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Oct 10, 2019

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This is a detailed problem document for technical analysis of investment

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31 vizualizări

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This is a detailed problem document for technical analysis of investment

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Company No. of Purchase

shares price

H ltd. 100 250

C ltd. 100 180

S ltd. 100 80

F ltd. 100 240

M ltd. 100 260

He paid brokerage of Rs. 1500. During the year 2001, Mr. Bhandari received the following:

Company Dividend Held:Bonu

(Rs) s

H ltd. 300 `1:2

C ltd. 290

S ltd. 450

F ltd. 500

M ltd. 600 `1:5

In January 2002, he sold all his holdings at the following prices:

Company Sale price

H ltd. 275

C ltd. 240

S ltd. 108

F ltd. 200

M ltd. 400

He paid brokerage Rs. 1865. Calculate his HPR. Ignore tax.

Horizon T Price HPR (P1-P0)/P0 HPR %

Half year $97.36 `(100-97.36)/97.36 0.0271159 2.71%

1 year $95.52 `(100-95.52)/95.52 0.0469012 4.69%

25 year $23.30 `(100-23.30)/23.30 3.2918455 329.18%

Time Outlay

0 $50 to purchase first share

1 $53 to purchase second share a year later

Proceeds

1 $2 dividend from initially purchase share

2 $4 dividend from the 2 shares held in the second

year, plus $108 received from selling both shares'

at $54 shares

Cash Flows for :

In House Account

Beginning value

Beginning of period inflow / (outflow)

Amount Invested

Ending Value

Beginning value

Beginning of period inflow / (outflow)

Amount Invested

Ending Value

In-house and Super Trust

Quarter

1 2 3 4

1,000,000 -500,000 225,000 -600,000

5,000,000 5,500,000 6,000,000 6,120,000

6,000,000 5,775,000 6,720,000 5,508,000

2,000,000 -1,200,000 -7,000,000 -400,000

12,000,000 12,000,000 5,240,000 5,259,200

13,200,000 12,240,000 5,659,200 5,469,568

•Your task is to compute the investment performance of the Walbright Fund during 2017

•On 1.1.2017, the walbright Fund has a market value of $100 Million

•During the period 1.1.2017 to 30.4.2017, the stocks in the fund showed a capital gain o

•On 1.5.2017, the stocks in the fund paid a total dividend of $2 million. All dividends w

•Because the funds performance has been exceptional, institutions invested an additiona

•On 31.12.2017, Walbright received total dividends of $2.64 million. The funds market v

•The fund made no other interim cash payments during 2017

•Compute:

•A) TWR and b) MWR

Fund during 2017. The facts are as follows:

All dividends were re-invested in additional shares

sted an additional $20 million in Walbright on 1.5.2017, raising assets under management to $13

he funds market value on 31.12.2017, not including the $2.64 million in dividends, was $140 mi

anagement to $132 million ($100+$10+$2+$20)

nds, was $140 million

Idea Ltd., had the following dividend per share and the market price per share for the period 20

2005 :

Year per share (Rs.)

(Rs.)

2000 1.53 31.25

2001 1.53 20.75

2002 1.53 30.88

2003 2 67

2004 2 100

2005 3 154

Calculate the annual rate of return for last five years. How risky is the share?

are for the period 2000 –

y is the share?

The returns on securities A and B are given below:

Probability Security A Security B

0.5 4 0

0.4 2 3

0.1 0 2

Give your security preference based on risk and return

Mr. Bond wants to buy sahres of Zytec limited which is currently selling at Rs. 50

without dividend payment. There is equal probabiltiy for the share to be sold at 55 and 70

during the next year. What is the expected return and risk if 300 shares are bought

Ignore transactions costs and taxes.

A stock costing Rs. 50, pays no dividend. The possible prices of the stock at the end of

the year and their probabilites are given below;

End of year price probability

60 0.1 a) Find expected return

65 0.2 b) Find standard deviation of the returns

70 0.4

75 0.2

80 0.1

An investor has a choice of four stocks for investment. Their rates of return and

probabilites are as below:

ICICI bank Axis bank Yes bank HDFC bank

r p (in %) r p (in %) r p (in %) r p (in %)

-30 20 -20 15 -20 20 -10 10

0 40 0 35 10 40 0 25

30 30 20 45 40 30 10 40

70 10 40 5 80 10 20 25

a) Are all these stocks attractive investment?

b) How should the investor choose one to buy

The following is the return of two securities for the past five year Calculate for each the

expected return and risk. What will be expected Return of Portfolio Comprising 40% - X and

60% - Y. What will be risk of portfolio

Year X Return Wx Wy

1 6.6 24.5 17.34 0.4 0.6

2 5.6 -5.9 -1.3

3 -9 19.9 8.34

4 12.6 -7.8 0.36

5 14 14.8 14.48

or each the

ing 40% - X and

The following is the forecast of return of two securities along with the probability of their occur

the expected return and risk of both the securities. Find correlation between Returns of X & Y.

bility (X) Y)

0.05 10 18

0.2 20 12

0.5 20 28

0.2 25 28

0.05 25 38

If a portfolio comprise of 30% - X & 70% - Y, Find Expected Return, S.D. of portfo

h the probability of their occurrence. Calculate

ion between Returns of X & Y.

