TUTORIAL QUESTIONS ON FUNDAMRNTAL OF INVESTMENT ANALYSIS 2024

1) a. define and describe the process of investment analysis,

b. define the following concept: Risk, return, Liquidity, Marketability,
investment process, financial security, trading assets, permanence, Efficiency Ratios,
Liquidity ratios, Growth Investing, Contrarian Investing, Buy and Hold Investing, multi-
factor model,
2) Enumerate the different components of return and write down their formulas, define
expected return and write down the formula
3) Enumerate the different investor’s objectives and write short note on 3 of them
4) Write short notes on the different steps of investment process
5) Write short notes on the different types or component of risk
6) Write short notes on: Interest rate risk, Market risk, Purchasing power risk, Business
risk
7) What is the statistical measure of the degree to which two variables (e.g., securities'
returns) move together?
8) What does covariance measure? If two assets are said to have positive covariance,
what does it mean?
9) An investor owns a risky stock and anticipates earning 16.5 percent on her investment
in that stock.Which one of the following best describes the 16.5 percent rate? A)
Expected return B) Real return C) Market rate D) Systematic return E)Risk premium
10) A portfolio having two risky securities can been turned risk less if: A) The securities
are A) completely positively correlated, B) If the correlation ranges between zero and one
C) The securities are completely negatively correlated
11) The firm of Sun and Moon purchased a share of Acme.com common stock exactly
one year ago for $45. During the past year the common stock paid an annual dividend of
$2.40. The firm sold the security today for $85. What is the rate of return the firm has
earned? A) 5.3% B) 194.2% C) 88.9% D) 94.2%
.12) Among the answers below what is used to measure the risk when comparing two
alternative investments with the same standard deviation but different expected value :
a) Coefficient of variation b) Standard deviation of securities c) Variance of Securities
d) None of the above
13) What is diversifiable risk? What is non-diversifiable risk? Give an example of each.
14) Define Beta, give it formula and interpret the different sign of beta (Beta > 1, Beta< 1
and Beta = 1)

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15) Explain the different types of correlation between two investments and give the
recommendation that an investor can take in each case
16) What means fundamental analysis, technical analysis and volume?
17) What means MP and IV, and what advise can you give to an investor in the following
case: MP> IV; MP< IV; MP = IV
18) For rational investment decision making, explain the analytical framework of
fundamental analysis
19) What are the key economic variables that an investor must monitor as part of his
fundamental analysis?
20) Write notes on the four stages of economic cycle
21) What are the key industry characteristics?
22) Write short notes on the four stages of industry life cycle (briefly give what
characterized each stage)
23) Write short notes on: Growth rate of national income, Interest rates, Industry life
cycle
24) What is the role of economy analysis, industry analysis and company analysis for an
investor?

25 ) Balance sheet reveals the revenue earned, the cost incurred and the resulting profit
and loss of the company (True or false)

26) Income statement indicates the financial position of the company (True or false)

27)Write down the different types of liquidity ratio and their formulas
28) What is the purpose of Ratio Analysis for investors?
29) Write notes on the three assumptions of technical analysis
30) Enumerate the different assumptions of technical analysis and give the Differences
between Technical Analysis and Fundamental Analysis
31) If the intrinsic value of a stock is greater than its market value, which of the following
is a reasonable conclusion? A) The stock has a low level of risk. B) The market is
undervaluing the stock.
31) What do you mean by Passive and Active investment Strategies?, enumerate the
different types of Passive and Active investment Strategies
32) enumerate the advantages and disadvantages of Passive and Active investment
Strategies

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33) A recession is an economic event that is best characterized as:
a. Unsystematic risk that can be diversified away. b. Systematic risk. c. Market risk
that can be diversified away.
34) What is the interpretation of the coefficient of determination for the investor? If the
coefficient of correlation for two securities is 0,7, what is the coefficient of
determination?
35) What is the Difference Between Strike Price and Spot Price?
36) What is the formula for the forward price of an investment asset that provides no
income?
37) What is the formula for the forward price of an investment asset that provides a
known dollar income?
38) What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agreeing to buy the underlying
asset for a certain price at a certain time in the future. When a trader enters into a short
forwardcontract, she is agreeing to sell the underlying asset for a certain price at a
certain time inthe future.
39) Explain the concept of correlation? If two securities have a high positive correlation
what does that mean?. If two securities have a low positive correlation what does that
mean?. If two securities are negatively correlated what does that mean?
40) Briefly explain the difference between beta as measure of risk and variance as
measure of risk
Answer: Variance measures the total risk of a security and is a measure of stand-alone
risk. Total risk has both unique risk and market risk. . Beta is a measure of market risk
and is useful in the context of a well-diversified portfolio. Beta measures the sensitivity
of the security returns to changes in market returns. In the other words
The variance of returns represents the total risk of an asset – how much, on average, that
returns deviate from the average return. Beta measures portfolio risk. That is, beta for an
asset, with respect to a given portfolio, represents the contribution of the asset to the
variability of a portfolio. The higher is beta, the higher is the contribution to portfolio
risk.

