CFM

Centre for Financial Management

January 2007

EXAMINATION BOOKLET Certified Financial Manager Programme PAPER 1 : INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
Time allowed : 4 hrs Name Roll No : : Marks : 100

Instructions 1. Return the entire examination booklet after you are through. You are not allowed to take the examination booklet outside the examination hall. 2. For multiple choice questions circle the right answer. If you circle more than one answer you will not get any marks for that question. 3. Show all the workings in the spaces provided. Without the supporting workings, you will not get any marks even if you circle the right answer. 4. If some information is missing in a problem, you can make suitable assumptions 5. You may use the blank pages at the end or other blank spaces for rough work. No additional sheets will be provided. 6. Do not unstaple, fold, or mutilate the examination booklet. 7. You can use an electronic calculator. 8. A set of tables (interest rate and normal distribution) have been appended at the end. Please return them along with the examination booklet. 9. Switch off your cellphones. This booklet has 24 pages.
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Some Formulae FVAn = A [(1 + r)n - 1] / r p2 = wi wj ij i j

CML : E (R j) = R f + j SML : E (Ri) = R f + j [ E (RM) - R f ] iM i = M2 Duration of a coupon bond: 1+y y c [ (1 + y)T - 1] + y (1 + y) + T (c - y)

Two stage growth model: 1 - 1 + g1 1+r P0 = D1 r-g Black - Scholes model: C0 = S0 N (d1) - E N (d2) e rt S0 E r + 1 2 t
2
n

D1 (1 + g1) n - 1 (1 + g2) + r - g2

1 (1 + r) n

ln d1 =

+ t

d2 = d1 - t

PART A: OBJECTIVE QUESTIONS Each question carries 1 mark 1. Open ended mutual fund schemes are ordinarily listed in stock exchange: (a) (b) True False

2. An example of a collateralised short term lending transaction is (a) (b) (c) (d) (e) Sterilisation Repo Bank overdraft Commercial paper None of the above

3. What is the expected return of a zero-beta security ? (a) (b) (c) (d) (e) Market return Risk-free rate of return. Market return - Risk- free return Market return + Risk-free return None of the above

4. The single index model requires: (a) (b) (c) (d) (e) n(n+1) estimates n(n-1) estimates 3n+2 estimates 3n-2 estimates None of the above

5. Strong form efficiency supports technical analysis (a) True (b) False

6. Horizon of arbitrage is limited for a portfolio manager because (a) (b) (c) (d) (e) Lack of mandate from investors Evaluation once every few months Regulatory restrictions Inadequacy of skills None of the above

7. Which one of the following ratios will be of special interest for a person investing in corporate bonds (a) (b) (c) (d) (e) Asset turnover ratio Price-earning ratio Fixed charges coverage ratio Acid-test ratio None of the above

8. An ascending yield curve means that: (a) (b) (c) (d) (e) Long- term rates are expected to rise in future Short-term rates are expected to rise in future Investors may be willing to hold long term bonds Both a and d None of the above

9. Which of the following is considered a bullish signal by a technical analyst ? (a) (b) (c) (d) (e) Double top formation A rise in the put/call ratio A high short-interest ratio A trin ratio of more than 1 None of the above

10. The appropriate measure of risk used in Treynor measure is (a) (b) (c) (d) (e) Variance Beta Standard deviation Range None of the above

PART B : PROBLEMS 1. Investment Planning As an investment advisor, you have been approached by a client called Shyam for advice on some financial matters. Shyam is 35 years old and has Rs.200,000 in bank. He plans to work for 25 years and retire at the age of 60. His present salary is Rs.400,000 per year. He expects his salary to increase at the rate of 12 percent per year until his retirement. Shyam has decided to invest his bank balance and future savings in a balanced mutual fund scheme which he believes will provide a return of 10 percent per year. Shyam seeks your help in answering several questions given below. In answering these questions, ignore the tax factor. (i) Once he retires at the age of 60, he would like to withdraw Rs.600,000 per year for his consumption needs for the following 20 years (his life expectancy is 80 years). Each annual withdrawal will be made at the beginning of the year. How much should be the value of his investments when he reaches the age of 60, to meet his retirement need? Marks : 2 a. Rs.5.619 million b. Rs.6.250 million c. Rs.5.555 million d. Rs.6.724 million e. None of the above Working: 600,000 x PVIFA (10%, 20) X 1.10 = = 600,000 X 8.514 X 1.10 Rs. 5619240