Mr. X is holding two securities X and Y in his portfolio. With the details given below calculate

portfolio risk and return.

y tion Deviation

X 0.6 10 20

Y 0.4 16 25

Correlation of the securities return is 0.50.

iven below calculate the

Novex owns a portfolio of two securities with the following expected return, standard deviation

and weights:

Securit Expected Standard Weight

y Return Deviation

X 12% 15% 0.4

Y 15% 20% 0.6

What are the maximum and minimum portfolio standard deviations for varying levels of co

1 between two securities?

If correlation is -1, calculate the proportion of the individual securities in the portfolio to re

2 risk to zero?

n, standard deviation

L Ltd. And M Ltd. Have the following risk and return estimates.

proportion of investment of L Ltd. and M Ltd. to minimize the risk of portfolio.

Standar

Securi Expect d

ed Weight

ty Return Deviati

on

L 20% 18% 0.4545454545

M 22% 15% 0.5454545455

1

)= – 1 Calculate the

rtfolio.

Europium Ltd. has been specially formed to undertake two investment

opportunities.

The risk and return characteristics of the two projects are shown below:

A B

Expected 12% 20%

Return

Risk 3% 7%

Europium plans to invest 80% of its available funds in Project A and 20% in B. The

directors believe that the correlation co-efficient between the returns of the

projects is +0.1.

Required:

a. Calculate the returns from the proposed portfolio of Projects A and B;

b. Calculate the risk of the portfolio;

c. reducing effects of diversification;

Suppose the correlation co-efficient between A and B was -1. How

d. should Europium Ltd. invest its funds in order to obtain a zero risk

portfolio.

The following are the different state of economy, the probability of occurrence of that state and

rate of return from Security A + and B in these different states :

Rate of Return

State Probability

Security A Security B

on

Boom 0.3 0.6 0.4

Find out the expected returns and the standard deviations for these two securities. Suppose, an

20,000 to invest. He invests Rs. 15,000 in Security A and balance in Security B, what will be the

and the standard deviation of the portfolio?

rrence of that state and the expected

urity B, what will be the expected return

L Ltd. and M Ltd. have the following risk and return estimates.

RL = 10%

RM = 12%

SL = 11.50%

SM = 15%

(Correlation Coefficient) = CORLM = – 1. Calculate the proportion of investment in L Ltd.

and M Ltd. to minimise the risk of portfolio.

tment in L Ltd.

P Ltd. and Q Ltd. have low positive correlation coefficient of + 0.5. Their

respective risk and return profile is as under :

RP = 10%

RQ = 15%

SP = 20%

SQ = 25%

Compute the portfolio of P and Q to minimise risk.

The forecast of returns for securities A and B are laid our below.

Security A Security B

Probability Return (%) Probability Return (%)

0.05 15 0.05 8

0.2 20 0.25 18

0.5 25 0.4 26

0.2 30 0.25 34

0.05 35 0.05 44

Required:

(i) Expected rate of return of each security.

(ii) Standard deviation for each security.

(ii) Comment with reasons as to which of the two securities has more upside potent

Independent of the first three elements, assume now that the probability of retu

(iv) with that of A. Compute

investment in A and remainder in B.

(v) Compute the risk in the 70/30 portfolio using three different methods.

s more upside potential and downside risk.

nt methods.

P Ltd. Invested on 1.4.2007 in Equity shares as below:

Compa Number of Cost (Rs.)

ny Shares

each)

500 (Rs. 10

N Ltd. 150,000

each)

Dividends from M Ltd. and N Ltd. for the year ending 31.3.2008 are likely to be 20% and 35%

respectively. Probabilities of market quotations on 31.3.2008 are:

ility share of

Factor of M Ltd. N Ltd.

0.5 250 310

0.3 280 330

You are required to:

(i) Calculate the expected average return from the portfolio for the year 2007-08.

(ii) Advise P Ltd. of the comparative risk of two investments by calculating the standard de

be 20% and 35%

2007-08.

ng the standard deviation

Following information is available in respect of expected dividend, market price and market con

Market Market Dividend per

condition Probability Price share

Rs. Rs.

Good 0.25 115 9

Normal 0.5 107 5

Bad 0.25 97 3

The existing market price of an equity share is Rs. 106(FV Rs.1), which is cum 10% bonus de

each per share. M/s X Finance Company Ltd had offered the buyback of debentures at face valu

expected return and variability of returns of equity shares. Whether Buy back offer be accepted

et price and market condition after one year.

debentures at face value. Find the

y back offer be accepted?

Mr. A is interested to invest Rs. 1,00,000 in the securities market. He selected two securities B

and D for this purpose. The risk return profile of these securities are as follows :

Expected

Securit Risk Return

y (s) (ER)

B 10% 12%

D 18% 20%

Co-efficient of correlation between B and D is 0.15.

You are required to calculate the portfolio return of the following portfolios of B and D to be

considered by A for his investment.

(i) 100 percent investment in B only;

(ii) 50 percent of the fund in B and the rest 50 percent in D;

(iii) 75 percent of the fund in B and the rest 25 percent in D; and

(iv) 100 percent investment in D only.

Also indicate that which portfolio is best for him from risk as well as return point of view?

ected two securities B

follows :

lios of B and D to be

Consider the following information on two stocks, A and B :

Year Return on A (%) Return on B (%)

2006 10 12

2007 16 18

You are required to determine:

(i) The expected return on a portfolio containing A and B in the proportion of 40% and 60

(ii) The Standard Deviation of return from each of the two stocks.

