Chapter 3

Portfolio Management
Calculation of Return
Q1. A mutual fund had a Net Asset Value (NAV) of Rs.50 at the beginning of the year.
During the year a sum of Rs.4 as distributed as in!ome (di"idend) besides Rs.#
as !a$ital gains distribution. At the end of the year NAV as Rs.55% !al!ulate
total return for the year.
Q&. 'u$$ose the aforesaid (utual )und in the ne*t year gi"es a di"idend of Rs.5 as
in!ome distribution and no !a$ital gains distribution and NAV at the end of
se!ond year is Rs.50.
+hat is the return for the se!ond year,
Q#. A-. /td.% has the folloing di"idend $er share and the mar0et $ri!e $er share
for the $eriod &0001&0052
.al!ulate the annual rate of return for last 3"e years. 4o ris0y is the share,
Q4. 5he folloing information is a"ailable in res$e!t of the return from se!urity 6
under di7erent e!onomi! !onditions2
)ind out the e*$e!ted return of the se!urity and the ris0 asso!iated ith that.
Dividend per
share
Market Price
Year Rs. Rs.
&000
&001
&00&
&00#
&004
&005
1.5#
1.5#
1.5#
&.00
&.00
#.00
#1.&5
&0.85
#0.99
:8.00
100.00
154.00

Economic Condition Return Probability
;ood
A"erage
-ad
<oor
&0=
1:=
10=
#=
0.1
0.4
0.#
0.&

Q5) !!" #ovember $%c& %' Marks&
!!' May (%b& %' Marks&
6 .o.% /td.% in"ested on 1141&005 in !ertain e>uity shares as belo 2
Name of .o. No. of shares .ost (Rs.)
( /td.
N /td.
1%000 (Rs.100 ea!h)
500 (Rs.10 ea!h)
&%00%000
1%50%000
?n 'e$tember% &005% 10= di"idend as $aid out by ( /td. and in @!tober% &005%
#0= di"idend $aid out by N /td. @n #1A#1&00: mar0et >uotations shoed a
"alue of Rs.&&0 and Rs.&B0 $er share of ( /td. and N /td. res$e!ti"ely.
@n 1A41&00:% in"estment ad"isors indi!ate (a) that the di"idends from ( /td.
and N /td. for the year ending #1A#1&008 are li0ely to be &0= and #5=%
res$e!ti"ely and (b) that the $robabilities of mar0et >uotations on #11#1&008 are
as belo 2
<robability
)a!tor
<ri!e C 'hare of ( /td. <ri!e C 'hare of N
/td.
0.&
0.5
0.#
&&0
&50
&90
&B0
#10
##0
Dou are re>uired to 2
i) .al!ulate the a"erage return from the $ortfolio for the year ended #11#1
&00:E
ii) .al!ulate the e*$e!ted a"erage return from the $ortfolio for the year
&00:108E and
iii) Ad"ise 6 .o. /td.% of the !om$arati"e ris0 in the to in"estments by
!al!ulating the standard de"iation in ea!h !ases.
Portfolio Management
Q:) 6 .o. /td.% in"ested on 1141&005 in !ertain e>uity shares as belo 2
#ame of Co. #o. of shares Cost %Rs.&
( /td.
N /td.
1%000 (Rs.100
ea!h)
500 (Rs.10
ea!h)
&%00%000
1.50%000
?n 'e$tember% &005% 10= di"idend as $aid out by ( /td. And in @!tober% &005%
#0= di"idend $aid out by N /td. @n #11#1&00: mar0et >uotations shoed a
"alue of Rs.&&0 and Rs.&B0 $er share for ( /td. And N /td. Res$e!ti"ely.
@n 1141&00:% in"estment ad"isors indi!ate (a) that the di"idends from ( /td.
And N /td. )or the year ending #11#1&008 are li0ely to be &0= and #5=%
res$e!ti"ely and (b) that the $robabilities of mar0et >uotations on #11#1&008 are
as belo2
<robability
fa!tor
<ri!e Cshare of
( /td.
<ri!e C share of N /td.
0.&
0.5
0.#
&&0
&50
&90
&B0
#10
##0
Dou are re>uired to2
i) .al!ulate the a"erage return from the $ortfolio for the year ended #11#1
&00:E
ii) .al!ulate the e*$e!ted a"erage return from the $ortfolio for the year
&00:108E and
iii) Ad"ise 6 .o. /td. of the !om$arati"e ris0 in the to in"estments by
!al!ulating the standard de"iation in ea!h !ase.
)election of )ecurities
Q8) !! #ovember $%b& %(! Marks&
)olloing is the data regarding si* se!urities2
A - . D F )
Return (=) 9 9 1& 4 B 9
Ris0 (=) ('tandard De"iation) 4 5 1& 4 5 :
i) +hi!h of the se!urities ill be sele!ted ,
ii) Assuming $erfe!t !orrelation% analyse hether it is $referable to in"est
85= in se!urity A and &5= in se!urity ..