(ii) How much should Shyam save each year for the next 25 years to be able to withdraw Rs.600,000 per year from the beginning of the 26th year for a period of 20 years? Assume that the savings will occur at the end of each year. Remember that he already has some bank balance. Give the answer to the nearest 000. Marks : 2 a. Rs.30,000 b. Rs.37,000

c. Rs.40,000 d. Rs.35,000 e. None of the above Working: Shyam needs Rs. 5,619,240 when he reaches the age of 60 His bank balance of Rs. 200,000 will grow to: 200,000 (1.10)25 = 200,000 (10.835) = 2,167,000 This means that his periodic savings must grow to 5,619,240 - 2,167,000 = 3,452,240 His annual savings must be: A = 3,452,240 FVIFA (25, 10%) = 3,452,240 = 98347 35,103

(iii) Suppose Shyam wants to donate Rs.500,000 per year in the last 5 years of his life to a charitable cause. Each donation would be made at the beginning of the year. Further, he wants to bequeath Rs.4,000,000 to his son at the end of his life. How much should he have in his investment account when he reaches the age of 60 to meet this need for donating and bequeathing? Approximate it to the nearest 000. Marks : 2 a. Rs.1,200,000 b. Rs.1,095,000 c. Rs. 900,000 d. Rs.1,099,000 e. None of the above Working: 74 75

500 Amount required for the charitable cause

500

500

500

500

500,000 x PVIFA (10%, 5 yrs) x PVIF (10% 14) = = 500,000 x 3.791 x 0.263 498,517

Amount required for bequeathing: 4,000,000 x PVIF (10%, 20) = 4,000,000 x 0.149 = 596,000

Total requirement for the charitable cause as well as bequeathing = 1,094,517

(iv) Shyam wants to find out the present value of his lifetime salary income. For the sake of simplicity, assume that his current salary of Rs. 400,000 will be paid exactly a year from now, and his salary is paid annually. What is the present value of his life time salary income, if the discount rate applicable to the same is 9 percent? Remember that Shyam expects his salary to increase at the rate of 12 percent per year until retirement. Marks : 2 a. Rs.11.68 million b. Rs.13.20 million c. Rs.12.95 million d. Rs.13.33 million e. None of the above

Working: A (1+g) 0 1 n (1+g)n 1 PVGA = A (1+g) (1+r)n r-g (1.12)25 1 = 400000 (1.09)25 0.09 0.12 = Rs. 12,952,809 A (1+g)n n

2. Bond Analysis A Rs.1,000 par bond carrying a coupon rate of 9 percent and maturing after 5 years is selling for Rs. 1,040. (i) What is the approximate YTM? Marks : 1 a. b. c. d. e. Working: YTM 8.12 % 8.06 % 7.98 % 8.01 % None of the above

90 + (1000 1040) / 5 0.6 x 1040 + 0.4 x 1000 8.01%

(ii) What will be the realised yield to maturity if the reinvestment rate is 7 percent? Marks : 2 a. 8.02 % b. 7.85 % c. 7.67 %

d. 7.92 % e. None of the above Working: 0 1 2 3 4 5

1040

90

90

90

90

90 1000

= = =

Terminal value at 7% reinvestment rate 90 x FVIFA (7%, 5yrs) + 1000 90 x 5.751 + 1000 1517.59 1/5 1517.59 Realised YTM = -1 1040 = 7.85%

(iii) Now, assume that the market price of the above bond is Rs.1,000. What is the duration of the bond? Marks : 2 a. 4.24 years b. 4.33 years c. 5.00 years d. 4.18 years e. None of the above Working: As market price = par value, YTM = coupon rate = 9% Duration of the bond = 1+y y = 1.09 .09 = (1+y) +T (cy) c [(1+y) T 1] + y (1.09) + 5 (.09 .09) = 12.11 - 7.87 .09 [ (1.09) 5 1] + .09

4.24 years

3. Equity Valuation The current dividend on an equity share of Omega Limited is Rs.8.00 on an earnings per share of Rs. 30.00. (i) Assume that the dividend per share will grow at the rate of 20 percent per year for the next 5 years. Thereafter, the growth rate is expected to fall and stabilise at 12

percent. Investors require a return of 15 percent from Omegas equity shares. What is the intrinsic value of Omegas equity share? Marks : 2 a. Rs.374 b. Rs.405 c. Rs.415 d. Rs.425 e. None of the above Working: g1 = 20 %, g2 = 12 %, n = 5 yrs , r = 15% D1 = 8 (1.20) = Rs. 9.60 1+ g1 1Po = D1 1+ r + r - g1 1.20 1 = 9.60 1.15 + 0.15 - 0.20 0.15 - 0.12 9.60 ( 1.20)4 (1.12) x ( 1.15)5 1
5 n