(iii) The covariance of returns from the two stocks.

(iv) Correlation coefficient between the returns of the two stocks.

(v) The risk of a portfolio containing A and B in the proportion of 40% and 60%.

oportion of 40% and 60% respectively.

0% and 60%.

An investor has decided to invest to invest Rs. 1,00,000 in the shares of two companies, namely

projections of returns from the shares of the two companies along with their probabilities are a

0.2 12 16

0.25 14 10

0.25 -7 28

0.3 28 -2

You are required to

(i) Comment on return and risk of investment in individual shares.

(ii) Compare the risk and return of these two shares with a Portfolio of these shares

(iii) Find out the proportion of each of the above shares to formulate a minimum risk

o companies, namely, ABC and XYZ. The

ir probabilities are as follows:

res.

olio of these shares in equal proportions.

late a minimum risk portfolio.

Particulars Security A Security B

Standard 20 40

Deviation

Expected 12 20

return

Correlation between the two securities is -0.20. Calculate the return and risk of the portfolio

different combinations of A and B and explain with the help of the data arrived the concepts

efficient frontier (b) utility curve (c) efficient portfolio (d) portfolio with risk free asset and e

portfolio and (e) capital market line. Use WA = 1, 0.9, 0.759, 0.5, 0.25, 0.

Standard 20 40

Deviation

Expected 12 20

return

n and risk of the portfolios for the

data arrived the concepts of (a)

o with risk free asset and efficient

25, 0.

Following is the data regarding six securities:

A B C D E F

Return (%) 8 8 12 4 9 8

Risk (%)

(Standard 4 5 12 4 5 6

Deviation)

Assuming perfect correlation, analyse whether it is preferable to invest 75% security A and 25

(ii) security C.

est 75% security A and 25%

An investor is able to borrow and lend at the risk free rate of 12 percent. The market portfolio o

has an expected return of 20 percent and a standard deviation of 25 percent. Determine the exp

and standard deviation of the portfolios

b. If two thirds are invested in risk free asset and one third in the market portfolio.

If all wealth is invested in the market portfolio. Additionally the investor borrows one t

c. wealth to invest in the market portfolio.

e market portfolio of securities

t. Determine the expected return

ket portfolio.

Give the following risky portfolio:

Particu A B C D E F

lars

Return 10 12.5 15 16 17 18

(%)

s (%) 4 5 12 4 5 6

(a) Which of the portfolios are efficient and which are inefficient?

Suppose one can tolerate a risk of 12%, what is the maximum return one can

(b) achieve if no borrowing or lending is resorted to?

Suppose one can tolerate a risk of 12%, what is the maximum return one can

(c) achieve if borrowing or lending at a rate of 12% is resorted to?

n one can

n one can

a) Assume : The risk-free interest rate is 9%

The expected return on the market portfolio is 18%.

If a security has a beta factor of (a) 1.4, (b) 1.0, or (c) 2.3, find out the expected return o

any capital asset.

b) The following data relate to two securities, A and B

Particu Security A Security

lars B

Expecte

d 22% 17%

return

Beta 1.512 0.72

factor

Assume: The risk –free interest rate is, 10%

The expected return on the market portfolio is, 18%

Find out the required return and also comment on the pricing as under valued, over valued or

otherwise.

the expected return on

Consider a portfolio that offers an expected return of 12% and standard

deviation (SD) of 18%.T-bills offer a risk-free rate of 7%. Determine the

maximum level of risk aversion for which a risky portfolio is still preferred

to bills.

Solution

a) Draw an indifference curve in the expected return – SD plane

corresponding to a utility level of 5% for an investor with a risk aversion

coefficient of 3. Select SD range from 5% to 25% and determine the expected

return that provides utility of 5%. Then plot returns against corresponding

SDs.

b) Now draw the curve for Utility level of 4% for an investor with a risk

aversion coefficient of 4. Compare answers to a)

c) Draw an indifference curve for a risk-neutral investor providing utility level

of 5%.

d) What must be true about the sign of the risk aversion coefficient, A, for a

risk lover? Draw the indifference curve for a risk lover for a utility level of 5%.

Indifference Curve

5.05%

5.00%

4.95%

4.90%

4.85%

4.80%

0.05 0.1 0.15 0.2 0.25

Col umn D

Given portfolio weights of Bills (5% return) ranging from 0 to 1, and for

the S&P 500 stock index ranging (13.5% return and 20% SD) from 1 to 0

respectively, calculate utility levels at each weighting for an investor with

A=3. What do you conclude?

Consider a risky portfolio. The end-of-year cash flow derived from the

portfolio will be either Rs. 70,000 or Rs. 200,000 with equal probabilities

of 0.5. The alternate risk free investment in T-bills pays 6%.

a. If you require a risk premium of 8%, how much will you be willing to

pay for the portfolio?

b. Suppose that the portfolio can be purchased for the amount you found

in (a). What is the expected return on the portfolio?

c. Now suppose that you require a risk premium of 12%. What is the

price that you will be willing to pay?

d. Comparing your answers in (a) and (c), what do you conclude about

the relationship between the required risk premium on a portfolio and

the price at which the portfolio will sell?

You manage a risky portfolio with expected rate of return of 18% and SD

of 28%. The T-bill offers 8%.

Question A:

Your client chooses to invest 70% of a portfolio in your fund and 30% in t-

bill money market fund. What is the expected value and SD of the rate of

return on his portfolio?