Q9) !!$ May 3%b& %' Marks&
)olloing is the data regarding si* se!urities2
G V + 6 D H
Return (=) 10 10 15 5 11 10
Ris0 (=) ('tandard de"iation) 5 : 1# 5 : 8
i) +hi!h of three se!urities ill be sele!ted,
ii) Assuming $erfe!t !orrelation% analyIe hether it is $referable to in"est
90= in se!urity G and &0= in se!urity + or to in"est 100= in D.
E*pected Return and Risk + ,-o .ssets Case
QB) !!/ + May "%a& %(! Marks&
5he histori!al rates of return of to se!urities o"er the $ast ten years are gi"en.
.al!ulate the .o"arian!e and the .orrelation !oeJ!ient of the to se!urities2
Dear 2 1 & # 4 5 : 8 9 B 10
'e!urity12 1& 9 8 14 1: 15 19 &0 1: &&
(return $er !ent)
'e!urity &2 &0 && &4 19 15 &0 &4 &5 && &0
(return $er !ent)
Q10)
'tate of F!onomy <robability AKs Return -Ks Return
-oom
Normal
Re!ession
0.&
0.:
0.&
#0=
&0=
10=
10=
&0=
#0=
i) +hat is e*$e!ted return of se!urities A and - ,
+hat is the ris0 atta!hed to se!urities A L - ,
ii) .al!ulate ris0 and return of $ortfolio !onsisting of
a) 50= of A L 50= of - b) :0= of A L 40= of -
Q11) 5he folloing are the di7erent state of e!onomy% the $robability of o!!urren!e of
that state and the e*$e!ted rate of return from 'e!urity A M and - in these
di7erent states.
'tate <robability Rate of Return
'e!urity A 'e!urity -
Re!ession
Normal
-oom
0.&0
0.50
0.#0
1.15
.&0
.:0
.&0
.#0
.40
)ind out the e*$e!ted returns and the standard de"iations for these to
se!urities.
'u$$ose an in"estor has Rs.&0%000 to in"est. 4e in"ests Rs.15%000 in 'e!urity A
and balan!e in 'e!urity -% hat ill be the e*$e!ted return and the standard
de"iation of the $ortfolio,
Q1&) (r. 6 is $resently !on!erned ith the in"estment of Rs.1%00%000. 4e has to
se!urities% '1 and '& for this $ur$ose. 5he rele"ant information in res$e!t of
these to se!urities is as follos2
'1 '&
F*$e!ted return
' of return ()
1&=
10=
&0=
19=
.oeJ!ient of !orrelation% r% beteen '1 and '& N .15.
4e has de!ided to !onsider only 3"e $ortfolios of '1 and '& as follos 2
i) All funds in"ested in '1.
ii) 50= of funds in ea!h of '1 and '&.
iii) 85= of funds in '1 and &5= in '&
i") &5= of funds in '1 and 85= in '&.
") All funds in"ested in '&.
)ind out 1) F*$e!ted return under di7erent $ortfolios.
&) Ris0 fa!tor asso!iated ith these $ortfolios.
#) +hi!h $ortfolio is best for him from the $oint of ris0% and%
4) +hi!h $ortfolio is best for him from the $oint of "ie of return.
Q1#) !! May 3%a& %(! Marks&
A /td. has an e*$e!ted return of &&= and 'tandard de"iation of 40=. - /td. has
an e*$e!ted return of &4= and 'tandard de"iation of #9=. A /td. has a beta of
0.9: and - /td. is 0.8&. 5he standard de"iation of the mar0et return is &0=.
'uggest2
i) ?s in"esting in - /td. better than in"esting in A /td,
ii) ?f you in"est #0= in - /td. and 80= in A /td.% hat is your e*$e!ted rate
of return and $ortfolio 'tandard de"iation,
iii) +hat is the mar0et $ortfolios e*$e!ted rate of return and ho mu!h is the
ris01free rate,
+hat is the beta of <ortfolio if A /td.Ks eight is 80= and - /tdKs eight is #0=,
Q14) !!' #ovember %#e-& (%c& %0 Marks&
.onsider the folloing information on to sto!0s% A and -2
Dear Return on A (=) Return on - (=)
&00: 10 1&
&008 1: 19
Dou are re>uired to determine2
i) 5he e*$e!ted return on a $ortfolio !ontaining A and - in the $ro$ortion of
40= and :0= res$e!ti"ely.
ii) 5he standard de"iation of return from ea!h of the to sto!0s.
iii) 5he !o"arian!e of returns from the to sto!0s.
i") .orrelation !oeJ!ient beteen the returns of the to sto!0s.
") 5he ris0 of a $ortfolio !ontaining A and - in the $ro$ortion of 40= and
:0=.
Minimum 1ariance Portfolio + ,-o .ssets Case
Hero Varian!e
Q15) / /td. and ( /td. ha"e the folloing ris0 and return estimates.
R
/
N &0=
R
(
N &&=
'
/
N 15=
'
(
N 19=
(.orrelation .oeJ!ient) N .@R
/(
N 11
.al!ulate the $ro$ortion of in"estment in / /td. and ( /td. to minimiIe the ris0
of $ortfolio.
