Semester-III, MBA-II

Security Analysis and Portfolio Management (SAPM)

Faculty: Sweety Shah

Assignment

1) During the last five years, the returns of a stock were as follows;

Year Returns
1 0.08
2 0.05
3 0.07
4 -0.04
5 0.10
Compute the following: (a) cumulative wealth index, (b) arithmetic mean, (c)
geometric mean, (d) variance, (e) standard deviation.

2) Suppose one has bought share of ABC limited at Rs.500 one year back. Over
the last year ABC has distributed dividend of Rs.10 per share. If share of ABC
limited sells at Rs.590 today, what is the return? In case share of the company
sell at Rs.420 today then what is return?

3) An investor purchase a share of XYZ limited at price of Rs.60 and during the
year the company paid dividend of Rs.2.40. At the end of year the price of share
is Rs.69. Compute the following: (a) Return, (b) Return Relative.

4) Calculate Arithmetic mean using following details;

Year Returns
(%)
1 16
2 15
3 28
4 -20
 5 8

5) Calculate Geometric Mean using following details;

Year 1 2 3 4 5

Return 19 14 22 -12 5
(%)
6) The total return for an equity stock during the year was 20.5%. The rate of
inflation during that year was 7.2%. Calculate real return of an equity stock.

7) Consider the returns from a stock over 6 year period is as follows;

Year Returns
(%)
1 20
2 24
3 10
4 -20
5 28
6 18
Calculate variance and standard deviation of the stock.

8) You are thinking of acquiring share of LMN Ltd. The rates of return
expectations are as follows:

Possible Probability
Returns
0.10 0.40
0.05 0.10
0.11 0.30
0.08 0.20

9) The probability distribution of the rate of return on stock is given below:

State of Probability Rate of

Economy of Return
Occurrence (%)
Boom 0.30 -12
 Normal 0.40 24
Recession 0.30 14

10) A portfolio consists of four securities A,B,C and D with expected returns of
12%, 15%, 18% and 20%. The weights of securities in portfolio are 0.20, 0.30,
0.30, and 0.20. Calculate expected return of portfolio.

11) The correlation between two securities is 0.7; calculate expected return and
variance of the portfolio using following information.

Security 1 Security 2
Weights 0.35 0.65
Return (%) 15 25
Standard 12 18
Deviation(%)

12) Consider two stocks security X and security Y:

Expected Standard
Return(%) Deviation(%)
Security X 14 32
Security Y 18 25

The returns on two securities are perfectly negatively correlated. What is

expected return of portfolio constructed to drive standard deviation of the
portfolio return to zero?

13) With the help of following details calculate portfolio variance comprises of
three securities;

Security Security Security

1 2 3
Weights 0.3 0.5 0.2
Standard 6 9 10
deviation (%)

The correlation between securities are as follows; security1,2 =0.4, security

1,3=0.8, security 2,3 = 0.7.

14) Consider two stocks with the following details;

 E(R1)= 0.15 ϭ1= 0.10 W1= 0.5
E(R2)= 0.20 ϭ2= 0.20 W2= 0.5

Compute the mean and standard deviation of portfolio, if correlation

between two security is 0.6.

15) The following information is available;

Security Security
A B
Expected 24 3
Returns(%)
Standard 12 18
deviation (%)

Co-efficient of correlation between two stocks is 0.60.

a) What is the covariance between Security A and Security B?
b) What is expected return and risk of a portfolio in which both securities
are equally weighted?

16) The following table gives an analyst’s expected return on two stocks for
particular market returns;
Market Aggressive Defensive
return(%) Stock(%) Stock(%)
6 2 8
20 30 16

a) What are the betas of the two stocks?

b) What is the expected return on each stock if the market return is equally
likely to be 6% or 20&?
c) If risk free rate is 7% and the market return is equally likely to be 6% or
20% What is SML?
d) What are the alphas of the two stocks?

17) If the market is providing a return of 14% and T bills are yielding 6% then
according to CAPM which of the following securities are overvalued or under-
valued?
Security Beta Expected Return
A 1.4 18.2
B 1.2 15.6
 C 1.5 19.4
D 1.1 14

18) The following details are given for the period of 15 years. Calculate beta of
stock A and Characteristic Line.

Year Return Market

on Return
stock A

1 10 12
2 15 14
3 18 13
4 14 10
5 16 9
6 16 13
7 18 14
8 4 7
9 -9 1
10 14 12
11 15 -11
12 14 16
13 6 8
14 7 7
15 -8 10

19) An investor build a portfolio of four companies. The investment of is

spread equally over the stocks. Market return is 11% amd Market variance is
26%. Find out portfolio return and variance.
Company α β Residual Variance
S 0.17 0.93 45.15

N 2.48 1.37 135.25

A 1.47 1.73 196.28

P 2.52 1.17 51.98
20) Consider the following information for three funds. The risk free rate
assumed to be 9%. Rank the funds with the help of Sharpe Index Measure.
Funds Rp ϭp β
A 25.38 4 0.23
 B 25.11 9.01 0.56
C 25.01 3.55 0.59

21) Consider the following information for three mutual funds and the market.
Mean Standard β
Return(%) deviation(%)
A 12 18 1.1
B 10 15 0.9
C 13 20 1.2
Market Index 11 17 1.0

The mean risk-free rate was 6%. Calculate the Treynor measure, Sharpe
measure and Jensen measure for three mutual funds and market index.
22) An investor holds a portfolio that over last 5 years. The portfolio produce
the return of 16.8%. during that time the portfolio beta value is 1.10. The risk
free rate of return and market return is 7.4% and 15.2% respectively. How
could you evaluate the performance of the portfolio?
23) Financial analyst analyse two investment alternatives Y and Z. The
following details are given regarding investment.
Probability Return onY Return on Z
0.20 22% 5%
0.60 14% 15%
0.20 - 4% 25%
24) Calculate expected return and variance of portfolio comprising two
securities. Assuming the following details.
Weights Returns(%) Standard deviation(%)

Security A 0.75 18 12

Security B 0.25 22 20

The correlation between two securities is 0.6.

25) The risk free rate of return is 7% and Market portfolio expected return and
standard deviation of return is 14% and 25% respectively. Under the
equilibrium condition described by CAPM, what would be the expected return
for portfolio having no unsystematic risk and 20% standard deviation of
portfolio?