Question B:

Now suppose that your risky portfolio includes the following investments

in the given proportions:

Stock A - 25%

Stock B - 32%

Stock C - 43%

What are the Investment proportions of your client`s overall portfolio,

including the position in T-bills if Q5 data is applied.

Question C:

What is the reward to volatility ratio (S) of your risky portfolio and your clients?

Question D:

Draw the Capital Allocation Line (CAL) of your portfolio on an expected

return-SD diagram. What is the slope of CAL? Show the position of your

client on your funds CAL.

Question E:

Suppose that your client decides to invest in your portfolio a proportion y,

of the total investment budget so that the overall portfolio will have an

expected return of 16%.

A. what is your proportion y?

B. what are your clients investment proportions in your three stocks and

t-bill fund?

c. What is the Standard deviation of the rate of return on your client’s

portfolio?

Question F:

Suppose that your client prefers to invest in your fund a proportion y that

maximizes the expected return on the complete portfolio subject to the

constraint that the complete portfolio standard deviation will not exceed

18%

a. What is the investment proportion in y?

b. What is the expected rate of return on your client’s portfolio?

Use the below data and answer the questions:

Utility Formula data A=4

Investment E(R) SD

1 0.12 0.3

2 0.15 0.5

3 0.21 0.16

4 0.24 0.21

a) Based on the utility formula, which investment would you select if you

were risk averse with A = 4

b) Based on the utility formula above, which investment would you select

if you were risk neutral

You manage an equity fund with an expected risk premium of 10% and an expected

SD of 14%. The rate on treasury bills is 6%. You client chooses to invest $60,000 of

her portfolio in your equity fund and $40,000 in a t-bill money market fund. What is

the expected return and SD on your client’s portfolio?

An investor is seeking the price to pay for a security, whose standard deviation is 3.00

percent. The correlation coefficient for the security with the market is 0.8 and the

market standard deviation is 2.2 percent. The return from government securities is 5.2

percent and from the market portfolio is 9.8 percent. The investor knows that, by

calculating the required return, he can then determine the price to pay for the security.

What is the required return on the security? What is the required return, if correlation

coefficient is not given?

eviation is 3.00

0.8 and the

securities is 5.2

ws that, by

for the security.

n, if correlation

An investment advisor has been monitoring the equity share of Spicy Foods Ltd. (SFL) over the

year. On the basis of his assessment of the fundamentals of the company and his expectations o

stock market conditions during the next six months, he has provided the following projections:

Return Return

on the

Probability from SFL Market

shares index

(%) (%) (%)

10 10 12

15 16 16

20 20 18

25 16 22

20 30 24

10 36 30

You are required to calculate the following:

a. The expected return and risk of the SFL share.

b. The expected return and risk of the market index.

c. The beta coefficient of the SFL share.

d. Whether share price is overpriced or underpriced assuming Risk Free rate of 5%

Foods Ltd. (SFL) over the past one

ny and his expectations on the

he following projections:

The following table gives an analyst’s expected return on tow shares for particular market retur

Return share share

6% 2% 8%

20% 30% 16%

1 What are the betas of the two share?

What is the expected return on each share if the market return is equally likely to b

2 or 20%?

If the risk-free rate is 7% and the market return is equally likely to be 6% or 20% w

3 the SML?

icular market return:

equally likely to be 6%

to be 6% or 20% what is

The Beta Coefficient of Target Ltd. is 1.4. The company been maintaining 8% rate of growth in dividends and ea

The last dividend paid was Rs. 4 per share. Return on Government securities is 10%. Return on market portfoli

15%. The current market price one share of Target Ltd. is Rs. 36.

(i) What will be the equilibrium price per share of Target Ltd.?

(ii) Would you advise purchasing the share?

wth in dividends and earnings.

urn on market portfolio is

Vimal enterprise has a beta of 1.5. The risk free rate is 7 percent and the expected

return on the market portfolio is 14 percent. The company presently pays a dividend of

Rs. 2.50 per share and investors expected a growth in dividend of 12 percent per

annum for many years to come. Compute the required rate of return on the equity

according to CAPM. What is the present market price of the equity share assuming the

computed return as required return?

e expected

ays a dividend of

ercent per

n the equity

e assuming the

You are analyzing a Portfolio consisting of 4 securities. Data are:

Expected Amount in

Beta of invested

Security

Return Million

security (%) (Rs.)

A 1.4 16 3.8

B 0 6 5.2

C 0.7 10 6.1

D 1.1 13 2.9

Calculate portfolio return and beta and analyse the individual securities. Rm = 10%,

. Rm = 10%,

You have Rs. 5,00,000 to invest in a stock portfolio. Your choices are stock A where you

invest Rs. 1,40,000, stock B where you invest Rs. 1,60,000 and stock C and risk free

asset where you invest the balance. Given the beta of stock A is 0.9, stock B 1.2 and that

of stock C is 1.6 and the overall beta is that of the whole market, how much money you

will invest in stock C and risk free asset.

ck A where you

and risk free

ck B 1.2 and that

uch money you

A stock has beta of 1.6 and an expected return of 16%. A risk free asset currently earns 5%.

(a) What is the expected return of portfolio of two assets invested in equal proportion?

(b) If a portfolio of the two assets has a beta of 0.6, what are the portfolio weights?

(c) If a portfolio of the assets has an expected return of 11%, what is its beta?