Q1:) < /td. and Q /td. ha"e lo $ositi"e !orrelation !oeJ!ient of M0.5. 5heir
res$e!ti"e ris0 and return $ro3le is as under /
R
<
N 10=
R
Q
N 15=
'
<
N &0=
'
Q
N &5=
.om$ute the $ortfolio of < L Q to minimiIe ris0.
Q18) !(! #ovember $ %(" Marks&
An in"estor has de!ided to in"est Rs.1%00%000 in the shares of to !om$anies%
namely% A-. and 6DH. 5he $roOe!tions of returns from the shares of the to
!om$anies along ith their $robabilities are as follos2
<robability A-. (=) 6DH (=)
.&0 1& 1:
.&5 14 10
.&5 18 &9
.#0 &9 1&
Dou are re>uired to
i) .omment on return and ris0 of in"estment in indi"idual shares
ii) .om$are the ris0 and return of these to shares ith a $ortfolio of these
shares in e>ual $ro$ortions.
)ind out the $ro$ortion of ea!h of the abo"e shares to formulate a minimum ris0
$ortfolio.
,-o .ssets Case Minimum 1ariance )et
Q19) !!2 3une %#e-& %a& %" Marks&
An in"estor has to $ortfolios 0non to be on minimum "arian!e set for a
$o$ulation of three se!urities A% - and . ha"ing belo mentioned eights2
+A +- +.
<ortfolio 6 0.#0 0.40 0.#0
<ortfolio D 0.&0 0.50 0.#0
?t is su$$osed that there are no restri!tions on short sales.
i) +hat ould be the eight for ea!h sto!0 for a $ortfolio !onstru!ted by
in"esting
ii) Rs.5%000 in $ortfolio . and Rs. #%000 in $ortfolio D,
'u$$ose the in"estor in"ests Rs. 4%000 out of Rs. 9%000 in se!urity A. ho
ill he allo!ate the balan!e beteen se!urity - and . to ensure that his
$ortfolio is on minimum "arian!e set,
E*pected Return + Risk 4 ,hree .ssets Case
Q1B) A $ortfolio !onsists of # se!urities A%- L . ith the folloing rele"ant
information 2
A - .
F*$e!ted Returns (=)
'tandard de"iation (=)
&8
##
&4
&9
&&
&:
.orrelation .oeJ!ient beteen 2
A L - 0.&0
- L . 10.40
A L . 0.50
?f the eights of se!urities are e>ual% 3nd out the ris0 L e*$e!ted return of the
$ortfolio.
Portfolio of Risk free .sset and Market Portfolio
Q&0) (r. 6 ants to build a $ortfolio of in"estment !om$rising of ris0 free se!urities
(rate of return 9=) and the mar0et $ortfolio (rate of return 19= and :=). 5he
minimum e*$e!ted rate of the return of the in"estor is 15=. ?n hat $ro$ortion
should he hold the ris0 free se!urities and mar0et $ortfolio,
Capital Market 5ine %CM5&
Q&1) F*$e!ted return from mar0et is &0= ith a standard de"iation of &5=. 5he ris0
free return is 9=.
i) )ind mar0et ris01return trade o7 (slo$e)
ii) )ind e*$e!ted return of the folloing eJ!ient $ortfolio% hose standard
de"iations are gi"en.
a) 15= b) &5= !) #0= d) 40=
Calculation of 6eta and Characteristic 5ine
Q&&) !!3 #ovember %c& %(! Marks&
5he rates of return on the se!urity of .om$any 6 and mar0et $ortfolio for 10
$eriods are gi"en belo2
<eriod Return of 'e!urity Return on (ar0et <ortfolio (=)
1
&
#
4
5
:
8
9
B
10
&0
&&
&5
&1
19
15
18
1B
18
&0
&&
&0
19
1:
&0
9
1:
5
:
11
i) +hat is the beta of 'e!urity 6,
ii) +hat is the !hara!teristi! line for 'e!urity 6 ,
Characteristic 5ine
Q&#) !!2 3une %c& %' Marks&
5he returns on sto!0 A and mar0et $ortfolio for a $eriod of : years are as
follos2
Dear Return on A (=) Return on mar0et $ortfolio (=)
1 1& 9
& 15 1&
# 11 11
4 & 14
5 10 B.5
: 11& 1&
Dou are re>uired to determine2
i) .hara!teristi! line for sto!0 A
ii) 5he systemati! and unsystemati! ris0 of sto!0.
Calculation of 6eta
Q&4) Dou are gi"en folloing information about A-. /td.
A-. /td.
Dear A"erage <ri!e Di"idend <er
'hare
(ar0et
?nde*
(ar0et
Di"idend =
?
R)
&000
&001
&00&
&00#
&4&
&8B
#05
#&&
&0
&5
#0
#5
191&
1B50
&&59
&&&0
4
5
:
8
:=
5=
4=
5=
.al!ulate -eta.
Q&5) !!" May 3%b& %' Marks&
5he distribution of return of se!urity K)K and the mar0et $ortfolio P<K is gi"en
belo 2
Return =
<robability ) <
0.#0
0.40
0.#0
#0
&0
0
110
&0
#0
Dou are re>uired to !al!ulate the e*$e!ted return of se!urity P)K and the mar0et
$ortfolio P<K% the !o"arian!e beteen the mar0et $ortfolio and se!urity and beta
for the se!urity.
