Investment Analysis and Portfolio Management – Spring 2026 – Midterm

Question 1: (i) Compare the following terms: a) Market order and Limit order. [CLO 01, L02, Marks: 2] b) Buy-side analyst and Sell-side analyst with examples. [CLO 01, L02, Marks: 3] (ii) Explain the assumptions of Markowitz Portfolio Theory. [CLO 01, L02, Marks: 3] (iii) During a period of heightened uncertainty in global financial markets, three individuals Rahim Ahmed, Nusrat Khan, and Tanvir Hossain engaged in transactions involving spot and futures contracts, each driven by a different economic motive. Rahim Ahmed works as the finance manager of a large textile manufacturing firm in Bangladesh that regularly imports raw cotton from abroad. His company is scheduled to make a USD 2 million payment in three months. Concerned that a potential appreciation of the US dollar against the Bangladeshi taka could significantly increase the firm's import cost, Rahim decided to enter into a currency futures contract to purchase US dollars at a predetermined exchange rate for settlement in three months. His primary intention was to protect the firm from unfavorable exchange rate movements and to ensure certainty in cash flow planning. At the same time, Nusrat Khan, an independent market participant, was closely following developments in global commodity markets. She believed that rising inflation expectations and geopolitical tensions would lead to a sharp increase in gold prices in the near future. Nusrat did not own gold, nor did she require physical delivery of the metal at any point. Acting on her market outlook, she purchased gold futures contracts, fully aware that she was exposed to price risk, with the sole objective of selling the contracts later at a profit if her expectations proved correct. Meanwhile, Tanvir Hossain, a professional trader with experience in commodity markets, noticed a clear pricing inconsistency between the spot and futures markets for crude oil. The spot price stood at $80 per barrel, while the three-month futures price was $88 per barrel, even though the combined cost of storage and financing for three months was only $4 per barrel. Recognizing an opportunity, Tanvir simultaneously bought crude oil in the spot market, stored it, and sold futures contracts for delivery in three months, thereby locking in a profit regardless of future price movements. Based on the actions, objectives, and risk exposure described in the passage, explain the trading strategy of Rahim Ahmed, Nusrat Khan, and Tanvir Hossain. [CLO 01, L02, Marks: 4] Question 2: Lena Hunziger has designed the following three-asset portfolio: Table 1: Expected return and portfolio weight SQUARPHARMA T. Bond GOLD Expected Return 15% 12% 9% Portfolio Weight 0.20 0.30 0.50 Table 2: Variance-Covariance Matrix SQUARPHARMA T. Bond GOLD SQUARPHARMA 400 45 189 T. Bond 45 81 38 GOLD 189 38 441 Requirement: Determine the expected return and risk of the portfolio from the above tables. [CLO 02, L03, Marks: 1+3=4] Question 3: An equity analyst is designing a Free-Float Market-Capitalization-Weighted Index to track the performance of large, actively traded companies. The index includes three listed firms from different sectors. Security Beginning of End of Dividends per Shares Period Price Period Price Share ($) Outstanding ($) ($) (Unit) Apple Inc. 3,000 3,300 120 6,000 Toyota Motor Corp. 2,800 2,400 180 8,000 Unilever PLC 1,200 1,350 90 12,000 To ensure the index reflects investable market value, the analyst excludes promoter holdings, government stakes, and strategic cross-holdings. Particulars Apple Inc. Toyota Motor Corp. Unilever PLC Percent of Shares Available 85% 70% 90% for Trading Requirement: a) Estimate the number of free-float shares outstanding for each company. [CLO 03, L05, Marks: 1] b) Estimate the price return and total return of the index. [CLO 03, L05, Marks: 2+2=4] Question 4: A market has the following limit orders standing on its book for a particular stock: Buyer Bid Size Limit Price (£) Offer Size Seller (Number of (Number of Shares) Shares) Adam 1,200 48.40 Brain 600 48.65 Chloe 700 48.80 Daniel 400 49.10 49.15 700 Olivia 49.30 1,000 Sophia 49.50 600 Ethan Emma submits a day order to sell 2,800 shares with a limit price of £48.65. Assuming that no more buy orders are submitted on that day after Ian submits his order. Requirements: a) Calculate Emma's average trade price and illustrate with whom Emma Trades. [CLO 02, L03, Marks: 2] b) Prepare the limit order book showing its status after the execution of Emma's order. [CLO 02, L03, Marks: 2]