UNIVERSITY EXAMINATIONS: 2018/2019
EXAMINATION FOR THE DEGREE OF BACHELOR OF BUSINESS IN
INFORMATION TECHNOLOGY
BUSS306 EVALUATION OF BUSINESS INVESTMENTS
FULL TIME/PART TIME/DISTANCE LEARNING
DATE: APRIL, 2019 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One & ANY OTHER TWO questions.
QUESTION ONE
a) Mhasibu Sacco ltd is planning to invest its funds in a portfolio of assets formed by combining assets X
and Y each having the following probability distribution of expected return:
State Probability Return on Return on
Stock X Stock Y
1 20% 15% 30%
2 60% 20% 20%
3 20% 25% 5%
Required:
Assuming the wealth of the investor can be shared between stock X and stock Y in the ratio 40%: 60%;
i) Calculate the expected return of the portfolio (2 Marks)
ii) Calculate the risk of the individual securities (2 Marks)
ii) Calculate the covariance of the returns of stocks X and Y (4 Marks)
iii) Calculate the correlation coefficient between the stocks X and Y (4 Marks)
iv) Calculate the portfolio risk (4 Marks)
v) Determine the reduction in risk as a result of diversification (4 Marks)
b) Discuss FIVE strategies that are used in avoiding hostile takeover (10 Marks)
QUESTION TWO
a) Explain the term market efficiency (1 Mark)
b) Identify and explain the three levels of market efficiency (9 Marks)
c) Differentiate between portfolio theory and Arbitrage Pricing Theory (APT) (10 Marks)
QUESTION THREE
a) State any TWO assumptions of arbitrage pricing theory and assess their practicality (4 Marks)
b) Provide FOUR differences between CAPM and APT (4 Marks)
c) Steadman Consulting Group (SCG) has established that the return of The East African Breweries
(EABL) ltd the stock is influenced by the change in inflation rate, interest rate, NSE 20-share index, and
industrial production. They have generated the forecasts and actual data for these factors and their
respective betas for the year 2015 as follows:
Factor Beta Expected value (%) Actual value (%)
Inflation 0.45 8.00 9.75
Interest rate 0.80 10.00 11.50
NSE index 1.60 8.50 10.50
Industrial production 1.90 11.00 10.50
An investor is considering making an investment in the shares of EABL ltd. The risk-free (anticipated)
rate of return is 11%.
Required:
Calculate the total return on the share using Arbitrage Pricing model (12 Marks)
QUESTION FOUR
a) Distinguish between a capital market line (CML) and securities market line (SML) (4 Marks)
b) The following are the historical returns for the Express (K) Ltd.
Average Return
Period Express (K) ltd’s Stock NSE Index
2006 10 12
2007 15 14
2008 18 13
2009 14 10
2010 16 9
2011 16 13
2012 18 14
2013 4 7
Required:
i) Compute the correlation coefficient between Express (K) Ltd. and the general market index.
(6Marks)
ii) Compute the Beta for the Express (K) Ltd. (2 Marks)
c) NSSF is a state corporation in Kenya having its investment portfolios managed by Premier Investment
Managers (PIM) ltd. PIM is currently attempting to evaluate two possible portfolios, which consist of the
same five assets held in different proportions. The company is particularly interested in using beta to
compare the risks of the portfolios and has gathered the data contained in the table below:
Portfolio weights
Asset Asset beta Portfolio K (%) Portfolio-L(%)
A 1.80 20 30
B 0.55 40 10
C 1.20 20 20
D 1.10 10 20
E 0.90 10 20
Totals 100% 100%
Required:
a) Calculate the betas for portfolio K and L (4 Marks)
b) Compare the risks of these portfolios to the market as well as to each other. Which portfolio is more
risky?
(4 Marks)
QUESTION FIVE
a) Discuss FIVE limitations of capital Asset Pricing Model (10 Marks)
b) Discuss THREE forms of mergers (6 Marks)
c) Explain ANY TWO considerations for mergers (4 Marks)