D1 (1 + g1)n - 1 (1 + g2 ) x r - g2

1 ( 1 + r )n

= 45.53 + 369.49 = Rs. 415.02

(ii) Assume that the growth rate of 20 percent will decline linearly over a five year period and then stabilise at 12 percent. What is the intrinsic value of Omegas share if the investors required rate of return is 15 percent? Marks : 2 a. Rs.375 b. Rs.404 c. Rs.325 d. Rs.352 e. None of the above

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Working:

D0 [ ( 1 + gn) + H ( ga - gn)] P0 = r - gn 8 [ (1.12) + 2.5 ( 0.20 - 0.12 )] = 0.15 - 0.12 = Rs. 352

(iii) Assume that the dividend is expected to grow at a rate of 13 percent annually forever from now on and investors require a return of 15 percent from Omegas equity shares. What will be the retrospective price-earnings ratio (Po/Eo) for Omega? Marks : 1 a. Rs.16.67 b. Rs.13.33 c. Rs.15.07 d. Rs.15.87 e. None of the above Working: 8.00 (1.13) P0 = 0.15 - 0.13 P0 / E0 = 452 / 30 = 15.07 = Rs. 452

4. Equity Analysis: The income statement and balance sheet of Tantex Company for the years 20X4 and 20X5 are given below.

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Income Statement 20X4 20,500 Net sales PBIT Interest PBT Tax PAT Dividends Retained earnings 2,800 600 2,200 450 1,750 400 1,350

20X5 24,750 2,950 550 2,400 500 1,900 500 1,400

Balance Sheet 20X4 1,800 Equity capital (Rs.5 par) 8,400 Reserves and surplus 3,600 Loan funds 13,800 8,500 Net fixed assets 1,500 Investments 3,800 Net current assets 13,800

20X5 1,800 9,800 3,400 15,000 9,500 1,600 3,900 15,000

(i) Show the decomposition of ROE for the year 20X5 in terms of five factors. Marks : 2 Working: ROE Decomposition PBIT ROE = Sales 2950 = 24,750 = 0.1638 x 15,000 = 16.38 % x Assets 24,750 x 2950 Sales x PBIT 2400 x 2400 PBT x PBT 1900 x 11,600 PAT x Net worth 15,000 Assets

(ii) What will be the EPS for the next year (20X6) using the following assumptions. Net sales will grow by 12% PBIT/Net sales ratio will increase by 1 percent over its 20X5 value Interest cost will increase by 10 percent over its 20X5 value The effective tax rate will be 20% Marks : 2 a. Rs. 5.75 b. Rs. 6.24 c. Rs. 6.61 d. Rs. 7.12 e. None of the above

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Working: 20x5 Sales PBIT Interest PBT Tax PAT EPS 24750 2950 550 2400 500 1900 20x6 27720 3581.2 605 2976.2 595.2 2381.0 Rs.6.61

5. Forward Rate Consider the following data for government securities: Face value Rs. 100,000 Rs. 100,000 Rs. 100,000 Interest rate 0 7% 7% Maturity (years) 1 2 3 Current price 95,000 99,500 99,200

What is the forward rate for year 3(r3)? Marks : 2 a. b. c. d. e. Working: 100,000 = 95,000 (1 + r1) 7,000 99,500 = (1.0526) 7,000 99,200 = (1.0526) r3 = 7.37 % + (1.0526) (1.0948) + (1.0526) (1 + r2) 7,000 + (1.0526) (1.0948) (1+r3) 107,000 107,000 r2 = 9.48 % r1 = 5.26 % 7.37 % 7.00 % 7.45 % 6.90 % None of the above

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6. Option Valuation: Binomial Model An equity share is currently selling for Rs.60. In a years time, it can rise by 50 percent or fall by 10 percent. The exercise price of a call option on this share is Rs.70. (i) What is the value of the call option if the risk-free rate is 8 percent? Use the optionequivalent method. Marks : 2 a. 5.55 b. 5.33 c. 4.95 d. 5.75 e. None of the above Working: S0 = Rs. 60, E = Rs. 70, u = 1.5, d = 0.9, R = 1.08 Cu - Cd = (u - d ) So u Cd - d Cu B = (u - d) R C = = 0.6 x 1.08 = Rs. 5.55 S + B = 20 / 36 x 60 - 27.78 = (0.6) 60 20 - 0 = 36 20

