INVESTMENT

UNIT 4:
PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT: CONCEPT

Analysing individual securities, evaluation of risk

and return of each.
TRADITIONAL Assumes market is not efficient & Fundamental
analysis yields results. Technical analysis also deals
ANALYSIS with individual securities.

• Maximum of return through a combination of

MODERN securities. Analyse the relationship between
different securities and inter-relation of the risk
ANALYSIS between them.
• Shaped by Markowitz and Sharpe’s works.
 DIVERSIFICATION
• Diversification is a process of minimizing risk
involved in investment & portfolio
management.
• Involves selection of assets, financial
instruments etc., in a manner that the total
risk is brought down.
• Not random. Securities with negative or no
correlation to be included in portfolio.
• Number is also restricted.
EXPECTED RETURN ON PORTFOLIO

Rp = ∑ wi Ri
Where,
Rp is the Expected Return on the portfolio
Wi is the weight of security ‘i’ in portfolio
Ri is the return on security ‘i’
 RP: PRACTICE QUESTION
Q. The returns on securities A and B are 10%
and 20% respectively. If the investor has these in
his portfolio in the ratio of 1:3. What is his
expected return from the portfolio?

Soln: Rp = ∑ wi Ri
WA= 0.25, wB = 0.75, RA=0.1, RB= 0.2
= 0.1*0.25 + 0.2*0.75 = 0.175
=17.5%
 RP PRACTICE QUESTION (2)
Q. Mr. X has some money for investment. He invests
40% in securities of L Ltd which has expected return
of 16% and rest in securities of M Ltd which
provides a return of 12%. What is Mr X’s expected
return from the portfolio? What will be his return if
the proportions are reversed?

Soln: Rp = ∑ wi Ri
WL= 0.4, WM = 0.6, RL=0.16, RM= 0.12
= 0.4*0.16 + 0.6*0.12 = 0.136 =13.6%
• If proportions are reversed WL= 0.6, WM = 0.4
= 0.6*0.16 + 0.4*0.12 = 0.144 =14.4%
 RP: PRACTICE QUESTION (3)
Q. Mr. X has Rs1,00,000 for investment. He expects
a return of 16%. He can invest in debentures
offering 15% and equity shares which provide a
return of 20%. Find the amount to be invested in
each security to achieve the target return.

Soln: Rp = ∑ w i Ri
RP= 0.16, RD=0.15, RE= 0.2;
Investment of Debenture = WD; Investment of Equity= WE
WD + WE =1, WE = 1- WD
= 0.16 = WD*0.15+ (1-WD)*0.2
WD= 0.8 = 80% ; WE = 20%
• Investment in Debentures = Rs 80,000 and Equity Rs 20,000
 PORTFOLIO RISK: TWO SECURITY
PORFOLIO

𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝜎1𝜎2𝑟12

Where,
W1= weight of Security 1 in the portfolio
W2= weight of Security 2 in the portfolio
σ1= risk (standard deviation) of Security 1
σ2= risk (standard deviation) of Security 2
r12= Pearson’s Correlation Coefficient between returns of
Securities 1 & 2
 RELATED FORMULAS 1
r12 = Cov12 / σ1σ2
Where,
r12= Pearson’s Correlation Coefficient between
returns of Securities 1 & 2
Cov12= Covariance between Securities 1 & 2
σ1= risk (standard deviation) of Security 1
σ2= risk (standard deviation) of Security 2
 RELATED FORMULAS 2

𝑁
Cov12 = [σ𝑖=1(𝑅1𝑖 − 𝑅1)(𝑅2𝑖 − 𝑅2)]/𝑁
Where,
Cov12= Covariance between Securities 1 & 2
R1i = Return on Security 1 in year i.
R2i = Return on Security 2 in year i.
R1 = Average Return on Security 1
R2 = Average Return on Security 2.
N = Number of years
 RELATED FORMULAS 3

𝑁
Cov12 = σ𝑖=1 𝑝𝑖 (𝑅1𝑖 − 𝐸𝑅1)(𝑅2𝑖 − 𝐸𝑅2)
Where,
Cov12= Covariance between Securities 1 & 2
R1i = Return on Security 1 for ith state of nature.
R2i = Return on Security 2 for ith state of nature
ER1 = Expected Return on Security 1
ER2 = Expected Return on Security 2.
N = states of nature
 σp : Practise Question 1:
• Given the following information about a portfolio
made up in equal parts of securities X and Y:
Security Risk (standard deviation)
X 4
Y 7
Calculate portfolio risk when:
i. r= -1
ii. r= - 0.5
iii. r= 0
iv. r= 0.5
v. r= 1
• Comment on the same.
 σp : Solution 1:

𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝜎1𝜎2𝑟12

W1= W2= 0.5; σ1= 4; σ2= 7
r 𝝈𝒑
-1 1.5
-0.5 3.04
0 4.03
0.5 4.82
1 5.5
Comment: Portfolio risk is minimum when r= - 1
and maximum when r=1
 Rp&σP PRACTICE QUESTION (2)
Q. An investor has 2 securities X and Y. Security X
has expected return of 15% with risk of 4% and
security Y provides a return of 18% with risk of 7%.
The coefficient of correlation is 1. What is the
expected return and risk from the portfolio formed
of 70% X and 30% Y.

