; risk-free rate is 4.75 percent and correlation between ROBI stock
and the market is 1.15. Calculate the beta and required return for ROBI stock. If ROBI pays 65%
of earnings as dividend, currently per share earnings Tk. 1.56 and dividend growth rate is 8.6%,
whereas earnings will grow at 11% and market price Tk. 34.80. Compare and contrast your
findings of ROBI price in two different stock valuation methods.
Best of Luck!!!!!!!!!!!!

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SOUTHEAST UNIVERSITY

School of Business Studies

Program: Master of Business Administration Full Marks: 40

Instructions and Information:

Answer the following questions (10*4=40)

I. Calculated the expected return for each asset.

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