Exercise 1: Orange company share’s price on June 10, 2019 is Rs. 900 (Pt–1) and the
price on June 9, 2020 (Pt ), is Rs. 950. Dividend received is Rs. 76 (D). Determine the
rate of return.
Exercise 2 Investment bank purchased a share of mutual fund common stock exactly
one year ago for $45. During the past year the common stock paid an annual dividend of

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$2.40. The firm sold the security today for $85. What is the rate of return the firm has
earned? Choose the correct answer
a. 5.3% b. 194.2% c. 88.9% d. 94.2%

Exercise 3 Consider a two-stock portfolio in which 60% of your money is invested in

stock A and 40% of your money is invested in stock B. Stock A has a standard deviation
of 50% and stock B has a standard deviation of 70%. The correlation between the returns
for stock A and stock B are 0.30. Find the standard deviation of this portfolio.

Exercice 4 Stock X has a standard deviation of return of 10%. Stock Y has a standard
deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you
invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of
a portfolio?

A) 10% B) 20% C) 12.2% D) None of the above

Exercice 5 Consider the following investments

Investment Expected return Standard deviation

A 5% 10%
B 7% 11%
C 6% 12%
D 6% 10%

Which investment would you prefer between the following pair:

1) if your are a risk averse investors
2) if your are risk loving investors
a ) A and D , b) B and C, c) C and D

Exercice 6: The following information is given about two companies A and B, you as
investor, Compute the expected rate of return and standard deviation of the returns of
their shares and identify the riskier company
Company A Company B
Returns Probalilty (pi) Returns Probalilty (pi)

(Ri ) (Ri )
5 0.10 5 0.05
7 0.20 7 0.15
9 0.30 9 0.20
11 0.25 10 0.40

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 13 0.15 11 0.20

Exercice 7 The covariance of the return on two securities, A and B is -0.0005. The
standard deviation of A returns is 4% and the standard deviation of B returns is 6%.
1. What is the correlation between the two returns of A and B?
2. What is the coefficient of determination? And interpret your result
Exercice 8 Company X has a beta of 1.45, the expected risk free rate of interest rate is
2.5% and the expected return on the market as a whole is 10%, using the CAPM, what is
ABC′s expected return?
Exercise 9 The following are possible states of the economy and the returns associated with
stocks A and B in those states.
State Probability Return on A Return on B

Good 0.3 24% 30%

Normal 0.4 36% 18%

Bad 0.3 48% -6%

Calculate the expected return and the standard deviation of a portfolio comprised of stocks A and
B. The weight in stock A is 60%.

Exercice10
The stock of an important food retail company has a beta of 1.2. The expected return on the
market portfolio is 12% and the risk-free rate 6%. What is the expected or required rate of return
on that stock?
Exercice11
The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $18
by the end of next year and that it will pay a dividend of $.50 per share during the year. Calculate the
actual return on Duncan if at the end of the year the price turns out to be $13 and the dividend actually
paid was just $0.10.
a. 12.7% b. 11.7% c. 12.3% d. 11.3%
exercice 12

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Macedonia Oil is drilling an offshore oil well. The following table lists the expected cash flow
from each possible outcome and, based on geological studies, the probability of each.
Outcome Cash Flow Probability
Dry Well -$1,000, 0.30
Natural Gas 1,000,000 0.30
Gas and Oil 2,000,000 0.20
Oil 1,000,000 0.20

Each cash flow will occur one year from today and will fully deplete the well. There is a cash
outflow for a dry well due to shutdown expenses. Calculate the expected value of the cash flows
from the well, and the standard deviation and coefficient of variation of the cash flows.
a. $1,000,000; $600,000; 1.537
b. $766,000; $1,512,250; 1.966
c. $600,000; $1,113,553; 1.856
d. $650,000; $1,211,353; 1.812
Exercices13
You have the following information on two securities in which you have invested:
Expected Standard Deviation Security Beta % Invested (w)
Return Invested (w)
Xerox 15% 4.5% 1.2 35%
Kodak 12% 3.8% 0.98 65%