Soln: WX= 0.7, WY = 0.3, RX=0.15, RY= 0.18, rXY=1, σx=0.04, σy = 0.07
Rp = ∑ wi Ri = 0.7*0.15 + 0.3*0.18 = 0.159 =15.9%
𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝜎1𝜎2𝑟12
𝜎𝑝 = 0.72 ∗ 0.042 +0.32 ∗ 0.072 +2 ∗ 0.7 ∗ 0.3 ∗ 0.04 ∗ 0.07 ∗ 1
𝝈𝒑 = 4.9%
 Rp&σP PRACTICE QUESTION (3)
• Return of two securities with 4 possible states of nature
are:
State of nature pi R1 (%) R2 (%)
1 0.2 7 4
2 0.4 9 10
3 0.3 14 18
4 0.1 18 28
Find:
i. Expected return on security 1 & 2
ii. Expected risk on security 1 & 2
iii. Covariance & correlation between returns of 1 &2.
iv. Rp&σP of portfolio with 40% security 1 & 60% Security 2.
 Rp&σP SOLUTION (3)
i. Calculation of Security Expected Return
ER1 = ∑piRi = 0.2*7+0.4*9+0.3*14+0.1*18 = 11%
ER2 = ∑piRi = 0.2*4+0.4*10+0.3*18+0.1*28 = 13%
ii. Calculation of Security Expected Return
pi R1i pi (R1i -ER1)2 R2i pi (R2i –ER2)2
0.2 7 0.03 4 0.16
0.4 9 0.02 10 0.04
0.3 14 0.03 18 0.08
0.1 18 0.05 28 0.23
∑= 0.12 0.5
𝝈𝟏 3.52% 𝝈𝟐 7.06%
 Rp&σP SOLUTION (3) contd
iii. Calculation of Covariance and Coefficient of
correlation
Sta pi R1i R1i -ER1 R2i R2i –ER2 pi (R1i -ER1)(R2i –ER2)
te
1 0.2 7 -4 4 -9 7.2
2 0.4 9 -2 10 -3 2.4
3 0.3 14 3 18 5 4.5
4 0.1 18 7 28 15 10.5
Covariance = 24.6

r12 = Cov12 / σ1σ2 = 24.6/3.52*7.06 = 0.99

 Rp&σP SOLUTION (3) contd
iv. Calculation of Portfolio Return &Risk
W1= 0.4, W2 = 0.6, R1=0.11, R2= 0.13, Cov12=24.6,
σ1=0.0352, σ2 = 0.0706

Rp = ∑ wi Ri = 0.4*0.11 + 0.6*0.13 = 12.2%

𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝐶𝑜𝑣12

𝜎𝑝 = 0.42 ∗ 3.522 +0.62 ∗ 7.062 +2 ∗ 0.6 ∗ 0.4 ∗ 24.6

𝝈𝒑 = 5.63%
 IS IT POSSIBLE TO ELIMINATE RISK?
Ideal Portfolio Combination
• In ideal situation, portfolio risk is minimum.
i.e. Zero.
• This is possible only when r = -1.
• Replacing these values of r and σp in formula
of portfolio risk we can derive weightage of
securities in an ideal 2 securities portfolio
combination.
Ideal 2 securities Portfolio Combination:
Formula Derivation
𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝜎1𝜎2𝑟12
In an ideal situation
𝜎𝑝 = 0; 𝑟12 = -1, 𝑤2 = 1- 𝑤1
Replacing the above values and squaring both sides
𝑤12 𝜎12 + (1 − 𝑤1)2 𝜎22 + 2𝑤1(1 − 𝑤1)𝜎1𝜎2(-1) = 0
Thus security combination in an ideal 2 security
portfolio are,
w1 = 𝝈𝟐/(𝝈𝟏 + 𝝈𝟐)
w2 = 𝝈𝟏/(𝝈𝟏 + 𝝈𝟐)
 Ideal 2 securities Portfolio
Combination: Practice Question
Q. An investor has 2 securities X and Y. Security
X has risk of 2% and security Y has risk of 8%. In
what proportion should they be combined in an
ideal portfolio.