(d) If a portfolio of the two assets has a beta of 3.2, what are the portfolio weights? H

ently earns 5%.

ual proportion?

io weights?

s beta?

portfolio weights? How do you interpret the weights?

Mr. X is attempting to evaluate two possible portfolios, which contains the same set of five assets but in differen

particularly interested in using beta to compute the risks of the portfolios. So he has gathered the following inf

Stock Beta Portfolio A Portfolio B

Essar 1.3 10% 30%

Shipping

Clariant 0.7 30% 10%

Vijaya bank 1.25 10% 20%

M&M 1.1 10% 20%

BSAF 0.9 40% 20%

(a) Calculate betas of portfolio A and B.

(b) Which portfolio is more risky?

(c) If Mr. X sells Essar shipping, which portfolio is more risky?

If Mr. X replaces Essar shipping with Clariant, which portfolio is more risky?

set of five assets but in different proportions. He is

has gathered the following information:

P Ltd. has an expected return of 22% and Standard deviation of 40%. Q Ltd. has an expected

return of 24% and standard deviation of 38%. P has a beta of 0.86 and Q 1.24. The

correlation between the returns of P and Q is 0.72. The standard deviation of the market

return is 20%.

If you invest 30% in Q and 70% in P I, what is your expected rate of return and the

(b) portfolio standard deviation?

What is the market portfolio’s expected rate of return and how much is the risk-free

(c) rate?

(d) What is the beta of portfolio is P’s weight is 70% and Q is 30%?

has an expected

4. The

f the market

h is the risk-free

Amit Company’s equity beta is 1.30. Its debt-equity ratio is 1.50 and its tax rate is 30 percent. W

beta?

tax rate is 30 percent. What is Amit Company’s asset

Omega Company’s equity beta is 1.4. The risk-free rate is 8 percent and the market risk premiu

12 percent. If the tax rate is 35 percent, what is its WACC?

arket risk premium is 7 percent. Omega’s debt-equity ratio is 0.8:1. Its pre-tax cost of debt is

A project had an equity beta of 1.2 and was going to be financed by a combination of 30% debt

Assuming debt-beta to be zero, Calculate the project return taking risk-free-rate of return to be

combination of 30% debt and 70% equity.

k-free-rate of return to be 10% and return on market portfolio at 18%.

Company D as beta value of 1.2. It is thinking of undertaking a project with a beta value of 1.7. I

of the firm’s total worth, what will be the subsequent beta value of the company?

with a beta value of 1.7. If, when accepted, the project will comprise 10%

company?

Two companies are identical in all respects except capital structure. One company AB Ltd. has a

and its equity has a (beta) value of 1.1. The other company XY Ltd. has a debt equity ratio of 3:4

Estimate (beta) value of XY Ltd. given the above.

e company AB Ltd. has a debt equity ratio of 1:4

a debt equity ratio of 3:4. Income Tax is 30%.

Vinay Company’s WACC is 10 percent and its tax rate is 35 percent. Vinay Company’s pre-tax

cost of debt is 10 percent and its debt-equity ratio is 1:1. The risk-free rate is 8 percent and the

market risk premium is 7 percent. What is the beta of Vinay Company’s equity?

ay Company’s pre-tax

rate is 8 percent and the

s equity?

Excellent Ltd. is a frozen food packaging company and is looking to diversify its Activities into t

Excellent Ltd. is trying to decide whether the project should be accepted or not. To help it decid

project and has the following information on three companies in the electronics business:

(a) Superior Ltd.: Equity beta of 1.33 Financed by 50% debt and 50% equity

Admirable Ltd.: Admirable Ltd. has an equity beta of 1.30, but it has just taken on a to

(b) company’s value, that has an asset beta of 1.4. The company is financed by 40% debt a

(c) Meritorious Ltd.: Equity beta of 1.05 Financed by 35% debt and 65% equity.

Assume that all debt is risk-free and that corporation tax is at a rate of 35 percent. Excellent Ltd

equity. The return of risk-free securities stands at 10 percent and the return on the market port

project?

sify its Activities into the electronics business. The project it is considering has a return of 18% and

or not. To help it decide it is going to use the CAPM. The company has to find a proxy beta for the

ctronics business:

0% equity

t has just taken on a totally unrelated project, accounting for 20% of the

nanced by 40% debt and 60% equity.

d 65% equity.

urn on the market portfolio is 14 percent. Should the company accept the

rn of 18% and

beta for the

M/s. V Steels Ltd. is planning for a diversification project in Automobile Sector. Its curr

has 1.6. Gearing of automobile sector is 30% debts, 70% equity. If expected market ret

taken as 30% and also that corporate debts is assumed to be risk free, compute suitabl

(ii) By 30% debt and 70% equity.

(iii) By 40% debt and 60% equity.

mobile Sector. Its current equity beta is 1.2, whereas the automobile sector

expected market return is 25%, risk free debt is 10% and taxation rate is

free, compute suitable discount rate under the following situations.

There are three firms, A, B and C engaged wholly in shipping. Their tax rate is 35 percent. Their

equity betas and debt-equity ratios are as follows;

Equity Debt –

equity

beta ratio

A 1.4 2

B 1.2 1.8

C 1.1 1.5

The risk-free rate is 8 percent and the expected return on the market portfolio is 14 percent.

What is the average asset beta of the three firms A, B and C.

is 35 percent. Their

lio is 14 percent.

Mr. Tempest has the following portfolio of four shares:

Investment Rs.