1.5 x 0 - 0.9 x 20 = - 27.78

(ii) What is the value of the call option, if the risk-free rate is 6 percent? Use the riskneutral method. Marks : 2 a. Rs. 6.67 b. Rs. 6.25 c. Rs. 4.78 d. Rs. 5.09 e. None of the above. Working: P x 50 % + ( 1 P ) x -10% = 6 % 50 P + 10P - 10 = 6 P = 0.27

Expected future value of call 0.27 x 20 + 0.73 x 0 = 5.4 5.4 Current value = 1.06
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Rs. 5.09

7. Option Valuation : Black-Scholes Model Consider the following data for a certain share: Price of the stock now = S0 = Rs.80 Exercise price = E = Rs.90 Standard deviation of continuously compounded annual return = = 0.3 Expiration period of the call option = 3 months Risk-free interest rate per annum = 8 percent (i) What is the value of the call option? Use the normal distribution table given at the end of this booklet and resort to linear interpolation. Marks : 5 a. Rs.1.88 b. Rs.1.96 c. Rs.2.12 d. Rs.2.33 e. None of the above Working: S0 = Rs. 80, E = Rs. 90, r = 0.08, = 0.3 , t = 0.25 E Co = So N (d1) So ln E d1 = t 0.09 - 0.1178 +( 0.08 + 2 = 0.3 0.25 d2 = d1 - t N (d1) = N (- 0.577) = - 0.577 - 0.3 0.25 = - 0.727 = - 0.577 ) 0.25 + r + 2 e
rt

N (d2) 2 t

N ( - 0.600) N (- 0.550 ) N ( -0.577)

= = = =

0.2743 0.2912 0.2743 +( 0.023 / 0.050) [0.2912 0.2743] 0.2821

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N(d2) = N ( - 0.727)

Co

N (- 0.750) = 0.2264 N (- 0.700) = 0.2420 N (- 0.727) = 0.2264 +(0 .023 /.050) [.2420 - .2264] = 0.2336 90 = 80 x 0.2821 x 0.2336 e 0.08 x 0.25 = 22.5 7 - 20.61 = Rs. 1.96

(ii) What is the value of a put option? Marks : 1 a. b. c. d. e. Working: E Po = Co - S o + e rt 90 = 1.96 - 80 + e

0.08 x 0.25

Rs.10.18 Rs. 9.55 Rs. 8.33 Rs. 11.75 None of the above

= Rs. 10.18

8. Futures The share of Phoenix Limited, which is not expected to pay any dividend in the near future, is currently selling for Rs. 320. The risk-free interest rate is 0.6 % per month. A 3-months futures is selling for Rs. 328. Develop an arbitrage strategy and show what the profit will be 3 months hence. Marks : 3 Working: The appropriate value of the 3 months futures contract is Fo = 320 ( 1.006)3 = Rs. 325.79

As the futures price of Rs.328 is more than this, it pays to do the following:

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Working: Action a) Borrow Rs.320 now and pay the loan with interest 3 months hence b) Buy the share now and sell 3 months hence c) Sell a futures contract Initial Cash flow 320 Cash flow at time T (3 months) - 320(1.006)3= - 325.79

- 320

ST 328 S T 2.21

0 The profit will be Rs. 2.21 per contract of one share.

9. Decomposition of Portfolio Return The return on a mutual fund portfolio during the last few years was 22 percent when the return on the market portfolio was 20 percent. The standard deviation of the mutual fund portfolio return was 40 percent whereas the standard deviation of the market portfolio was 30 percent. The portfolio beta was 1.2. The risk-free return was 10%. (i) What was the impact of systematic risk? Marks: 1 a. b. c. d. e. Working: p ( RM - Rf ) 10 % 11 % 14 % 12 % None of the above

= 1.2 (20 - 10) = 12 %

(ii) What was the impact of imperfect diversification? Marks: 1 a. b. c. d. e. 1.25 % 1.33 % 1.44 % 1.45 % None of the above

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Working: ( p / M - p ) ( RM - Rf ) 40 = 30 - 1.2 (20 - 10 ) = 1.33 %

