SECTION B NBAA PAST PAPERS

QUESTION 18 NOVEMBER 2015

Kimolo Company is an all equity financed company with a cost of capital of 19%. The company is considering
the following capital investment projects:
Expected receipt in
Project Outlay now (TZS) one year Beta factor
A 70 million 76.65 million 0.3
B 70 million 79.10 million 0.5
C 105 million 124.6 million 1.0
D 140 million 168.0 million 2.0
The Treasury Bill rate is 8% and the expected return on an average market portfolio is 15%.
Required:
(i) Calculate Kimolo’s beta factor. (2 marks)
(ii) Evaluate the economic viability of each project. (8 marks)
QUESTION 21 MAY 2018
(a) Explain the meaning of Capital Asset Pricing Model (CAPM) and state its components. (6 marks)
(b) Joti has recently won a substantial amount of money after playing one of the famous betting games in
Tanzania. Among of the financial advices received from friends is for him to invest in shares listed at the
local stock exchange.
The following information relating to available shares at the stock exchange and their forecasted return
given the different state of economy were obtained:
State of the
economy Probability Share returns
Tembo shares Nyati shares Simba shares
Recession 0.25 10% 15% -7%
Growth 0.50 20% 50% 12%
Boom 0.25 30% -10% 40%
Joti wishes to invest in two different shares but does not know the shares which promise high future
returns. He has asked you to help him in the selection of shares.
Required:
(i) Calculate the expected return and standard deviation of each share and advise Joti on two shares
he should invest in. (9 marks)
(ii) Compute the expected portfolio return and portfolio standard deviation of the shares selected in (i)
above when the available funds are invested equally in each of the shares. (5 marks)
QUESTION 22 NOVEMBER 2018
Briefly explain the Markowitz Portfolio Theory (MPT) and outline nay three factors the constrain the underlying
investment strategy. (6 marks)
QUESTION 25 FEBRUARY 2022
Kaswaki, a newly established Japanese-based car manufacturer, is evaluating two overseas locations for a
proposed expansion of production facilities at a site in Dar es Salaam (Tanzania) and another in Nakuru
(Kenya). The likely future return from investment in each site depends to a great extent on future economic
conditions. Three scenarios are postulated, and the Internal Rate of Return (IRR) from each investment is
computed under each scenario. The returns with their estimated probabilities shown below:
Internal Rate of Return (IRR)(%)
Economic condition Probability Dar es Salaam Kenya

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 Boom 0.3 10 10
Recession 0.3 20 30
Depression 0.4 15 20
Required: Calculate the expected return and the standard deviation of the following investment strategies
and comment on the best strategy to be adopted by Kaswaki:
(i) Investment Strategy No.1
Committing 50% of available funds to the site in Dar es Salaam and 50% to Nakuru? (4 marks)
(ii) Investment Strategy No.2
Committing 75% of available funds to the site in Dar es Salaam and 25% to Nakuru? (4 marks)
(iii) Assuming Kaswaki investors are risk averse recommend a better investment strategy. (2 marks)

QUESTION 26 AUGUST 2022

Securities K, N and Q have standard deviation of returns of 9%, 13% and 6% respectively. The expected
return on market portfolio is 30% with standard deviation of return of 10%. The risk-free rate is 6%.
Required: If the correlation coefficient between K and Q’s returns is –0.8, find the expected return on a
portfolio made up of 30% of security K and 70% of security Q. (4 marks)

QUESTION 27 AUGUST 2022

You have been following four assets, E, F, G and H, which are listed in the local securities market. Your
assistant has collected some information about the four assets with some of the assets missing critical
information. The collected information is summarized as follows:
Asset Expected Returns Deviation Beta Residual Variance
E 0.115 0.150 ?? 0
F 0.140 ?? 2 0.49
G ?? ?? 1 0
H 0.40 ?? 0 0.36
Required:
(i) Use the Capital Assets Pricing Model (CAPM) to calculate the expected return on asset G, the standard
deviation on assets F, G and H and the beta on asset E. (6 marks)
(ii) Provide a brief assessment of each asset based on its risk and return profile. (2 marks)
QUESTION 30 FEBRUARY 2023
(a) Evaluate the usefulness of the following measures in the context of an individual security and a portfolio:
(i) Expected return
(ii) Standard deviation
(iii) Coefficient of variation (6 marks)
(b) A division of Bawaba Company has been allocated a fixed capital sum by the main Board of Directors
for its capital investment during the next year. The division’s management has identified three capital
investment projects, each potentially successful and of similar size. However, it has only been allocated
enough funds to undertake two projects. Projects are not divisible and cannot be postponed until a later
date.
The division’s management proposed to use portfolio theory to determine which two projects should be
undertaken, based on an analysis of the projects’ risk and return. The success of the projects will depend
on the growth rate of the economy. Estimate of project returns at different levels of economic growth are
as follows:
Economic Growth Probability of
(Annual Average) Occurrence Estimate Return (%)
Project 1 Project 2 Project 3
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 Zero 0.2 5 5 10
2 percent 0.3 10 10 10
4 percent 0.3 10 10 10
6 percent 0.2 5 20 10
The company is contemplating on whether to invest in Portfolio 1 or Portfolio 2. Portfolio 1 is made up
of Projects 1 and 2 while Portfolio 2 is made up of Projects 1 and 3. The projects in each portfolio are
equally weighted.
Required: Use the above information to evaluate which of the two portfolios the division of Bawaba
Company is likely to undertake. All relevant information must be shown. (9 marks)