Q&:) !!$ #ovember 0%a& %' Marks&
;i"en belo is information of mar0et rates of Returns and Data from to
.om$anies A and -.
Dear
&00&
Dear
&00#
Dear
&004
(ar0et (=)
.om$any A (=)
.om$any - (=)
1&.0
1#.0
11.0
11.0
11.5
10.5
B.0
B.9
B.5
Re>uired 2
i) Determine the beta !oeJ!ients of the 'hares of .om$any A and .om$any
-.
ii) Distinguish beteen P'ystemati! ris0K and PGnsystemati! ris0K.
Q&8) .al!ulate the beta fa!tor of the folloing in"estments. ?s a!!e$tan!e of the
in"estment orthhile based u$on its le"el of ris0, 5he ris0 free rate ?
R)
may be
ta0en at :=.
Returns on
<robability (ar0et (() ?n"estment
(')
1C#
1C#
1C#
B=
1&=
19=
:=
#0=
19=
Q&9) Dou are $resented ith the folloing information !on!erning the returns on the
shares of . /td. and on the mar0et $ortfolio% a!!ording to the "arious !onditions
of the e!onomy.
.ondition of
e!onomy
<robability of !ondition
o!!urring
Return on .
/td.
Return on the
mar0et
1
&
0.&
0.4
15=
14=
10=
1:=
# 0.4 &:= &4=
5he !urrent ris0 Q free interest rate is B $er !ent.
Re>uired2
a) .al!ulate the !oeJ!ient of !orrelation beteen the returns on . /td. and
the mar0et $ortfolio.
b) .al!ulate the total ris0 (i.e. standard de"iation) of . /td. and dis!uss hy
this is not the most a$$ro$riate measure of ris0 to be used in mar0eting
in"estment de!isions.
!) .al!ulate the beta fa!tor for . /td. And brieRy dis!uss its signi3!an!e. ?s .
/td. eJ!iently $ri!ed a!!ording to the .A<( and the information gi"en
abo"e,
Calculation of 6eta and E*pected Return and determining -hether the asset
is under7overpriced
Q&B) ?f a se!urity has a beta fa!tor of (a) 1.4% (b) 1.0 or (!) &.#% 3nd out the e*$e!ted
return of the se!urity.
Assume 2 ?
R)
N B=% R
(
N 19=
Q#0) .al!ulate the e*$e!ted rate of return for se!urity PsK from the folloing 2
?
R)
N 10=E R
(
N 19=E b N 1.#5.
Q#1) .al!ulate the e*$e!ted return on $ortfolio PAK ith the folloing data2
i) Ris0 free rate of return 9=
ii) F*$e!ted return on mar0et $ortfolio1&=
iii) (ar0et sensiti"ity inde* 0.85
Q#&) 5he ris0 free interest is 9 $er !ent and the e*$e!ted return on the mar0et
$ortfolio is 1: $er !ent.
.al!ulate the e*$e!ted return on the folloing se!urities2
'e!urity -eta
A
-
.
D
0.4
1.0
&.:
&.0
Q##) )rom the folloing data !om$ute beta of se!urity *.
s
*
N 1&E s
m
N B and .or
*m
N M0.8&
Q#4) 5he standard de"iation of return of se!urity D is &0 and of mar0et $ortfolio is 15.
.al!ulate beta of D if (a) .or
ym
N 0.80% (b) .or
ym
N M0.40 and (!) .or
ym
N10.&5.
Q#5) a) .al!ulate the mar0et sensiti"ity inde* and the e*$e!ted return on
in"estment from the folloing data.
'tandard de"iation of an asset
(ar0et standard de"iations
Ris0 Q free rate of return
F*$e!ted return on mar0et $ortfolio
.orrelation !oeJ!ient of $ortfolio ith
mar0et
&.5=
&.0=
1#.0=
15.0=
0.9
b) +hat ill be the e*$e!ted return on the $ortfolio if $ortfolio beta is 0.5
and the ris0 free return is 10=.
Revised 6eta and E*pected Rate of Return
Q#:) !!3 May %c& %' Marks&
.n investor is holding (8!!! shares of 9atlass Company. Presently the
rate of dividend being paid by the company is Rs. per share and the
share is being sold at Rs.0 per share in the market. :o-ever8 several
factors are likely to change during the course of the year as indicated
belo-;
F*isting Re"ised
Ris0 free rate
(ar0et ris0 $remium
-eta "alue
F*$e!ted groth rate
1&=
:=
1.4
5=
10=
4=
1.&5
B=
?n "ie of the abo"e fa!tors hether the in"estor should buy% hold or sell the
shares, and hy,
Q#8) An in"estor is see0ing the $ri!e to $ay for a se!urity% hose standard de"iation
is #.00 $er !ent. 5he !orrelation !oeJ!ient for the se!urity ith the mar0et is
0.9 and the mar0et standard de"iation is &.& $er !ent. 5he return from
;o"ernment 'e!urities is 5.& $er !ent and from the mar0et $ortfolio is B.9 $er
!ent. 5he in"estor 0nos that% by !al!ulating the re>uired return% he !an then
determine the $ri!e to $ay for the se!urity. +hat is the re>uired return on the
se!urity ,
Q#9) 5he folloing information is a"ailable in res$e!t of se!urity 6 and D.
