Portfolio Management Handout 2 - Questions
Uploaded by
PriyankaPortfolio Management Handout 2 - Questions
Uploaded by
PriyankaCA FINAL
STRATEGIC FINANCIAL MANAGEMENT
PORTFOLIO MANAGEMENT
QUESTIONS
Question 1
Mr. Adarsh Srivastava is a recently passed CFA and is working with Money
Managers Ltd. at Mumbai. He is aware of the mechanical portfolio
management techniques and wants to test one of the techniques on an equity
fund he has constructed and compare the gains and losses from the technique
with those from a passive buy and hold strategy. The fund consists of equities
only and the ending NAVs of the fund he constructed for the last 10 months
are given below:
Month Ending NAV Month Ending NAV
(Rs./unit) (Rs./unit)
December 2000 40.00 May 2001 37.00
January 2001 25.00 June 2001 42.00
February 2001 36.00 July 2001 43.00
March 2001 32.00 August 2001 50.00
April 2001 38.00 September 2001 52.00
Assume Adarsh had invested a notional amount of Rs.20 lakhs equally in the
equity fund and a conservative portfolio (of bonds) in the beginning of
December 2000 and the total portfolio was being rebalanced each time the
NAV of the fund increased or decreased by 15%.
You are required to determine the value of the portfolio for each level of NAV
following the Constant Ratio Plan.
SANJAY SARAF SIR 1
Question 2
Mr. Ram Das has estimated probable returns under different macroeconomic
conditions for the following three stocks :
Rates of return (%) during different
Current Price macroeconomic scenarios
Stock
(`)
Recession Moderate growth Boom
Him Ice Ltd 15 -10 17 14
Kalahari 20 20 10 -6
Biotech
Puma Softech 70 15 25 20
Mr. Ram Das is exploring if it is possible to make any arbitrage profits from
the above information.
Required :
Using the above information construct an arbitrage portfolio and show the
payoffs under different economic scenarios.
SANJAY SARAF SIR 2
Question 3
Consider a 3 factor APT world
F1 F2 F3
Factor risk premium 4% 5% 6%
Rf = 6%
i. Write down the equation of APT ?
ii. Now consider the following 2 stocks in this APT world –
Stock Sensitivities/β
F1 F2 F3
RIL 0.6 1.3 1.8
Infy. 1.4 2 1.9
a. Calculate the expected return from each stock.
b. Construct a portfolio combining these two stocks such that the portfolio
has the unit sensitivity w.r.t. factor 1.
c. Find out the factor sensitivities of the portfolio constructed by you in (ii)
(b)
d. Find out the expected return by above portfolio?
e. An investor has own funds of 6000. He leverage 4000 at Rf. He invest the
entire fund in RIL & Infoy.in the ratio of 4 : 1. Calculate factor sensitivities
of his portfolio.
SANJAY SARAF SIR 3
Question 4
Mr. A owns a portfolio with the following characteristics
Security X Security Y Risk Free security
Factor 1 sensitivity 0.70 1.40 0
Factor 2 sensitivity 0.80 1.60 0
Expected Return 14% 18% 9%
It is assumed that security returns are generated by a two factor model.
i. If Mr. A has ` 1,20,000 to invest and sells short ` 40,000 of security Y and
purchases 1,60,000 of security X what is the sensitivity of Mr. A's portfolio
to the two factors?
ii. If Mr. A borrows ` 60000 at the risk free rate and invests the amount he
borrows along with the original amount of ` 1,20,000 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 ?
iii. What is the expected risk premium of factor 2?
SANJAY SARAF SIR 4
Question 5
Mr. Niraj Panday has categorized all the available stocks in the market into the
following types:
i. Small cap value stocks
ii. Small cap growth stocks
iii. Large cap value stocks
iv. Large cap growth stocks
He has also estimated the weights of the above categories of stocks in the
market index. Further more, the sensitivity of returns on these categories
of stocks to the three important factors are estimated to be:
Category of Weight in Factor I Factor II Factor III
Stocks the Market (Market) (Price/Book) (average
Index Capitalization)
Small Cap
10% 0.90 0.75 1.25
value
Small cap
25% 0.80 1.39 1.35
growth
Large cap
15% 0.85 2.05 6.75
value
Large cap
50% 1.165 2.75 8.65
growth
Risk
Premium 6.85% -3.5% 0.65%
(FRP)
The risk free rate of return is 4.5%
Required:
a. Using Arbitrage Pricing Theory, determine the expected return on the
market index.
b. Using Capital Asset Pricing Model, determine the expected return on the
market index.
c. Mr. Niraj Pandey wants to construct a portfolio constituting only the
'small cap value' and 'large cap growth' stocks. If the target beta for the
portfolio is one, determine the composition of his portfolio.
SANJAY SARAF SIR 5
Question 6
Mr. TOM intends to invest in equity shares of a company the value of which
depends upon various parameters as mentioned below :
Factor Beta Expected value in % Actual value in %
GNP 1.30 8.70 9.70
Ination 1.85 6.50 5.50
Interest rate 1.40 7.70 6.00
Stock market index 1.75 9.00 11.00
Industrial production 1.00 6.50 4.50
If the risk free rate of interest be 9.50%, how much is the return of the share
under Arbitrage Pricing Theory ?
Question 7
Mr. A. Rathi is testing the weak form efficient market hypothesis on the Indian
stock market. For this he has collected the data on a leading market
index for the last 15 trading days. This is given below:
Trading day Market Index
1 4500
2 4550
3 4400
4 4350
5 4300
6 4330
7 4400
8 4445
9 4440
10 4370
11 4380
12 4365
13 4500
14 4560
15 4600
You are required to perform a runs test and determine the independence of
data at 10% level of significance.