SFM – CMA FINAL
SFM – Portfolio Management - 2
1. From the following, you are required to find the Risk of the Portfolio, if the Standard Deviation
of the Market Index (σ) is 18%.
Security Beta Random Error σ Weight
ei
A 1.60 7 0.25
B 1.15 11 0.30
C 1.40 3 0.25
D 1.00 9 0.20
2. Calculate the Systematic and Unsystematic Risk for the Companies Stock. If equal amount of
money is allocated for the stocks, what would be the risk of Portfolio?
Company A Company B Sensex
Average Return 0.15 0.25 0.66
Variance of Return 6.30 5.86 2.25
Beta 0.71 0.685
Co efficient of determination 0.18
3. From the following information, ascertain the Market Price (X) of Risk of the portfolio -
Market Return Standard Return on Government Standard Deviation
(R ) Deviation on Bonds (R ) of the
m Market Return (σ ) f Portfolio (σ )
m p
18% 6% 6% 8%
20% 8% 7% 4%
22% 9% 8% 12%
Also, determine the expected return for each of the above cases.
4. X Co. Ltd., invested on 1.4.2021 in certain equity shares as below:
Name of Co. No. of shares Cost
D Ltd. 1,000 (₹ 10 each) 20,000
G Ltd. 500 (₹1 each) 15,000
In September, 2021,10% dividend was paid out by D Ltd. and in October, 2021, 30%
dividend paid out by G Ltd. On 31.3.2022 market quotations showed a value of ₹22 and ₹29
per share for D Ltd. and G Ltd. respectively.
On 1.4.2022, investment advisors indicate:
(a) that the dividends from D Ltd. and G Ltd. for the year ending 31.3.2023 are likely to be
20% and 35%, respectively and
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(b) that the probabilities of market quotations on 31.3.2023 are as given below:
Probability factor Price/ share of D Ltd. Price/ share of G Ltd.
0.2 22 29
0.5 25 31
0.3 28 33
You are required to—
a. Calculate the average return from the portfolio for the year ended 31.3.2022
b. Calculate the expected average return from the portfolio for the year 2022-23; and
c. Advise X Co. Ltd., of the comparative risk in the two investments by
calculating the standard deviation in each case.
P
5. A Study by a Mutual Fund has revealed the following data in respect of the three securities:
Security σ (%) Correlation with Index, ρ
sm
P 20 0.66
Q 18 0.95
R 12 0.75
The Standard Deviation of the Market Portfolio (BSE Sensex) is observed to be 18%.
a) What is the sensitivity of returns of each stock with respect to the market?
b) What are the Co-variances among the various stocks?
c) What would be the risk of portfolio consisting of all the three stocks equally?
d) What is the beta of the portfolio consisting of equal investment in each stock?
e) What is the total systematic and unsystematic risk of the portfolio in (4)?
6. Calculate mean returns and standard deviation of returns for the following individual stocks.
Year Stock - X(%) Stock -Y(%)
2019 12.40 -19.00
2020 7.20 -23.40
2021 8.00 27.60
2022 4.80 -10.60
2023 0.40 19.00
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Also find out the portfolio return and portfolio risk assuming that
(i) weights are equal in both the stocks
(ii) weights are not given
7. Following are the details of a portfolio consisting of three Shares:
Share Portfolio Beta Expected Return Total Variance
A Weight
0.20 0.40 %
14 0.015
B 0.50 0.50 15 0.025
C 0.30 1.10 21 0.100
Standard Deviation of Market Portfolio Returns= 10%
You are given the following additional data: Covariance (A, B) = 0.030, Covariance (A, C) =
0.020, Covariance (B, C) = 0.040
Calculate the following:
(i) The Portfolio Beta,
(ii) Residual Variance of each of the three Share,
(iii) Portfolio Variance using Sharpe Index Model,
(iv) Portfolio Variance (on the basis of Modern Portfolio Theory given by
Markowitz).
8. A Stock costing ₹120 pays no dividends. The possible prices that the Stock might sell for at the
end of the year with the respective probabilities are given below. Compute the Expected Return
and its Standard Deviation.
Price 115 120 125 130 135 140
Probability 0.1 0.1 0.2 0.3 0.2 0.1
9. The following are the Returns of Share S and the Market (M) for the Last 6 years –
Year 1 2 3 4 5 6
Return on S (%) 18 9 20 -10 5 12
Return on Market 15 7 16 -13 4 7
Portfolio
a. Calculation the Covariance & Correlation Co-efficient of returns
b. Determine the Beta co-efficient for S
c. What is S’s Total Risk?
d. How much is the Systematic Risk?