'e!urity b F*$e!ted
Return
6
D
1.9
1.:
&&.00=
&0.40=
?f the ris0 free rate is 8=% are these se!urities !orre!tly $ri!ed, +hat ould the
ris0 free rate has to be if they are !orre!tly $ri!ed,
Q#B) 5he folloing data relate to to se!urities% A and -.
'e!urities A -
F*$e!ted Return
-eta )a!tor (b)
&&=
1.5
18=
0.8
Assume2 ?
R)
N 10= and R
(
N 19=.
)ind out hether the se!urities% A and - are !orre!tly $ri!ed, Also sho the
gra$hi! $resentation of the abo"e situation.
Q40) 5he e*$e!ted returns L S of # se!urities are as follos2
'e!urities A - .
F*$e!ted Returns (=)
S fa!tor
19
1.8
11
0.:
15
1.&
?f ?
R)
N B= L R
m
N 14=% hi!h of the abo"e se!urities are o"er% under
or !orre!tly "alued in the mar0et,
+hat is your strategy,
Calculation of .lpha of a )ecurity
Q41. A-. /td. has a S of 1.&0 ?
R)
N9= and R
m
N 15=. +hat is the re>uired rate on
shares of A-.,
?f the a!tual returns for 4 obser"ations are as follos% hat is the al$ha "alue of
shares of A-. ,
Dear A!tual Returns
1
&
#
4
&0.4#
19.90
1:.40
1#.B5
Calculation of .lphas and 6etas
Q4&) !!/ May %b& %' Marks&
F*$e!ted returns on to sto!0s for $arti!ular mar0et returns are gi"en in the
folloing table2
(ar0et Aggressi"e Defensi"e
Return 'to!0 'to!0
8= 4= B=
&5= 40= 19=
You are required to calculate2
a) 5he -eta of to sto!0s.
b) F*$e!ted return of ea!h sto!0% if the mar0et return is e>ually li0ely to be
8= or &5=.
!) 5he 'e!urity (ar0et /ine ('(/)% if the ris0 free rate is 8.5= and mar0et
return is e>ually li0ely to be 8= or &5=.
5he Al$has of to sto!0s.
Q4#) As an in"estment manager you are gi"en the folloing information 2
?n"estment in e>uity shares
of
?nitial $ri!e Di"idends (ar0et $ri!e
at the end of
the year
-eta
ris0
fa!tor
Rs. Rs. Rs.
A. .ement /td. &5 & 50 0.9
'teel /td.
/i>uor /td.
-. ;o"ernment of ?ndia
-onds
#5
45
1%000
&
&
140
:0
1#5
1%005
0.8
0.5
0.BB
Ris0 free return may be ta0en at 14=
Dou are re>uired to !al!ulate2
i& F*$e!ted rate of returns of $ortfolio in ea!h !ase using .a$ital Asset
<ri!ing (odel (.A<().
ii& A"erage return of $ortfolio.
Q44) !!3 May "%b& %" Marks&
Dour !lient is holding the folloing se!urities2
<arti!ulars of .ost Di"idends (ar0et <ri!e -F5A
'e!urities Rs. Rs. Rs.
F>uity 'hares2
.o. 6 9%000 900 9%&00 0.9
.o. D 10%000 900 10%500 0.8
.o. H 1:%000 900 &&%000 0.5
<'G -onds #4%000 #%400 #&%#00 1.0
Assuming a Ris01free rate of 15=% !al!ulate2
- F*$e!ted rate of return in ea!h% using the .a$ital Asset <ri!ing (odel (.A<()
- A"erage return of the $ortfolio.
Portfolio 6eta
Q45) (r. 6 has in"ested in four se!urities A% -% . L D the folloing amounts 2
A 2 10%000
- 2 &0%000
. 2 1:%000
D 2 14%000
5he S "alues of the se!urities are .901% 1.&0% 1.40 L 1.85 res$e!ti"ely.
.om$ute $ortfolio S.
Q4:) A /td. has an e*$e!ted return of &&= and standard de"iation of 40=. - /td. has
an e*$e!ted return of &4= and standard de"iation of #9=. A /td. has a beta of
0.9: and - /td. a beta of 1.&4.
5he !orrelation !oeJ!ient beteen the return of A /td. and - /td. is 0.8&. 5he
standard de"iation of the mar0et return is &0=. 'uggest 2
i) ?s in"esting in - /td. better than in"esting in A /td. ,
ii) ?f you in"est #0= in - /td. and 80= in A /td.% hat is your e*$e!ted rate
of return and $ortfolio standard de"iation ,
iii) +hat is the mar0et $ortfolio e*$e!ted rate of return and ho mu!h is the
ris0 Q free rate ,
i") +hat is the beta of $ortfolio if A /td.Ks eight is 80= and - /td.Ks eight is
#0=.
