CPA › Financial Management › Introduction to portfolio analysis
Back to Unit

Introduction to portfolio analysis

Unit: Financial Management

Premium Topic Resources

Sign in to download the full Topic PDF and enable offline revision mode.

Login to Access
Join the community! 550+ students upgraded in the last 24 hours. Limited Discount Seats Available

August 2025

 2 Questions
Question 5c
​​Discuss THREE forms of market efficiency in relation to efficient market hypothesis (EMH).


Answers and Explanations are locked.

Login to View Answer
Question 5d
​ ​ ​ ​ ​ ​​The Alliance Fund is a mutual fund that holds long-term positions in a small number of non-dividend paying stocks. The holdings at the end of two recent years are as follows:

Year 2023 
                       Year 2024 
Stocks
Number of shares 
Price (Sh.) 
Number of shares 
Price (Sh.) 
A
20,000
45.25
20,000
48.75
B
45,000 
25.38 
45,000 
24.75 
C
75,000
14.50
75,000
12.38
D
23,000
87.13
23,000
98.50
E
30,800
56.50 
30,800 
62.50 
F
35,000 
63.00
35,000
77.00
G
42,400
32.00
42,400
38.63 
H
55,000
15.25
55,000
8.75
I
90,000
9.63
90,000
27.45
J
18,000 
71.25
18,000
75.38 
K
17,400
42.13 
17,400
49.63
L
27,400
19.88
0
27.88
M
0
17.75
30,000
19.75 

2023 Sh.

2024 Sh.
Cash  
708,400
574,600
Expenses 
146,000
166,000

At the end of each year, the Alliance Fund had 1,086,000 shares outstanding. 

Required: 
(i) The Net Asset Value (NAV) of a share of Alliance Fund at the end of year 2023 and year 2024 (including cash position in the total portfolio value). 

(ii) The growth rate in the net asset value (NAV).


Answers and Explanations are locked.

Login to View Answer

April 2025

 1 Questions
Question 2c
​ ​ ​ ​​The following information relates to two securities; security X and security Y where an investor has a capital of Sh.1,500,000 in which Sh.900,000 is to be invested in Security X while Sh.600,000 is to be invested in Security Y. 

The returns and associated probabilities for the various economic states are as shown below:

Economic States
Probability
Returns (%) 
Security X
Security Y 
A
0.20
10
18
B
0.30
15
24
C
0.50
17
26

Required: 
(i) Expected portfolio return. 

(ii) Using the mathematical model, compute the portfolio risk. 


Answers and Explanations are locked.

Login to View Answer

December 2024

 2 Questions
Question 3a
​​Distinguish between “Fundamental theory” and “Random walk theory” in relation to valuation of financial assets.


Answers and Explanations are locked.

Login to View Answer
Question 5c
​ ​ ​​The returns of Saflox Limited shares and the returns on the securities exchange index and associated probabilities in different possible economic states of the economy that might prevail next year are illustrated below:

Economic conditions
Probability
Market return (%)
Saflox Limited returns (%)
Rapid expansion
0.30
25
13
Moderate expansion 
0.25
20
10
No growth
0.45
15
8

Required: 
(i) The expected return of the market and that of Saflox Limited shares. 

(ii) The correlation coefficient between the returns at the securities exchange with the returns of Saflox Ltd. shares. 


Answers and Explanations are locked.

Login to View Answer

August 2024

 2 Questions
Question 5b
Analyse FOUR differences between “efficient market hypothesis and “behavioural finance”. 


Answers and Explanations are locked.

Login to View Answer
Question 3b
​ ​ ​​The following information relates to the market price per share of Wendoh Limited over a period of five years:

Year
Market price per share (Sh.)
2023
28
2022
22
2021
18
2020
25
2019
28

Required: 
(i) The expected return of the shares of the company. 

(ii) Comment on the performance of the company based on the movement of its share price over the last five years.


Answers and Explanations are locked.

Login to View Answer

April 2024

 1 Questions
Question 1c
​ ​ ​ ​ ​ ​​The following information relates to two potential investments namely; investment M and investment K:

 Investment M 
 Investment K
Probability
Return
Probability
Return
0.30
20%
0.20
20%
0.40
8%
0.60
8%
0.30
-4%
0.20
-4%

Required: 
(i) Compute the expected return for each investment. 

(ii) Determine the standard deviation of investment M and investment K. 

(iii) Compute the portfolio return assuming that 30% of the total wealth is invested in investment M and 70% in investment K.


Answers and Explanations are locked.