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10. An investor holds two stocks X and Y. An analyst prepared ex-ante probability distribution
for the possible Economic scenarios and the conditional returns for the two stocks and the
market index as shown below:
Economic Scenario Probability Conditional Returns %
X Y Market
Growth 0.40 25 20 18
Stagnation 0.30 10 15 13
Recession 0.30 -5 -8 -3
The risk free rate during the next year is expected to be around 9%. Determine whether the
investor should liquidate his holdings in stocks X and Y or on the contrary make fresh
investments in them. CAPM assumptions are holding true.
11. Expected returns on two stocks for particular market returns are given in the following table:
Market Return Aggressive Defensive
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 equally likely to be 7% or 25%.
(d) The Alphas of the two stocks.
12. Consider the following table, which gives a security analyst’s expected return on two stocks for
two particulars market returns.
Market return Aggressive stock Defensive stock
5% -2 6%
25% 38% 12%
(a) What are the betas of the two stocks?
(b) What is the expected rate of return on each stock if the market return is equally likely
to be 5% or 25%?
(c) If the T-Bill rate is 6% and the market return is equally likely to be 5% or 25%, find
the equation of the SMl.
(d) What are the alphas of each?
(e) What hurdle rate should be used by the management of the aggressive firm for a
project with the risk characteristics of the defensive firm’s stock?
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13. Information related to an investment is as follows:
Risk free rate 10%
Market Return 15%
Beta 1.2
(i) What would be the return from this investment?
(ii) If the projected return is 18%, is the investment rightly valued?
(iii) What is your strategy?
14. The expected returns and Beta of three stocks are given below
Stock A B C
Expected Return (%) 18 11 15
Beta Factor 1.7 0.6 1.2
If the risk free rate is 9% and the expected rate of return on the market portfolio is 14%
which of the above stocks are over, under or correctly valued in the market?
What shall be the strategy?
15. With the help of following data determine the return on the security X.
Factor Risk Premium associated with the Factor βi
Market 4% 1.3
Growth Rate of GDP 1% 0.3
Inflation -4% 0.2
Risk Free Rate of Return is 8%.
16. Estimate the stock return by using CAPM and the APT model by which the particulars are
given below:
The expected return of the market is 14 per cent and the equity beta is 1.2.
The risk free rate of interest is 6 per cent.
Factor Market Price of Risk (%) Sensitivity Index
Inflation 5 1.2
Industrial Production 1 0.9
Risk Premium 3 1.1
Interest Rate 4 -0.8
What explanations can you offer for the difference in the two estimates?
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17. XYZ Ltd. has substantial cash flow and until the surplus funds are utilised to meet the
future capital expenditure, likely to happen after several months, are invested in a portfolio
of short- term equity investments, details for which are given below:
Investment No. of Beta Market price Expected dividend
shares per share yield
I 60,000 ₹
1.16 4.29 19.50%
II 80,000 2.28 2.92 24.00%
III 1,00,000 0.90 2.17 17.50%
IV 1,25,000 1.50 3.14 26.00%
The current market return is 19% and the risk free rate is 11%.
Required to:
a) Calculate the risk of XYZ’s short-term investment portfolio relative to that of the
market;
b) Whether XYZ should change the composition of its portfolio.
18. A company has a choice of investments between several different equity shares. The
company has an amount of ₹1 crore to invest. The details of the mutual funds are as follows:
Assets Beta
ABCD 1.6
E 1.0
0.9
2.0
0.6
Required:
a) If the company invests 20% of its investment in each of the first two mutual
funds and an equal amount in the mutual funds C, D and E, what is the beta
of the portfolio?
b) If the company invests 15% of its investment in C, 15% in A, 10% in E and the
balance in equal amount in the other two mutual funds, what is the beta of the
portfolio?
c) If the expected return of market portfolio is 12% at a beta factor of 1.0, what
will be the portfolios expected return in both the situations given above?
19. A portfolio manager owns 3 stocks: Find its Beta.
Stock Share owned Stock Price (₹) Beta
1 2 Lakh 800 1.1
2 4 Lakh 600 1.2
3 6 Lakh 200 1.3
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20. Sanjiv is contemplating buying/selling the shares of Companies M, N and O. He already holds
some shares in each of these Companies. He has the following data in his hand to aid him in
his decision —
a) Return on NIFTY 16%
b) ₹ 500 Treasury Bonds, whose returns are considered risk free, earns its owners a return
of ₹35
c) Company M has a Beta Factor of 0.95 and investment therein yields a return of 13.5%
d) Company N, which is traded at ₹1,200 per shares, earns its investors a sum of ₹246. It
has a beta factor of 1.5.
e) Company O, price of which is ₹450 has a beta factor of 0.6. Historical data shows that
annual share price increase of the Company is around 8%. Last dividend declared was
₹12 per share. Dividend payout is expected to double in the next year.
Sanjiv seeks your guidance on the course of action.
21. You have chosen a risky market portfolio P, with an expected return of 15% and a standard
deviation
f of 25%. The R 0.06.
a. State the equation for CML for portfolio P
b. Suppose you prefer to reduce your risk by investing
f 40% in R, and balance 60% in
portfolio P. What is your expected return now?
c. What is your risk as per (b) above.