Q48) !!2 #ovember %#e-& %a& %(! Marks&
An in"estor holds to sto!0s A and -. an analyst $re$ared e*1ante $robability
distribution for the $ossible F!onomi! s!enarios and the !onditional returns for
to sto!0s and the mar0et inde* as shon belo2
F!onomi! s!enario <robability .onditional Returns =
A - .
;roth 0.40 &5 &0 19
'tagnation 0.#0 10 15 1#
Re!ession 0.#0 15 19 1#
5he ris0 free rate during the ne*t year is e*$e!ted to be around 11=. Determine
hether the in"estor should li>uidate his holdings in sto!0s A and - or on the
!ontrary ma0e fresh in"estments in them. .A<( assum$tions are holding true.
Q49) !!2 #ovember 0%b& %' Marks&
A study by a (utual fund has re"ealed the folloing data in res$e!t of three
se!urities2
'e!urity T (=) .orrelation ith
?nde*% <m
A &0 0.:0
- 19 0.B5
. 1& 0.85
5he standard de"iation of mar0et $ortfolio (-'F 'ense*) is obser"ed to be 15=.
i) +hat is the sensiti"ity of returns of ea!h sto!0 ith res$e!t to the mar0et,
ii) +hat are the !o"arian!e among the "arious sto!0s,
iii) +hat ould be the ris0 of $ortfolio !onsisting of all the three sto!0s
e>ually,
i") +hat is the beta of the $ortfolio !onsisting of e>ual in"estment in ea!h
sto!0,
") +hat is the total% systemati! and unsystemati! ris0 of the $ortfolio in (i"),
Determination of Risk
Q4B) 5he folloing details are gi"en for 6 and D !om$aniesK sto!0 and the -ombay
'ense* for a $eriod of one year. .al!ulate the systemati! and unsystemati! ris0
for the !om$aniesK sto!0s. ?f e>ual amount of money is allo!ated for the sto!0s
hat ould be the $ortfolio ris0 ,
6 'to!0 D 'to!0 'ense*
A"erage return
Varian!e of return
S
.orrelation .o1eJ!ient
.o1eJ!ient of determination (r
&
)
0.15
:.#0
0.81
0.4&4
0.19
0.&5
5.9:
0.&8
0.0:
&.&5
)election of <ptimum Portfolio + )harpe=s Method
Q50) Date for 3nding out the o$timal $ortfolio are gi"en belo 2
'e!urity
Number
(ean
Return
R
m
F*!ess
Return
R
i
1 R
m
-eta Ris0
S
Gnsystemati
! Return
T
&
F*!ess to
-eta
R
i
Q R
m

S
1 1B 14 1.0 &0 14
&
#
4
5
:
8
&#
11
&5
1#
B
14
19
:
&0
9
4
B
1.5
0.5
&.0
1.0
0.5
1.5
#0
10
40
&0
50
#0
1&
1&
10
9
9
:
5he ris0less rate of interest is 5 $er !ent and the mar0et "arian!e is 10.
Determine the !ut Q o7 $oint.
)olution;
<ptimum Portfolio )election
Q51) !(! May 3 %c& %(! Marks&
Ramesh ants to in"est in sto!0 mar0et. 4e has got the folloing information
about indi"idual se!urities2
'e!urity F*$e!ted Returns -eta

!i
&
A 15 1.5 40
- 1& & &0
. 10 &.5 #0
D B 1 10
F 9 1.& &0
) 14 1.5 #0
(ar0et inde* "arian!e is 10 $er!ent and the ris0 free rate of return is 8=.
+hat should be the o$timum $ortfolio assuming no short sales,
)olution;
5his is based on 'har$eKs (ethod of o$timum <ortfolio 'ele!tion.
'te$ 1 .al!ulate e*!ess return earned by ea!h se!urity in e*!ess of ris0
free rate of return. i.e. R
i
1 R
f
.
'te$ & .al!ulate su!h e*!ess return $er unit of 'ystemati! Ris0 (measured
in terms of -eta). i.e. R
i
1 R
f
CS.
'te$ # Ran0 them in the des!ending order.
'te$ 4 .al!ulate !ut1o7 $oint C
>
.
'te$ 5
'e!urity F*$e!ted
Return
F*!ess Return -eta R
i
1 R
f
11111111
S
Ran0
A 15 9 1.5 5.## 1
- 1& 5 & &.50 #
. 10 # &.5 1.& 5
D B & 1 & 4
F 9 1 1.& 0.9# :
) 14 8 1.5 4.:8 &
,able ?
'e!urity
%(&
F*!ess
Return
%&
-eta
%3&
(R Q
R)S
%$&

ei
&
%0&
(R Q R)SC
ei
&
%"&
.um. (R
i
Q
R
f
)SC
ei
&
%/&
A 9 1.5 1& 40 0.#0 0.#0
) 8 1.5 10.5 #0 0.#5 0.:5
- 5 & 10 &0 0.50 1.15
D & 1 & 10 0.&0 1.#5
. # &.5 8.5 #0 0.&5 1.:0
F 1 1.& 1.& &0 0.0: 1.::
,able ??