Login to View Answer

December 2023

 1 Questions
Question 2b
​ ​ ​ ​​Job Nyangaya plans to invest in two securities; security A and security B. 

 The returns on each security is dependent on the state of the economy as shown below:

State of economy
Probability
Return on security A 
Return on security B 
Boom
0.40
27%
36%
Average
0.50
21%
33%
Recession
0.10
18%
31.5%   

Required: 
(i) The standard deviation for security A and security B. 

(ii) The covariance between security A and security B. 

(iii) The correlation of coefficient between security A and security B. 


Answers and Explanations are locked.

Login to View Answer

August 2023

 1 Questions
Question 3a
​ ​​By aid of a diagram, differentiate between “systematic risk” and “unsystematic risk” in relation to portfolio analysis.


Answers and Explanations are locked.

Login to View Answer

April 2023

 2 Questions
Question 3c
​​The Maji Group portfolio comprises of Maji A shares with an expected return of 10% and a standard deviation of 20% and Maji B shares with an expected return of 16% and a standard deviation of 40%. The correlation between Maji A shares and Maji B shares is 0.4. The portfolio is comprised of 30% Maji A and 70% Maji B. 
 
Required: 
(i) The expected return of the portfolio.
 
(ii) The standard deviation of the portfolio. 


Answers and Explanations are locked.

Login to View Answer
Question 4b
​​Outline FOUR roles of mutual funds as investment avenues.


Answers and Explanations are locked.

Login to View Answer

August 2022

 1 Questions
Question 5b
​ ​​A financial expert has provided you with the following data regarding returns on Mebco Ltd.’s shares for the years 2017 – 2021:

Year
Return on Mebco Ltd.’s shares (%)
2017
18
2018
16
2019
10
2020
6
2021
8

Required: 
The risk in Mebco Ltd.’s shares return as measured by the standard deviation. 


Answers and Explanations are locked.

Login to View Answer

April 2022

 1 Questions
Question 4c
​ ​ ​ ​​Fredrick Onyango, a prospective investor, is considering buying shares of Company A and Company B which are currently selling at Sh.40 and Sh.50 respectively at the securities exchange. He wishes to invest Sh.1,000,000 in both companies' shares in the ratio of 6:4 for share A and share B respectively. 

The forecasted end of year market prices and the probabilities of their occurrence in different economic conditions are given as follows:

Economic
End of year market price (Sh.)
Condition
Probability
Share A
Share B
Best 
0.40
50
60
Fair
0.30
42
50
Poor
0.30
35
40

Required: 
(i) Expected rate of return for each investment.

(ii) Portfolio expected return. 

(iii) Assuming that the returns of share A and share B are perfectly positively correlated, compute the portfolio risk. 


Answers and Explanations are locked.

Login to View Answer

Pilot December 2021

 2 Questions
Question 5a
​ ​​Utawala Ltd. plans to buy shares of Mcop Ltd. that are currently selling at Sh.20 each at the National Securities Exchange. 

The forecasted price per share and probability of their occurrence on different states of nature are as follows:

State of nature
Probability
Forecasted Share Price (Sh.)
Excellent
0.30
25
Normal
0.20
22
Poor
0.35
21
Very Poor
0.15
19

Required: 
(i) Expected rate of return of the company's shares. 

(ii) The standard deviation of returns. 


Answers and Explanations are locked.

Login to View Answer
Question 2b
​ ​​Economics Industries Ltd. is an all equity financed company with a cost of capital of 18.75%. The company is evaluating five annual capital investment projects with the following extended returns and risks as measured by the Beta factor.

Project
Initial outlay
Annual cash flows
Beta coefficient
(Sh.)
(Sh.)

A
300,000 
330,000 
0.3
B
300,000 
340,000 
0.5
C
400,000
480,000 
1.0
D
500,000
590,000
1.5
E
500,000
600,000
2.0

Additional information: 
1. The risk free rate of return is 7.7%. 
2. The market rate of return is 16%. 

Required: 
(i) The beta factor of Economic Industries Ltd. 

(ii) Advise the management of Economics Industries Ltd on the project to undertake.

(iii) Compute the beta factor of the accepted project (s) based on results in b (ii) above. 


Answers and Explanations are locked.

Login to View Answer

December 2021

 1 Questions
Question 2c
​ ​ ​​The following data shows the returns of two stocks, A and B and their respective probabilities of occurrence:

Probability
Returns of stock А (%)
Returns of stock B (%)
0.40
10
8
0.30
7
12
0.30
13
7

Required: 
(i) The expected returns of stock A and stock B. 

(ii) The standard deviation of the returns of stock A and stock В. 