Name Beta Lac.

Oxy Rin Ltd. 0.45 0.8

Boxed Ltd. 0.35 1.5

Square Ltd. 1.15 2.25

Ellipse Ltd. 1.85 4.5

The risk free rate of return is 7% and the market rate of return is 14%.

Required.

(i) Determine the portfolio return.

(ii) Calculate the portfolio Beta.

Amal Ltd. has been maintaining a growth rate of 12% in dividends. The company has paid divid

portfolio is 15% and the risk-free rate of return in the market has been observed as10%. The be

You are required to calculate the expected rate of return on the company’s shares as per CAPM

e company has paid dividend @ Rs. 3 per share. The rate of return on market

observed as10%. The beta co-efficient of the company’s share is 1.2.

ny’s shares as per CAPM model and the equilibirium price per share by dividend growth model.

growth model.

The following information is available in respect of Security X

Equilibrium Return 15%

Market Return 15%

7% Treasury Bond $140

Trading at

Covariance of Market

Return and Security 225%

Return

Coefficient of 0.75

Correlation

You are required to determine the Standard Deviation of Market Return and Security Return

et Return and Security Return.

Assuming that shares of ABC Ltd. and XYZ Ltd. are correctly priced according to Capital Asset P

Model. The expected return from and Beta of these shares are as follows:

return

XYZ 0.9 17.10%

You are required to derive Security Market Line.

ng to Capital Asset Pricing

XYZ Ltd. has substantial cash flow and until the surplus funds are utilised to meet the future cap

invested in a portfolio of short term equity investments, details for which are given below:

Market Expected

Investm No. of Beta price per

ent shares yield

share

II 80,000 2.28 2.92 24.00%

III 100,000 0.9 2.17 17.50%

IV 125,000 1.5 3.14 26.00%

The current market return is 19% and the risk free rate is 11%.

Required to:

(i) Calculate the risk of XYZ’s short-term investment portfolio relative to that of the marke

(ii) Whether XYZ should change the composition of its portfolio.

meet the future capital expenditure, likely to happen after several months, are

given below:

A company has a choice of investments between several different equity oriented mutual funds

company has an amount of Rs.1 crore to invest. The details of the mutual funds are as follows:

Mutual Beta

Fund

A 1.6

B 1

C 0.9

D 2

E 0.6

Required:

If the company invests 20% of its investment in the first two mutual funds and an equ

(i) mutual funds C, D and E, what is the beta of the portfolio?

If the company invests 15% of its investment in C, 15% in A, 10% in E and the balance

(ii) the other two mutual funds, what is the beta of the portfolio?

If the expected return of market portfolio is 12% at a beta factor of 1.0, what will be th

(iii) expected return in both the situations given above?

oriented mutual funds. The

funds are as follows:

An investor is holding 5,000 shares of X Ltd. Current year dividend rate is Rs. 3/ share. Market p

factors which are likely to change during the next financial year as indicated below:

Dividend paid/ anticipated per share (Rs.) 3 2.5

Risk free rate 12% 10%

Market Risk Premium 5% 4%

Beta Value 1.3 1.4

Expected growth 9% 7%

In view of the above, advise whether the investor should buy, hold or sell the shares.

Rs. 3/ share. Market price of the share is Rs. 40 each. The investor is concerned about several

ted below:

the shares.

about several

An investor holds two stocks A and B. An analyst prepared ex-ante probability distribution for t

conditional returns for two stocks and the market index as shown below:

scenario

A B Market

Growth 0.4 25 20 18

Stagnation 0.3 10 15 13

Recession 0.3 -5 -8 -3

The risk free rate during the next year is expected to be around 11%. Determine whether the in

liquidate his holdings in stocks A and B or on the contrary make fresh investments in them. CAP

are holding true.

ability distribution for the possible economic scenarios and the

w:

vestments in them. CAPM assumptions

A Portfolio Manager (PM) has the following four stocks in his portfolio:

Market

Securit No. of Price β

y Shares pershare

(Rs.)

VSL 10,000 50 0.9

CSL 5,000 20 1

SML 8,000 25 1.5

APL 2,000 200 1.2

Compute the following:

(i) Portfolio beta.

(ii) If the PM seeks to reduce the beta to 0.8, how much risk free investment should he brin

(iii) If the PM seeks to increase the beta to 1.2, how much risk free investment should he bri

ent should he bring in?

ment should he bring in?

XYZ Limited pays no taxes and is entirely financed by equity shares. The equity share has a beta

an expected return of 20 per cent. XYZ Ltd. now decides to buy back half of the enquiry shares b

free return of 10%, calculate:

(i) The beta of the equity shares after the buyback.

(ii) The required return and risk premium on the equity shares before the buyback

(iii) The required return and risk premium on the equity shares after the buyback

(iv) The required return on debt.

(v) The percentage increase in expected earnings per share.

(vi) The new price – earning multiple

Assume that the operating profit of the firm is expected to remain constant in perpetuity.

uity share has a beta of 0.6, a price-earning ratio of 12.5 and priced to offer

he enquiry shares by borrowing an equal amount. If the debt yields a risk

the buyback

e buyback

n perpetuity.

Year Jay kay Ltd. Market

Ret on

Share DPS Index Div Stock Market

GOI

price yield return Return

Bonds

2002 242 20 1812 4% 6%

2003 279 25 1950 5% 5% 25.62% 12.62% Beta=

2004 305 30 2258 6% 4% 20.07% 21.79%

2005 322 35 2220 7% 5% 17.05% 5.32%

Compute beta value of the company at the end of 2005.