S
&
%'&
S
&
C
ei
&
%2&
.um.S
&
C
ei
&
%(!&
C
>

&
m
* .um. (R
i
Q R
f
)SC
ei
&
1111111111111111111111111111
1 M
&
m
* .um.S
&
C
ei
&
Alternati"ely

m
* Col./
4444444444444444444444444444
( @

m
* Col.(!
%((&
&.&5 0.05:&5 0.05:&5 10 *0.#0C1M10 * 0.05:&5 N
1.B&
&.&5 0.085 0.1#1&5 10*0.:5C1M10*0.1#1&5 N
&.9109
4 0.&0 0.##1&5 10*1.15C1M10*0.##1&5
N&.:::
1 0.10 0.4#1&5 10*1.#5C1M10*0.4#1&5N
&.54118
:.&5 0.&09## 0.:#B59 10*1.:0C1M10*0.:#B59 N
&.1:##B
1.44 0.08& 0.81159 10*1.::C1M10*0.81159N&.04
5#B
C
>
increases in the beginning %up to )ecurity & and then starts
decreasing. ,herefore cut oA point is security . Ramesh should invest
in Brst t-o securities only.
Calculation of C i.e. proportion of the amount to be invested in each
security
S R
i
1 R
f

HN 111111 ( 1111111 1 .U)

ei
&
S
'e!urity H
A 1.5C40 (5.## Q &.9109) N 0.0#85 (&.51B&) N 0.0B448
) 1.5C#0 (4.:8 Q &.9109) N 0.05 (1.95:&)N 0.0B&91
0.198&9
5herefore ?n"estment in
A N 0.0B448C0.198&9 N 50.44=
) N 0.0B&91C0.198&9 N 4B.5:=
Q5&) !!0 #ovember %b& %' Marks&
)olloing information is a"ailable in res$e!t of di"idend% mar0et $ri!e and
mar0et !ondition after one year.
(ar0et !ondition <robability (ar0et <ri!e Di"idend $er share
;ood
Normal
-ad
0.&5
0.50
0.&5
115
108
B8
B
5
#
5he e*isting mar0et $ri!e of an e>uity share is Rs.10: ().V. Re.1)% hi!h is !um
10= bonus debenture of Rs.: ea!h% $er share. (Cs. 6 )inan!e .om$any /td.% had
o7ered the buy Q ba!0 of debentures at fa!e "alue.
)ind out the e*$e!ted return and "ariability of returns of the e>uity shares.
And also ad"ise Q +hether to a!!e$t buy ba!0 o7er,
Q5#) !!/ #ovember "%d& %' Marks&
6DH /td. has substantial !ash Ro and until the sur$lus funds are utiliIed to
meet the future !a$ital e*$enditure% li0ely to ha$$en after se"eral months% are
in"ested in a $ortfolio of short1term e>uity in"estments% details for hi!h are
gi"en belo2
?n"estment No. of -eta (ar0et $ri!e F*$e!ted
'hares $er share di"idend
Rs. Dield
? :0%000 1.1: 4.&B 1B.50=
?? 90%000 &.&9 &.B& &4.00=
??? 1% 00%000 0.B0 &.18 18.50=
?V 1% &5%000 1.50 #.14 &:.00=
5he !urrent mar0et return is 1B= and the ris0 free rate is 11=.
Re>uired to2
i) .al!ulate the ris0 of 6DHKs short1term in"estment $ortfolio relati"e to that
of the mar0etE
+hether 6DH should !hange the !om$osition of its $ortfolio.
54) !!' May %a& %(! Marks&
A !om$any has a !hoi!e of in"estments beteen se"eral di7erent e>uity
oriented mutual funds. 5he !om$any has an amount of Rs. 1 !rore to in"est. 5he
details of the mutual funds are gi"en belo2
(utual )und -eta
A 1.:
- 1.0
. 0.B
D &.0
F 0.:
Re>uired2
i) ?f the !om$any in"ests &0= of its in"estment in the 3rst to mutual funds
and an e>ual amount in the mutual funds .% D and F% hat is the beta of
the $ortfolio,
ii) ?f the !om$any in"ests 15= of its in"estment in .% 15= in A% 10= in F and
the balan!e in e>ual amount in the other to mutual funds% hat is the
beta of the $ortfolio,
i") ?f the e*$e!ted return of the mar0et $ortfolio is 1&= at a beta fa!tor of
1.0% hat ill be the $ortfolios e*$e!ted return in both the situations
gi"en abo"e,
)olution;
.rbitrage Pricing Model
Q55) !!2 3une ( %b& %' Marks&
(r. 6 ons a $ortfolio ith the folloing !hara!teristi!s2
'e!urity A 'e!urity - Ris0 free se!urity
)a!tor 1 sensiti"ity 0.90 1.50 0
)a!tor & sensiti"ity 0.:0 1.&0 0
F*$e!ted Return 15= &0= 10=
?t is assumed that se!urity returns are generated by a to fa!tor model.