(iii) What was the net superior returns due to selectivity? Marks : 1 a. b. c. d. e. Working: p Rp - Rf + 40 22 - 10 + 30 (10) = - 1.33 % M ( RM - Rf ) 0% 1.33 % - 1.33 % - 0.67 % None of the above

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PART C : MINI CASE You have recently graduated as a major in finance and have been hired as a financial planner by Jubilee Securities, a financial services company. Your boss has assigned you the task of investing Rs.1,000,000 for a client who has a 1-year investment horizon. You have been asked to consider only the following investment alternatives: T-bills, stock A, stock B, stock C, and market index. The economics cell of Jubilee Securities has developed the probability distribution for the state of the economy and the equity researchers of Jubilee Securities have estimated the rates of return under each state of the economy. You have gathered the following information from them: Returns on Alternative Investments Market Stock A Stock B Stock C Portfolio (18.0%) 25.0% (6.0%) (10.0%) 20.0 5.0 15.0 16.0 42.0 (12.0) 26.0 30.0

State of the Economy Recession Normal Boom

Probability 0.2 0.5 0.3

T-Bills 6.0% 6.0 6.0

Your client is a very curious investor who has heard a lot relating to portfolio theory and asset pricing theory. He requests you to answer the following question: a. What is the expected return and the standard deviation of return for stocks A,B,C, and the market portfolio? b. What is the covariance between the returns on A and B? returns on A and C? returns on B and C? c. What is the coefficient of correlation between the returns of A and B? d. What is the expected return and standard deviation on a portfolio in which the weights assigned to stocks A, B, and C are 0.4, 0.4, and 0.2 respectively? e. The beta coefficients for the various alternatives, based on historical analysis, are as follows: Security T-bills A B C Beta 0.00 1.30 (0.60) 0.95

i. What is the SML relationship? ii. What is the alpha for stocks A, B, and C? f. Suppose the following historical returns have been earned for the stock market and the stock of company D.

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Period 1 2 3 4 5

Market (5%) 4 8 15 9
.

D (15%) 7 14 22 5

What is the beta for stock D? How would you interpret it? g. What is the basic difference between the CAPM and the APT? Marks : 20 Working: a. For stock A: Expected return = (0.2 x -18) + (0.5 x 20) + (0.3 x 42) = 19

Standard deviation = [ 0.2 ( -18 -19)2 + 0.5 (20-19)2 + 0.3 (42 19)2 ] 1/2 = [273.8 + 0.5 + 158.7]1/2 = 20.07 For stock B: Expected return = (0.2 x 25) + (0.5 x 5) + [ 0.3 x (-) 12] = 3.9

Standard deviation = [0.2 ( 25 3.9)2 + 0.5 (5 -3.9)2 + 0.3 (-123.9)2]1/2 = (89.04 + 0.61 + 75.84) = 12.86 For stock C: Expected return = [0.2 x (-6)] + (0.5 x 15) + (0.3 x 26)] = 14.1

Standard deviation = [0.2 (-6 14.1)2 + 0.5 (15 -14.1)2 + 0.3 (26-14.1)2] = [80.80 + 0.41 + 42.48] = 11.12

For market portfolio: Expected return = [0.2 x (-)10] + (0.5 x 16) + (0.3 x 30) = -2 + 8 + 9 = 15

Standard deviation = [0.2 (-10-15)2 + 0.5(16-15)2 + 0.3 (30 15)2] = ( 125 + 0.5 + 67.5 ) = 13.89

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Working: b. State of the Economy Probability (p) Return on A (%) (RA) Return B (%) (RB) RA-E(RA) RB-E(RB) p x [RA-E(RA)] x[RB-E(RB)] -156.14 0.55 - 109.71 - 265.30

Recession Normal Boom

0.2 0.5 0.3

-18 20 42

25 5 -12

-37.0 1.0 23.0

21.1 1.1 -15.9 total =

Covariance between the returns of A and B is (-) 265.3 State of the Economy Return on A Prob(%) (RA) ability (p) Return C (%) (RC) RA-E(RA) RC-E(RC) p x [RA-E(RA)] x[RC-E(RC)] 148.74 0.45 82.11 231.30