0.150188

The returns on stock A and market portfolio for a period of 6 years are as follows:

Return on

Return market

Year on A portfolio

(%) (%)

1 12 8

2 15 12

3 11 11

4 2 -4

5 10 9.5

6 -12 -2

You are required to determine:

(i) Characteristic line for stock A

(ii) The systematic and unsystematic risk of stock A.

e as follows:

The following details are given for X and Y companies stocks and the BSE sensex for a

period of one year. Calculate the systematic and unsystematic risk for the companies

stocks. If equal amount of money is allocated for the stocks what would be the portfolio

risk?

Average 0.15 0.25 0.06

return

Variance of 6.3 5.86 2.25

return

b 0.71 0.685

Coefficient of determination = 0.18.

SE sensex for a

he companies

d be the portfolio

Ramesh wants to invest in stock market. He has got the following information about individual securities:

Expected σ2ci

Security Beta

Return

A 15 1.5 40

B 12 2 20

C 10 2.5 30

D 9 1 10

E 8 1.2 20

F 14 1.5 30

Market index variance is 10 percent and the risk free rate of return is 7%. What should be the optimum portfolio assumin

ptimum portfolio assuming no short sales?

Find out cut of point and optimal portfolio using the following data:

Security Mean ret Beta risk [s2 ei] beta

[Ri – Rf]

1 19 14 1 20 14

2 23 18 1.5 30 12

3 11 6 0.5 10 13

4 25 20 2 40 10

5 13 8 1 20 8

6 9 4 0.5 20 8

7 14 9 1.5 50 6

The risk less rate of interest is 5% and the market variance is 10.

Expected returns on two stocks for particular market returns are given in the following table:

Market Aggressive Defensive

Return

7% 4% 9%

25% 40% 18%

You are required to calculate:

(a) The Betas of the two stocks.

(b) Expected return of each stock, if the market return is equally likely to be 7% or 25%

(c) The Security Market Line (SML), if the risk free rate is 7.5% and market return is eq

(d) The Alphas of the two stocks.

in the following table:

y likely to be 7% or 25%.

and market return is equally likely to be 7% or 25%.

A study by a Mutual fund has revealed the following data in respect of three securities:

Correlation with

Security s(%) Index, Pm

A 20 0.6

B 18 0.95

C 12 0.75

The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.

(i) What is the sensitivity of returns of each stock with respect to the market?

(ii) What are the covariances among the various stocks?

(iii) What would be the risk of portfolio consisting of all the three stocks equally?

(iv) What is the beta of the portfolio consisting of equal investment in each stock?

What is the total, systematic and unsystematic risk of the portfolio in (iv) ?

ecurities:

e market?

cks equally?

n each stock?

Following are the details of a portfolio consisting of three shares:

Share Portfolio Expected Total

Beta

weight return in % variance

A 0.2 0.4 14 0.015

B 0.5 0.5 15 0.025

C 0.3 1.1 21 0.1

Standard Deviation of Market Portfolio Returns = 10%

You are given the following additional data:

Covariance (A, B) = 0.030 0.03 0.03

Covariance (A, C) = 0.020 0.02 0.02

Covariance (B, C) = 0.040 0.04 0.04

Calculate the following:

(i) The Portfolio Beta

(ii) Residual variance of each of the three shares

(iii) Portfolio variance using Sharpe Index Model

(iv) Portfolio variance (on the basis of modern portfolio theory given by Markowitz)

n by Markowitz)

A has portfolio having following features:

Random

Security β Error σei Weight

L 1.6 7 0.25

M 1.15 11 0.3

N 1.4 3 0.25

K 1 9 0.2

You are required to find out the risk of the portfolio if the standard deviation of the market inde

iation of the market index (σ m) is 18%

The estimated factor sensitivity of TEC to the five macro economic factors are given in the table

Factor Risk

Factor sensitivity premium (%)

Time horizon risk 0.3 -0.66

Inflation risk -0.45 -4.32

Business cycle risk 1.6 1.49

Market timing risk 0.8 3.61

Use APT model to calculate the required rate of return for TEC. The treasury bill rate is 4.1%.

are given in the table below

Assume that only two macro economic factors, factor 1 and factor 2, impact security returns. In

Investment b1 b2

A 1.75 0.25

B -1 2

C 2 1

We are given the expected risk premium is 4% on factor 1 and 8% on factor 2. According to the

50,000 of B and sell Rs. 1,50,000 of C. What is the sensitivity of this portfolio to each of the two

mpact security returns. Investments A, B and C have the following sensitivities to these two factors:

factor 2. According to the APT, what is the risk premium on each of the three stocks? Suppose we buy Rs

ortfolio to each of the two factors? What is the expected risk premium?

o these two factors:

Mr. X owns a portfolio with the following characteristics:

Security B Risk free

Investment Security A security

Factor 1 0.5 1.5 0

Factor 2 0.8 1.4 0

Expected 15% 20% 10%

return

It is assumed that the security’s returns are generated by two factor model:

(a) In what combination one should invest in A and B, that the overall portfolio is ins

(b) In what combination one should invest in A, B and risk free security so that the o

rall portfolio is insensitive to changes in factor 2?

curity so that the overall portfolio is insensitive to changes in factor 2 and has sensitivity of 1 to factor 1?

nsitivity of 1 to factor 1?