i) ?f (r. 6 has Rs. 1% 00%000 to in"est and sells short Rs. 50%000 of se!urity -
and $ur!hases Rs. 1% 50%000 of se!urity. A hat is the sensiti"ity of (r. 6Ks
$ortfolio to the to fa!tors,
ii) ?f (r. 6 borros Rs. 1% 00%000 at the ris0 free rate and in"ests the amount
he borros along ith the original amount of Rs. 1% 00%000 in se!urity A
and - in the same $ro$ortion as des!ribed in $art (i)% hat is the
sensiti"ity of the $ortfolio to the to fa!tors,
iii) +hat is the e*$e!ted return $remium of fa!tor &,
Q5:) !(( May (%a& %0 Marks&
(r. 5amarind intends to in"est in e>uity shares of a !om$any the "alue of hi!h
de$ends u$on "arious $arameters as mentioned belo2
9actor 6eta E*pected value in
D
.ctual value in
D
;N< 1.&0 8.80 8.80
?nRation 1.85 5.50 8.00
?nterest rate 1.#0 8.85 B.00
'to!0 mar0et inde* 1.80 10.00 1&.00
?ndustrial
$rodu!tion
1.00 8.00 8.50
?f the ris0 free rate of interest be B.&5=% ho mu!h is the return of the share
under Arbitrage <ri!ing 5heory,
)ECER?,Y .#.5Y)?)
Q58) !!' #ovember %#e-& $%c& %' Marks&
5he !losing "alue of 'ense* for the month of @!tober% &008 is gi"en belo2
Date .losing 'ense* Value
1.10.08 &900
#.10.08 &890
4.10.08 &8B5
5.10.08 &9#0
9.10.08 &8:0
B.10.08 &8B0
10.10.08 &990
11.10.08 &B:0
1&.10.08 &BB0
15.10.08 #&00
1:.10.08 ##00
18.10.08 #450
1B.10.08 ##:0
&&.10.08 #&B0
&#.10.08 ##:0
&4.10.08 ##40
&5.10.08 #&B0
&B.10.08 #&40
#0.10.08 #140
#1.10.08 #&:0
Dou are re>uested to test the ee0 (ea0) form of eJ!ient mar0et hy$othesis
by a$$lying the run test at 5= and 10= le"el of signi3!an!e.
)olloing "alue table !an be used2
Value of t at 5= is &.101 at 19 degrees of freedom
Value of t at 10= is 1.8#4 at 19 degrees of freedom
Value of t at 5= is &.09: at &0 degrees of freedom
Value of t at 10= is 1.8&5 at &0 degrees of freedom
,echnical .nalysis
Q59) !!2 #ovember 3%a& %" Marks&
.losing "alues of -'F 'ense* from :
th
to 18
th
day of the month of Vanuary of the
year &006 ere as follos2
Day Date Day 'ense*
1 : 54G 145&&
& 8 )R? 14B&5
# 9 'A5 No 5rading
4 B 'GN No 5rading
5 10 (@N 15&&&
: 11 5GF 1:000
8 1& +FD 1:400
9 1# 54G 18%000
B 14 )R? No 5rading
10 15 'A5 No 5rading
11 1: 'GN No 5rading
1& 18 (@N 19000
.onsider F*$onential (o"ing A"erage (F(A) of 'ense* during the abo"e $eriod.
5he #0 day sim$le mo"ing a"erage of 'ense* !an be assumed as 15%000. 5he
"alue of e*$onent for #0 days F(A is 0.0:&.
;i"e detailed analysis of your !al!ulations.
Portfolio Management + Measurement of Performance
)rom (utual )und
Q5B) +ith a ris0 Q free rate of 10=% and ith the mar0et $ortfolio ha"ing an e*$e!ted
return of &0= ith a standard de"iation of 9=% hat is the 'har$e ?nde* for
$ortfolio 6% ith a mean of 14= and a standard de"iation of 19= , )or $ortfolio
y% ha"ing a return of &0= and a standard de"iation of 1:= , ould you rather
be in the mar0et $ortfolio or one of the other to $ortfolios ,
Q:0) 'i* $ortfolios e*$erien!ed the folloing results during at 8 Q year $eriod 2
<ortfolio A"erage Annual
Return
'tandard
De"iation
.orrelation ith
mar0et
A
-
.
D
F
)
(ar0et Ris0
)ree Rate
19.:
14.9
15.1
&&.0
1B.0
&:.5
1#.0
B.0
&8.0
19.0
9.0
&1.&
4.0
1B.#
1&.0
0.91
0.:5
0.B9
0.85
0.45
0.:#
a) Ran0 these $ortfolios using (i) 'har$eWs method% and (ii) 5reynorWs method.
b) .om$are the ran0ing in $art (a) and e*$lain the reasons behind the
di7eren!es.
Q:1) .onsider the folloing $erforman!e information on three $ortfolios 2
5reynorWs 5$ 'har$e '$ Vensen V$
<ortfolio A
<ortfolio -
<ortfolio .
6DH ?nde*
14.0
9.0
4.0
5.0
1.5
1.&
.#
.:
15.0
#.0
0
0
a) Ran0 ea!h of the $ortfolios using ea!h of the $erforman!e measures. Are
the ran0ings !onsistent for the three te!hni>ues,
b) .om$are ea!h $ortfolioWs $erforman!e to the mar0etWs $erforman!e. Are
the !om$arisons !onsistent for three te!hni>ues,