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Mid Sem

BITS Pilani Mid-Sem Solutions

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13 views2 pages

Mid Sem

BITS Pilani Mid-Sem Solutions

Uploaded by

malaniritu2103
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Semester I: 2018 -19

Security Analysis and Portfolio Management


Mid-semester Examination (Closed Book)

Course code:ECONF412/FIN F313 Date:13/10/18(9:00-10.30PM)


Duration: 90Mins Max.Marks:70 (Weightage:35%)
__________________________________________________________________________

Answer all the questions. Sub parts of EACH question should be answered at one place in
sequential order.

1. Discuss the three components of an investor’s required rate of return on an


investment. 6M

2. You have borrowed $20,000 on margin to buy shares in Disney, which is now selling
at $40 per share. Your account starts at the initial margin requirement of 50%. The
maintenance margin is 35%. Two days later, the stock price falls to $35 per share.
a. Will you receive a margin call? 6M
b. How low can the price of Disney shares fall before you receive a margin call?

3. Based on the scenarios below

Bear Market Normal Market Bull Market


Probability 0.2 0.5 0.3
Stock X -20% 18% 50%
Stock Y -15% 20% 10%

a. What are the expected rates of return for Stocks X and Y?


b. What are the standard deviations of returns on Stocks X and Y?
c. By the relative measure of risk which stock is preferable?
d. Assume that of your $10,000 portfolio, you invest $9,000 in stock X and
$1,000 in Stock Y. What is the expected return on your portfolio? 12M

4. Consider a portfolio that offers an expected rate of return of 12% and standard deviation
of 18%. T – bills offer a risk free 7% rate of return. what is the maximum level of risk
aversion for which the risky portfolio is still preferred to bills? 6M

(P.T.O)
5. Are the following true or false (Only a and b)? Explain. 8M
a. Stocks with a beta of zero offer an expected rate of return of Zero
b. The CAPM implies that investors require a higher return to hold highly volatile
securities.
c. What must be the beta of a portfolio with E(Rp) = 18%, if Rf=6% and E(RM)=14%?
d. Analyse the reasons for present Rupee depreciation against US Dollar.

6.
a. Identify the three most important determinants of the price of a Bond. Describe the
effect of each.
b. Explain what is meant by the term structure of interest rates. Explain the theoretical
basis of an upward – sloping yield curve.

The ability to immunize a bond portfolio is very desirable for bond portfolio managers
in some instances.
c. Discuss the components of interest rate risk. Assuming a change in interest rates
over time, explain the two risks faced by the holder of a bond.
d. Define Immunization, and discuss why a bond manager would immunize a
portfolio. 16M
7.
a. Calculate the Macaulay duration of an 8 percent coupon paid semi-annually, $1,000
par bond that matures in three years if the bond’s YTM is 10 percent.
b. Calculate this bond’s modified duration
c. Assuming the Bond’s YTM goes from 10 percent to 9.5 percent, calculate an
estimate of the price change. 8M

8. A Bond for XYZ Corporation has the following characteristics. 8M


Maturity -12 years
Coupon – 10%
YTM – 9.5%
Macaulay duration – 5.7 years
Convexity – 48
a. Calculate the approximate price change for this bond using only its duration,
assuming its yield to maturity increased by 150 basis points.
b. Discuss (with calculations) the impact when you include the convexity effect.
c. Calculate the approximate price change for this bond using only its duration,
assuming its yield to maturity declined by 300 basis points.
d. Analyse (with calculations) the impact on price change, when bond’s yield to
maturity declined by 300 basis points when you include the convexity factor.
***************************************

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