22. Assuming that shares of ABC Ltd. and XYZ Ltd. are correctly priced according to
Capital Asset Pricing Model. The expected return from and Beta of these shares are as
follows:
Share Beta Expected return
ABC 1.2 19.8%
XYZ 0.9 17.1%
You are required to derive Security Market Line.
23. On the basis of the following information, compute covariance between the returns on a pair of
securities according to the Sharpe single-index model:
Beta for stock A = 1.183 Beta for stock B = 1.021 Beta for stock C = 2.322
The variance of the market portfolio = 20.91
24. Share of Shree Limited has a beta factor of 1.8. The NIFTY has yielded a return of 17.5%.
6.75% ₹100.
Treasury Bills are traded at ₹108. Ascertain —
(a) Expected Return on Shares of Sharee Ltd under CAPM.
(b) Alpha Factor of Shares of Sharee Ltd if the past 5 Years actual returns on shares of
Sharee Ltd are —
23.4%; 27.2%; 26.6%; 24.3% and 28.5%.
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25. Mr. Parekh is totally confused whether Rheƒ should purchase stock of HUL or not. His financial
analyst has provided the following information: = 5%
Factor λ β
Interest Rate Risk i0.90 i0.90
Purchasing Power Risk 0.8 1.70
Infltion Risk 1.4 1.50
Market Risk 0.7 -1.60
The probability of getting a return on HUL stock is given below:
Return % Probability (%)
18 40
20 30
12 20
8 10
Advise Mr. Parekh.
26. Mr. Shiva has estimated probable returns under different macroeconomic conditions for the
following three stocks.
Name of the Current market Rates of return under different macroeconomic
stocks price (₹) scenarios (%)
Recession Moderate Boom
X 10 -12 growth
15 35
Y 30 20 12 -5
Z 80 18 20 15
Mr. Shiva is exploring if it is possible to make any arbitrage profits from the above information.
Using the above information construct an arbitrage portfolio and show the payoffs under
different economic scenarios.
Complete the blanks in the following table assuming the relevant equilibrium model in the
CAPM with unlimited borrowing and lending at the riskless rate of return.
Stock Expected Standard deviation Beta Residual variance
A 0.18 - 1.5 0.12
B 0.15 0.50 0.75 0.05
C - - 0.60 0.14
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27. Suppose that the standard deviation of the market portfolios return is 25%.
a) What is the standard deviation of a well diversified portfolio with a beta (β) of 1.4?
b) What is the beta of a well diversified portfolio with a standard deviation of 18%
c) What is the standard deviation of a well diversified portfolio with a (β) of 0?
d) What can you say about the beta (β) of poorly diversified portfolio with a standard
deviation of 25%?
28. Mr. Aditya owns a portfolio with the following characteristics and it is assumed that security
returns are generated by a two-factor model. With this information of Aditya, the newly
inducted trainee Mr. Barun has been asked to analyse with comments, if any.
Security X Security Y Risk free
Factor 1 sensitivity 0.80 1.50 0 Security
Factor 1 sensitivity 0.60 1.20 0
Expected Return 15% 20% 10%
a) If Mr. Aditya has ₹ 1,00,000 to invest and sells short ₹50,000 of security Y and
purchases ₹1,50,000 of security X what is the sensitivity of Mr. Aditya’s portfolio to
the two factors?
b) If Mr. Aditya borrows ₹1,00,000 at the risk free rate and invests the amount he
borrows along with the original amount of ₹1,00,000 in security X and Y in the same
proportion as described in part (i), what is the sensitivity of the portfolio to the two
factors?
c) What will be the expected return premium of factor 2?
29. Consider the following information regarding the returns and risk of certain stocks:
Name of the Expected Return Beta Standard Deviation of
Security
Stock P 32 (%) 1.70 Return (%)
50
Stock Q 30 1.40 35
Stock R 25 1.10 40
Stock S 22 0.95 24
Stock T 20 1.05 28
Stock U 10 0.70 18
Stock Index 12 1.00 20
Treasury Bills 8 0.00 0
From the following information:
a) Draw the SML, and plot all the stocks on the graph.
(ii) Identify which securities are underpriced or overpriced.
(iii) Calculate the return and risk of a portfolio containing all the stocks in equal proportions.
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(iv) The
return and risk of the portfolio constructed is invested with a margin of
40% and cost of borrowing is 8%.
30. Consider the following data for a one-factor economy. All portfolios are well diversified.
Portfolio E(r) Beta
A 12% 1.2
B 6% 0.0
Suppose, that another portfolio, portfolio C, is well diversified with a beta 0.6 and has an
expected return of 8%. Would an arbitrage opportunity exist? if so, what would be the
arbitrage strategy?
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