QUESTION 31 FEBRUARY 2023

An investor has a portfolio of shares in four (4) listed companies as detailed below:
Expected Return
Number of Market price per during the Next
Company shares Held share Beta Factor Year
Ace Ltd 5,000 TZS 500 1.5 19.5%
Black Ltd 7,000 TZS 600 2.0 22%
Club Ltd 8,000 TZS 700 1.7 20%
Diamond Ltd 9,000 TZS 800 0.7 13%
At present, the risk-free rate of return is 7% while the return on market is 15%.
Required:
(i) Calculate the beta for the portfolio and the required return on the portfolio. (4 marks)
(ii) Assess the performance of the individual share in the portfolio and state whether the portfolio investment
is financially viable. (4 marks)
QUESTION 32 MAY 2023
(a) Assume there are N securities in the market. The expected return of every security is 10 percent. All
securities also have the same variance of 0.0144 and the covariance between any pair of securities is
0.0064.
Required:
(i) Briefly explain the key determinants of the expected returns and variance of a port-folio made up
of several risky assets. (3 marks)
(ii) What is the expected return of an equally weighted portfolio containing all N securities? (2 marks)
(iii) What will happen to the variance as N gets larger? (1 mark)
(iv) What security characteristics are most important in the determination of the variance of a well-
diversified portfolio? (2 marks)
(b) Mollel plc manufactures sunglasses, and therefore, its returns are best during sunny seasons. Another
company Mwani plc, manufactures umbrellas, and therefore, its returns are best during rain seasons.
The returns on the shares are shown in the table below, together with the probability of when a particular
weather ‘event’ may occur.
Event Probability Mollel plc (%) Mwani plc (%)
Sunny Weather 0.3 20 4
Sunny Spells 0.4 12 15
Wet Weather 0.3 -5 25
Required:
(i) Calculate the expected return and standard deviation of a share in Mollel plc and Mwani plc. (6
marks)

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 (ii) Discuss the results from (i) with reference to risk and return, stating which company has higher risk
and which one would you choose to invest in. (3 mark)
(iii) Explain how you could improve the combined risk and return received by an investor through the
use of a portfolio comprising shares in both Mollel plc and Mwani plc. (3 marks) (Total: 20 marks)
QUESTION 33 NOVEMBER 2023
(a) A broker has advised you not to invest in cooking oil industry because, in her opinion, it is far too risky.
She has shown you evidence of how widely the prices of cooking oil stocks have fluctuated in the recent
past. She argues that the standard deviation of cooking oil stocks is very high relative to most stocks.
Required: Evaluate the broker’s advice considering that you view yourself as a risk averse investor.
(b) A typical investor will normally hold a portfolio of financial assets. As a result, each asset is normally
evaluated in relation to the other assets rather than in isolation.
Required:
(i) Briefly explain why the covariance of a security with the rest of a portfolio is more appropriate
measure of risk than the security’s variance. (3 marks)
(ii) Describe the factors that determine the beta of a financial asset. (3 marks)

QUESTION 34 FEBRUARY 2024

(a) According to the portfolio theory, a market estimate of investors reactions to risk cannot be measured
precisely. So, it is impossible to set risk adjusted discount rates for various classes of investments with
a high degree of precision.
Required: Discuss this statement. (6 marks)
(b) Metongo and Orengo are two famous security analysts at the local stock market. Recently, the local
stock exchange has experienced market changes due to different economic and political factors which
have affected the price and return of the securities traded in the market. As a result, the two analysts
have selected different stocks with each claiming that the stock selected is better performing than the
other. The expected return and risk as indicated by beta on the stocks selected by the analysts are as
follows:
Metongo Orengo
Return 19% 16%
Beta 1.5 1.0
Required:
(i) Aside from the issue of general movements in the market, which investor had a better performing
stock? (4 marks)
(ii) Notwithstanding your response in (i) above, if the government bond rate were 6% and the market
return during the period was 14%, which investor would have a superior stock selection? (4 marks)
(c) Assume that there are N Securities in the Makorokocho Stock Market (MSM). The expected return of
every security is 10% and all securities have the same variance of 0.0144. The covariance between any
pair of the securities is 0.0064.
Required:
(i) Compute the expected return of an equity weighted portfolio. (3 marks)
(ii) Explain what will happen to the variance as N gets larger, and outline the main determinant(s) of
the risk of a well-diversified portfolio. (3 marks) (Total: 20 marks)

QUESTION 35 MAY 2024

Prospero Company Ltd is considering whether or not to invest in three widely different projects to be located
in Dar es Salaam, Tanga and Morogoro. The company has no capital rationing problem. Each project is

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considered to have its own distinct beta factor. An assessment has been made of data for risk/returns for
each project as follows:
Project Dar Tanga Moro
Expected return 14% 12% 17%
Estimated correlation of returns with the market 0.62 0.75 0.58
Standard deviation of returns 3.7% 4.1% 6.5%
The expected market return is 15% and the standard deviation of market returns is 4.8%. The risk-free rate
of return is 8%.
Required:
(i) Calculate and interpret the beta factor for each project. (5 marks)
(ii) Use the Capital Asset Pricing Model 9CAPM) to establish the economic viability of each project. (5
marks)

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