(iii) Suppose that a portfolio is created composed of 70% of stock A and 30% of stock B. Determine this portfolio's risk in terms of portfolio standard deviation.


Answers and Explanations are locked.

Login to View Answer

September 2021

 1 Questions
Question 3c
​ ​ ​​Theophilus Akumu has a capital of Sh.1,000,000 which she intends to invest in two securities; namely Security A and Security B. 

She plans to invest Sh.200,000 in Security A, and Sh.800,000 in Security B. 

The returns of the two securities have the following characteristics depending on the state of the economy:

State of the economy
Probability
Returns (%) Security
A
B
Recession
0.40
18
24
Stable
0.50
14
22
Expansion
0.10
12
21

Required: 
(i) Expected return for the portfolio comprising of Security A and Security B. 

(ii) Correlation coefficient between Securities A and B.


Answers and Explanations are locked.

Login to View Answer

May 2021

 1 Questions
Question 2d
​ ​​Eliud Mwaniki is considering investing in Security A and Security B in equal proportions. The following forecasts have been provided:

State
Probability
Returns (%)

Security A
Security B
Recession
0.30
12
6
Stable
0.40
15
7.5
Expansion
0.30
10
5

Required: 
(i) Expected return for the portfolio.

(ii) Standard deviation for security A.


Answers and Explanations are locked.

Login to View Answer

November 2020

 1 Questions
Question 5b(ii)
​​Explain the risk-return trade off in the context of investments,


Answers and Explanations are locked.

Login to View Answer

November 2019

 3 Questions
Question 3a
Using a well labelled diagram, distinguish between "systematic risk" and "unsystematic risk". ​​


Answers and Explanations are locked.

Login to View Answer
Question 3b
​​An investor has presented the following information relating to forecasted returns of two securities, Y and Z together with their respective probabilities:
  
Forecasted returns (%)
Probabilities (Pi)
X
Z
0.10
0.20
0.35
0.05
0.15
0.15
10
12
8
15
14
9
8
10
7
12
11
8

Required:
(i).   The standard deviation of security Y and security Z returns. 
(ii).  The relative risk of security Y and security Z. 
(iii).  Advise the investor on which of the two securities to invest in. 


Answers and Explanations are locked.

Login to View Answer
Question 4c
​​A financial analyst has predicted the following returns on the securities of two companies, Coral Ltd. and Reef Ltd., operating in the same industry, during the financial year ending 31 December 2019 under different states of the economy.

State of economy
Probability
Forecasted return (%) 
Coral Ltd.
Reef Ltd.
Boom
Normal
Recession
0.20
0.60
0.20
16
12
8
14
10
6

A prospective investor is considering investing Sh.500,000 in the shares of both firms. He wishes to invest Sh.300,000 in shares of Coral Ltd. and the balance in the shares of Reef Ltd. The prospective investor feels that his 2 - asset portfolio will not only guarantee him his required return but will assist him to eliminate diversifiable risks.

Required: 
On the basis of 2 - asset portfolio, determine: 
(i) Portfolio's expected rate of return. 
(ii) Portfolio's actual risk using the mathematical model. 


Answers and Explanations are locked.

Login to View Answer

November 2018

 1 Questions
Question 5c
​ ​​Daima Investment Bank has provided the following information relating to two of its securities namely: A and B:

State of economy
Probability (P)
Security returns (%)
A
B
Stable
0.30
12
6
Expansion
0.40
15
7.5
Recession
0.30
10
5

Required: 
(i).     The expected return for each security. 
(ii).    The standard deviation for each security. 
(iii).   The correlation coefficient between the two securities' returns. 
(iv).   Determine the expected return of a portfolio constituting 60% of Security A and 40% of Security B. 
(v).    Compute the risk of the portfolio in (c) (iv) above.


Answers and Explanations are locked.

Login to View Answer

November 2017

 1 Questions
Question 5c
​​A prospective investor is intending to buy ordinary shares of a firm listed at the securities exchange whose market price per share is Sh.30.

The forecasted market price per share for the following five months is estimated as follows:

Month
Forecasted market price per share (Sh.)
Probability
1
33
0.2
2
30
0.1
3
27
0.3
4
36
0.15
5
39
0.25

Required: 
The expected return from the investment.


Answers and Explanations are locked.

Login to View Answer

November 2015

 1 Questions
Question 5d
​Makata Limited intends to invest its surplus funds in shares with the following return expectations:

Economic condition
Boom
Average
Recession		Probability
0.20
0.60
0.20		Share returns
40%
15%
-10%

Required:
Using the coefficient of variation, assess the risk level associated with the investment.


Answers and Explanations are locked.

Login to View Answer
Related Topics