What is the expected return on the portfolio? What is the beta of the portfolio? And what is the
standard deviation
a.13.05%; 1.06; 3.64%
b. 14.25%; 1.06; 3.64%
c. 13.25%; 1.21; 3.64%
d. 12.96%; 1.15; 3.64%

Exercice 14
Find the expected return and standard deviation of each stock.
Stock A Stock B
Probability Return Probability Return
0.20 -30% 0.40 30%

0.40 15% 0.40 30%

0.40 30% 0.30 20%

If you were going to put all of you money into one of these two stocks, which
should you pick?
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Exercice 15 1) Find the expected return and standard deviation of each stock
Return of Return of
Probability
Stock C Stock D
0.30 -10% 25%
0.50 15% 10%
0.20 40% 0%
2) Calculate the expected return and standard deviation of a portfolio made up of 50% stock C
and 50% stock D if the correlation is -0.75.
3). would you prefer to put your money in stock C, stock D or the 50/50 portfolio? Explain.

Exercise 17
Suppose an investment opportunity promises the following cash flows in future years
Year Cash flow receipts(FCFA)
1 250,000
2 230,000
3 200,000
4 240,000
5 275,000
6 300,000
7 220,000
Find the sum of the present values of these cash receipts if the firm’s discounting rate is 13
percent
Exercice 18
ABC company has the following information:
Assets = $100 million, Liabilities = $75 million, Outstanding shares = 10 million, Stock price =
$5 per share,
1) Calculate the price to book ratio

2) What Does Price-to-Book tells investors?

3) Define dividend yield and Compute the dividend yield for a stock that pays a $2.50 annual
dividend and has a current share price of $100.00.

Exercise 19
1. Suppose that you enter into a 6-month forward contract on a non-dividend-paying stock when
the stock price is $30 and the risk-free interest rate (with continuous compounding) is 5% per
annum. What is the forward price?

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2. A stock index currently stands at 350. The risk-free interest rate is 4% per annum (with
continuous compounding) and the dividend yield on the index is 3% per annum. What should the
forward price for a 4-month contract be?
Exercice 20

The Balance Sheet f of XYZ.INC is given as (in millions of dollars)

Currents assets 2010

Cash 84
Accounts receivable 165
inventory 393
Total current assets 642
Net plan and equipment 2731
Total asset 3373

Current liabilities
Accounts payable 312
Notes payable ( < 1 year) 231
Total current liabilities 543
Long term debt 531
Total liabilities 1074
Owners’ equity 500
Retained earnings 1799
Total Owners’ equity 2299
Total liabilities and equity 3373
Income statement
Sales 2311
Net income 89.1

1. Determine and interpret:

a) The Liquidity Ratios (The Current Ratio and the Quick Ratio)
b) The efficiency ratio ( Receivables Turnover, asset turnover)
c) The solvency ratio (Debt to Assets Ratio)
d) The profitability ratio (Return on Assets)

Exercice 21 base on the following factors in the table belowGive the differences
in investment & speculation:

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 FACTOR INVESTEMENT SPECULATION
1. Degree of risk Relatively lesser Relatively higher
2.Basis of return Income and capital gain Change in market price
3. Basis for decision Analysis of fundamentals Rumors, tips, etc
4.Position of Ownership Party of an agreement or dealer
investor
5.Investment period Long term Short term

Exercise 22 : Assume you are considering a portfolio containing two assets, A and B. Asset
A will represent 45% of the dollar value of the portfolio, and asset B will account for the other
55%. The expected returns over next 6 years, 2009-2014, for each of these assets are summarized
in the following table.
Year Return on A Return on B
2009 13% 20%
2010 13 19
2011 15 15
2012 16 13
2013 16 12
2014 20 11

1. Calculate the average return and standard deviation of returns for Assets A and B.
2. Find the portfolio’s expected return for EACH of the 6 years.
3. Calculate the (arithmetic) average expected portfolio return, over the 6-year period.
4. Calculate the standard deviation of expected portfolio returns, over the 6-year period.
5. How would you characterize the correlation of the returns of the two assets A and B (no
calculations are necessary)?
6. Discuss any benefits of diversification achieved through creation of the
portfolio.

Exercise 23 the returns for two different investments are shown in the following table.

1. Calculate the arithmetic average returns for each investment.

2. Which of the two investments seems to be more risky? Explain why.
3. What are the standard deviation of returns of each investment?

Year Return on A Return on B

2002 5% 10%
2003 16 14
2004 11 8
2005 1 13

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2006 9 9
2007 24 12

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