Section A
Answer TWO questions from this section
1. Caladrius Biosciences Inc is a US-based biopharmaceutical company active in the field of stem cell therapy and regenerative medicine, particularly of cardiovascular disease. The current stock price of Caladrius Biosciences is $55. Your projections for the next four years are based on the following assumptions
The company has 10 million shares outstanding. The required return on the stock is estimated to be 10 percent.
Require:
1. Estimate the value of the stock at the end of Year 4.
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2. Estimate the current value of the stock.
(25 Marks)
(35 Marks)
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3. Judge whether Caladrius Biosciences is undervalued, fairly valued, or overvalued.
(10 Marks)
4. A company’s life cycle can be divided into three stages: growth, transition, and mature. Briefly discuss the features of each stage with respect to earnings and dividends.
(30 Marks)
(Total 100 Marks)
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2. Suppose that Mrs Johnson can invest all her savings in shares in Ansell plc or all her savings in Reckitt plc. Alternatively she could diversify her investment between these two. There are three possible states of the economy – boom, growth or recession – and the returns of Ansell and Reckitt depend on which state will occur.
|
State of the economy |
Probability of state of the economy occurring |
Ansell return (%) |
Reckitt return (%) |
|
Boom |
0.3 |
40 |
10 |
|
Growth |
0.4 |
30 |
15 |
|
Recession |
0.3 |
-40 |
25 |
Required
(a) Calculate the expected return, variance and standard deviation for each share.
(30 Marks)
(b) Calculate the expected return, variance and standard deviation for the following diversifying allocations of Mrs Dolores’s savings:
40% in Ansell, 60% in Reckitt
(20 Marks)
(c) Briefly explain how diversification impacts the trade-off of risk and return.
(25 Marks)
(d) What is the minimum risk (standard deviation) that we can achieve in a portfolio that contains only the two securities above?
(25 Marks)
(Total 100 Marks)
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3. Consider the two (excess return) index model regression results for A and B:
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Required:
RA=3%+0.7Rm+eA RB=-2%+1.2Rm+eB
sM=20%, R²A=0.20, R²B=0.12
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(i) What is the standard deviation of each stock?
(20 Marks)
(ii) Break down the variance of each stock to the systematic and firm-specific components.
(20 Marks)
(iii) What are the covariance and correlation coefficient between the two stocks? What is the covariance between each stock and the market index?
(30 Marks)
(iv) For portfolio P with investment proportions of 0.6 in A and 0.4 in B, what is the standard deviation of this portfolio P? What is the covariance between portfolio P and the market index?
(30 Marks)
(Total 100 Marks)
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SECTION B
Answer ONE question
- In early 2021, a member of the popular Reddit group, Wall Street Bets, discovered that certain hedge funds were heavily shorting, or betting against GameStop stock (GME). Three million members of the Wall Street Bets Reddit group decided to see if they could make the hedge fund lose money. To do that, they bought the stock to push the stock even higher and tremendously squeezed GameStop’s short sellers. This strategy began working to perfection as GameStop stock increase from $17.25 to start the year, hitting an all-time high of $483 before trending back down.
- Tesla’s Elon Musk tweeted “Gamestonk!!” and declared that the short-selling practice “should be illegal.”
- Professor Campbell Harvey of Duke University commented: “Any one of small retail investors can’t really influence the price. But you put them all together, and they can have substantial influence… such ‘wild volatility’ and deviations from a firm’s fundamental value invite questions about whether the market is becoming less efficient.”
- (1) Professor Eugene Fama of University of Chicago was awarded the Nobel Prize in Economics (2013) for his contribution on “the empirical analysis of asset prices”. Discuss the motivation of his work and how it contributes to the conventional CAPM.
Answer the following questions with the knowledge of efficient market hypothesis and behavioural finance.
Explain whether short-selling should be legitimate.
(35 Marks)
Discuss this argument and explain whether retail investors could fundamentally impact market efficiency.
(65 Marks)
(Total 100 Marks)
(40 Marks)
(2) Boris, CFA is a portfolio manager for MP Investments, Ltd. and a close friend of Gordon, a CEO of Ed-Bio Inc. which is a US-based molecular diagnostics company.
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This company intends to manufacture and sell reagents used for diagnostic tests. In mid-January 2020, President Trump announced that “It’s going to be just fine in America”, as a response to the coronavirus outbreak in China. However, during a private conversation with Gordon, Boris found out that Ed-Bio Corporation just received $200 million Covid-19 test kits order from U.S. Government. This information has not been made public. Boris advised his clients to reduce their investments in airline ETFs but increase their investments in healthcare ETFs, instead of Ed-Bio Corporation.
Discuss whether Boris has violated any CFA Institute Standards of Professional Conduct.
(60 Marks)
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