Mr. X owns a portfolio with the following characteristics:

Security A Security B Risk free

Investment security

Factor 1 0.8 1.5 0

sensitivity

Factor 2 0.6 1.2 0

sensitivity

Expected 15% 20% 10%

return

It is assumed that the security returns are generated by two factor model:

(i) If Mr. X has Rs. 1,00,000 to invest and sells short Rs. 50,000 of security B and pu

(ii) If Mr. X borrow Rs. 1,00,000 at the risk free rate and invests the amount he borr

f security B and purchases Rs. 1,50,000 of security A what is the sensitivity of Mr. X’s portfolio to the two

he amount he borrows along with the original amount Rs. 1,00,000 in security A and B in the same prop

portfolio to the two factors?

B in the same proportion as described in part (i), what is the sensitivity of the portfolio to the two factor

io to the two factors?

Mr. Nirmal Kumar has categorized all the available stock in the market into the following types:

(i) Small cap growth stocks

(ii) Small cap value stocks

(iii) Large cap growth stocks

(iv) Large cap value stocks

Mr. Nirmal Kumar also estimated the weights of the above categories of stock in the market index. Further mor

important factors are estimated to be :

stocks market index [beta] [Price Book] [inflation]

Small cap 25% 0.8 1.39 1.35

growth

Large cap

growth 50% 1.165 2.75 8.65

The rate of return on treasury bonds is 4.5%

Required:

(a) Using Arbitrage Pricing Theory, determine the expected return on the market index.

(b) Using Capital Asset Pricing Model (CAPM), determine the expected return on the market inde

(c) Mr. Nirmal Kumar wants to construct a portfolio constituting only the small cap value and lar

desired portfolio is 1, determine the composition of his portfolio.

wing types:

market index. Further more, the sensitivity of returns on these categories of stock to the three

d return on the market index.

the small cap value and large cap growth Stocks. If the target beta for the

Mr. Tamarind intends to invest in equity shares of a company the value of which depends upon

Expected Actual

Factor Beta value in% value in %

GNP 1.2 7.7 7.7

Inflation 1.75 5.5 7

Interest rate 1.3 7.75 9

Stock market

1.7 10 12

index

Industrial

production 1 7 7.5

If the risk free rate of interest be 9.25%, how much is the return of the share under Arbitrage Pr

e of which depends upon various parameters as mentioned below:

The risk free rate of return Rf is 9 percent. The expected rate of return on the market portfolio R

growth for the dividend of Platinum Ltd. is 7 percent. The last dividend paid on the equity stock

Platinum Ltd. equity stock is 1.2.

(i) What is the equilibrium price of the equity stock of Platinum Ltd?

(ii) How would the equilibrium price change when

· The inflation premium increases by 2 percent?

· The expected growth rate increases by 3 percent?

· The beta of Platinum ltd. equity rises to 1.3?

on the market portfolio Rm is 13 percent. The expected rate of

paid on the equity stock of firm A was Rs. 2.00. The beta of

Capital structure of Sun Ltd. as at 31.3.2003 was as under:

(Rs. in lakhs)

Equity share 80

capital

8%Preference 64

share capital

12% Debentures 32

Sun Ltd., earns a profit of Rs. 32 Lakh annually on an average before deductio

Normal return on equity shares of companies similarly placed is 9.6% provid

(a) Profit after tax covers fixed interest and fixed dividends as least 3 times.

(b) Capital gearing ratio is 0.75.

(c) Yield on share is calculated at 50% of profits distributed and at 5% on distrib

Sun ltd., has been regularly paying equity dividend of 8%.

Compute the value per equity share of the company. The required return increases as per the b

(i) 1 % for every one time of difference for interest and Fixed Dividend Coverage

(ii) 2% for every one time of difference for Capital Gearing Ratio.

average before deduction of income-tax, which works out to 35% and interest on debentures.

y placed is 9.6% provided:

ds as least 3 times.

ixed Dividend Coverage.

n debentures.

Suppose the returns are described by two index model

Assume existence of two diversified portfolios shown in the following table

PortfolioExpected Return Beta1 Beta2

A 15 1 0.6

B 14 0.5 1

C 10 0.3 0.2

Now Suppose portfolio E exists with an expected return of 15%, a beta1 of 0.6 and beta 2 of 0.6

What happens when you form a combination of portfolios A,B and C (call it Portfolio D) which h

Find the expected return on Portfolio D

Do you have an Arbitrage startegy?

What is the riskless gain? What will happen with the expected return of portfolio E

a1 of 0.6 and beta 2 of 0.6

call it Portfolio D) which has equal investment of each?

of portfolio E

Suppose we derive following factor values from market data:

Rm-Rf 4.80%

Rsmall-Rbig 2.40%

Rhbm-Rlbm 1.60%

Rf 3.40%

CAPM Beta 1.30

Beta(mkt) 1.20

Beta(smb) 0.40

Beta(hml) -0.20

Sam Porter is evaluating three portfolios based on Carhart Model. The following table provides the factor exposures of each of

Risk Factor

Portfolio RMRF SMB HML WML

Eridanus 1 0 0 0

Scorpius 0 1 0 0

Lyra 1.2 0 0.2 0.8

1)RMRF will be highrer than expected

2)Large caps will outperform small cap

ctor exposures of each of these portfolios to the four carhart factors

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