COURSE OUTLINE

Portfolio Theory & Management

COURSE DESCRIPTION:
This course is an in-depth study of the funds management theory and practice. Participants will first
develop a strong theoretical knowledge of asset pricing, market efficiency and funds management.
Students will then be exposed to the managed funds industry and be required to apply their theoretical
knowledge to understand the process of developing, managing and evaluating these assets. In addition,
students will practically develop an Investment Policy Statement (or a Statement of Advice) for an
investor, forecast characteristics of various asset classes in an economy, and be able to create an
investment vehicle to satisfy investors' needs. The students will also learn various strategies to manage
funds, issues that impact performance, and issues in benchmarking and performance evaluation.
Equities, Fixed Income Securities, Commodities, Real Estate, Alternate Funds, Emerging, Developing and
Developed markets will be examined in the context of portfolio construction.

MATERIAL / RESOURCES:/RECOMMENDED TEXTS:

Essentials of Investments, 9th edition by Bodie, Kane and Marcus (BKM). McGraw-Hill Irwin

BY WEEK COURSE CONTENTS

Week 1: Fundamentals of Modern Portfolio Theory
Week 2: Overview of the Financial Market and Basic Performance Measures
Weeks 3 and 4: Investment Policy Statement (IPS) and the Asset Allocation Decision
Week 5: Active Equity Portfolio Management Strategies
Week 6: Bonds Portfolio Management Strategies
Week 7: Real Estate, International Investments, and Emerging Markets
Week 8: Passive Equity Portfolio Management Strategies
Week 9: Issues in Portfolio Management Strategies
Week 10: Hedge Funds
Week 11: Behavioural Finance
Week 12: Performance Evaluation Theory, Evidence and Issues

ASSIGNMENT
Following information has been extracted from the Balance Sheet and Income
Statement of ABC Company to perform fundamental analysis.
Particulars

Rs. (000)

Cash

200

Current assets

937

Earning before interest and taxes (EBIT)

Interest expenses
Sales

50,150
2,550
105,000

Long term debts

1,700

Common Stock (@100 per share)

2,000

Current liabilities

409

Total assets

6,737

Inventory

212

Preferred dividend

1,230

Company ABC has recently paid dividend of Rs. 5 and expected

dividend for the next year is Rs. 5.30. Required rate of return for
such type of investment is 12% and company is paying tax at 35%.
Question #01.
You are required to calculate the following:
Quick ratio
Net profit margin
Interest coverage ratio
Earning per share
Intrinsic value of stock

Question #2.
Compare the ABC Companys ratios (calculated in question #01) with the Industry average and rank its
performance accordingly as per table below:
Ratios
Industry average
Company's ratio
Ranking
(poor/good or low/high)
Quick
1.75 Times ? ?
Net profit margin
35% ? ?

Interest coverage
Earning per share

16 Times ? ?
Rs. 1.35 ? ?

Important Tip: This Assignment can be best attempted from the knowledge acquired after watching video lecture no. 1
to lecture no.13
Schedule Due Date and Time November 11, 2011 At 11:59 P.M. (Mid-Night)
Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned due date is usually
available
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FIN630 Assignment 1 Solution

Solution of Question no.1:Acid Test Ratio = Current assets-Inventories-prepaid expense / Current Liabilities
= (200,000 + 937,000 212,000) / 409,000 = 2.262
=2.26 Times

Net Profit Margin = (Net Profit after Taxation / Net Sales)*100

= (30940000/105000000)*100
=29.47%

Times Interest Earned =EBIT / interest Expense

=50, 150000/ 2, 550000
=19.67 Times
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Earnings per Share= (Net income Dividends on preferred stock) / average outstanding shares
=30940000-1230000/2000000
=14.85

Intrinsic value of stock = D1/ (r-g)

= 5.30/ (12-0)
= 5.30/ (12%)
= 44.16

Solution of Question no.2:Ratios

Quick

Net Profit Margin

Industry Average

Companys ratio

Ranking (Poor/good)

2.26 Times

Good

1.75 Times

35%

29.47%
Poor

Interest Coverage

16 Times
19.67 Times

Earning per share

Rs. 1.35

Good

Rs.14.85
Good