Recession Normal Boom

0.2 0.5 0.3

-18 20 42

- 6.0 15.0 26.0

-37.0 1.0 23.0

-20.1 0.9 11.9 total =

Covariance between the returns of A and C is 231.30 (-) 265.3 c. Coefficient of correlation between the returns of A and B = 20.07 x 12.86 231.3 Coefficient of correlaton between the returns of A and C = 20.07 x 11.12 d. Portfolio in which stocks A and B are equally weighted: Economic condition Recession Normal Boom Probability 0.2 0.5 0.3 Overall expected return 0.5 x (-) 18 + 0.5 x 25 = 3.5 0.5 x 20 + 0.5 x 5 = 12.5 0.5 x 42 + 0.5 x (-)12 = 15.0 = 1 = (-) 1

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Expected return of the portfolio = (0.2 x 3.5) + (0.5 x 12.5) + (0.3 x 15.0) = 0.7 + 6.25 + 4.5 = 11.45 Standard deviation of the portfolio = [ 0.2 (3.5 11.45)2 + 0.5 (12.5 11.45)2 + 0.3 (15.0 11.45)2]1/2 = [ 12.64 + 0.55 + 3.78] = 4.12 Portfolio in which weights assigned to stocks A, B and C are 0.4, 0.4 and 0.2 respectively. Expected return of the portfolio = (0.4 x 19.0) + (0.4 x 3.9) + 0.2 x 14.1) = 7.6 + 1.56 + 2.82 = 11.98 For calculating the standard deviation of the portfolio we also need covariance between B and C, which is calculated as under: State of the Economy Probability (p) Return on B (%) (RB) Return on C (%) (RC) - 6.0 15.0 26.0 RB-E(RB) RC-E(RC) p x[RB-E(RB)] x[RC-E(RC)] (-) 84.82 0.50 (-) 56.76 (-)141.08

Recession Normal Boom

0.2 0.5 0.3

25 5 (-)12

21.1 1.1 (-)15.9

-20.1 0.9 11.9 total =

Covariance between the returns of B and C is (-)141.08 We have the following values: WA = 0.4 WB = 0.4 A = 20.07 B = 12.86 AB = (-)265.3 AC = 231.3 Standard deviation = [ (0.4 x 20.07)2 + (0.4 x 12.86)2 + (0.2 x 11.12)2 + [ 2 x 0.4 x 4 x (-) 265.3 ] + + [2 x 0.4 x 0.2 x 231.3] + [2 x 0.4 x 0.2 x (-) 141.08]1/2 = (64.45 + 26.46 + 4.95 84.90 + 37.01 22.57)1/2 = 5.04

WC = 0.2 C = 11.12 BC = (-) 141.08

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e. (i) Risk-free rate is 6% and market risk premium is 15 6 = 9% The SML relationship is Required return = 6% + x 9% (ii) For stock A: Required return = 6 % + 1.3 x 9 % = 17.7 %; Expected return = 19 % Alpha = 19 17.7 = 1.3% For stock B: Required return = 6 % - 0.60 x 9 % = 0.6%; Expected return = 3.9 % Alpha = 3.9 0.6 = 3.3 % For stock C: Required return = 6% + 0.95 x 9 % = 14.55 %; Expected return = 14.1% Alpha = 14.1 14.55 = (-) 0.45 % f. Period RD (%) 1 -15 2 7 3 14 4 22 5 5 RM (%) -5 4 8 15 9 _ _ _ _ _ 2 RD-RD RM-RM (RM-RM ) (RD-RD) (RM-RM) -21.6 -11.2 125.44 241.92 0.4 -2.2 4.84 -0.88 7.4 1.8 3.24 13.32 15.4 8.8 77.44 135.52 -1.6 2.8 7.84 - 4.48 _ _ _ 2 (RM-RM) = 218.80 (RD-RD) (RM-RM) = 385.4 2m = 218.8/4 = 54.7 Cov (D,M) = 385.4/4 = 96.35

RD = 33 RM = 31 _ _ RD = 6.6 RM = 6.2 = 96.35 / 54.7 = 1.76

Interpretation: The change in return of D is expected to be 1.76 times the expected change in return on the market portfolio. g. CAPM assumes that return on a stock/portfolio is solely influenced by the market factor whereas the APT assumes that the return is influenced by a set of factors called risk factors.

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PART D : THEORY Answer any one of the following three questions. The answer must be approximately 400 words. It must be written in the space provided. Devote adequate time and frame your answer carefully, as this question carries 30 percent weightage. 1. Explain the key financial numbers relating to a mutual fund scheme. 2. Evaluate technical analysis. 3. Discuss the Swiss investment wisdom as embodied in Zurich axioms.
.

Marks : 30

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