Soln: WX= ?, WY = ? (1- WX), rXY=-1, σx=0.02, σy = 0.08

w1 = 𝜎2/(𝜎1 + 𝜎2) = 0.08/(0.02+0.08) = 80%
w2 = 𝜎1/(𝜎1 + 𝜎2) = 0.02/(0.02+0.08) = 20%
 MINIMUM VARIANCE PORTFOLIO
• We differentiate portfolio variance wrt W1.
then equate it to 0. Calculate W1. W2=1-W1
• This gives the following formula:
𝜎22 −𝐶𝑜𝑣12
𝑊min 1 =
𝜎12 + 𝜎22 −2𝐶𝑜𝑣12
Or
𝜎22 −𝑟12 𝜎1 𝜎2
𝑊min 1 =
𝜎12 + 𝜎22 −2𝑟12 𝜎1 𝜎2
 Minimum Variance- Question
• Construct a minimum variance portfolio of
Security A and B from the following
information. Calculate his portfolio’s return as
well as risk. Covariance between the returns
of A and B is -10.
Security A B
Expected Return (%) 15 9
SD (%) 5.3 2
 Solution
𝜎22 −𝐶𝑜𝑣12
• 𝑊min 𝐴 =
𝜎12 + 𝜎22 −2𝐶𝑜𝑣12
22 −(−10)
𝑊min 𝐴 =
5.32 + 22 −2∗(−10)
𝑊min 𝐴 = 0.27; 𝑊min 2 = 1-0.27 = 0.73

Rp = ∑ wi Ri = 0.27*15+0.73*9 = 10.62%
𝜎𝑝 = 𝑤12 𝜎12 + 𝑤22 𝜎22 + 2𝑤1𝑤2𝐶𝑜𝑣12

𝜎𝑝
= 0.272 ∗ 5.32 +0.732 ∗ 22 +2 ∗ 0.27 ∗ 0.73 ∗ (−10)
𝝈𝒑 = 0.5%
 MARKOWITZ THEORY
• Markowitz model is a theoretical framework for
analysis of risk and return and their inter-relationships.
• Markowitz emphasized that quality of a portfolio will
be different from the quality of individual assets within
it. Thus, the combined risk of two assets taken
separately is not the same risk of two assets together.
• Determines Efficient set of portfolio for investor
through 3 important variables:
– Return
– Risk
– Coefficient of Correlation
• Also called Full Covariance Model or Mean Variance
Model.
ASSUMPTIONS OF MARKOWITZ MODEL

• Efficient market and complete investor

knowledge
• Investors are risk averse
• Investors want to maximize return
• Investors can reduce risk by adding new
securities to portfolio
• Investors have a common one period horizon
 Criteria of Dominance:
• Every possible combination of assets that exists can be
plotted on a graph, with the portfolio's risk on the X-
axis and the expected return on the Y-axis.
• All the portfolios on the plane are called ATTAINABLE
or FEASIBLE PORTFOLIOS.
• Dominance refers to the superiority of one portfolio
over the other.
• A set can dominate over the other, if with the same
return, the risk is lower or with the same risk, the
return is higher.
• Dominance principle involves the trade-off between
risk and return.
EFFICIENT PORTFOLIO & EFFICIENT FRONTIER
• This plot reveals the most desirable portfolios. For
example, assume Portfolio A has an expected return
of 8.5% and a risk (standard deviation) of 8%, and
that Portfolio B has an expected return of 9.5% and a
risk of 8%. Portfolio B would be deemed more
"efficient" because it provides higher return for the
same expected risk.
• Such portfolios providing the highest return for a
given level of risk are called EFFICIENT PORTFOLIO.
• It is possible to draw an upward sloping hyperbola to
connect all of the efficient portfolios, and this is
known as the EFFICIENT FRONTIER. Investing in any
portfolio not on this curve is not desirable.
 SELECTING THE OPTIMAL PORTFOLIO
• The exact portfolio chosen by an investor
depends on his risk return attitude
represented by an indifference curve.
• The portfolio on the Efficient Frontier which
lies at the point of tangency with the
indifference curve is chosen by the investor.
 RISK FREE ASSET AND MARKOWITZ
MODEL
• RISK FREE ASSET: Asset whose return is certain.
No risk. e.g. T - bills
• When risk free asset is available, then investor
can invest part of their funds in risk free asset and
remaining in Optimal Portfolio.
• This (RfM) is called as LENDING PORTFOLIO.
• If investor can borrow at risk free rate, then he
will invest his own and borrowed funds. M ꚙ is
the BORROWING PORTFOLIO.
• The line joining the return on risk free asset &
optimal portfolio on the Efficient frontier is
CAPITAL MARKET LINE.
 CAPITAL MARKET LINE
• Capital market line (CML) is a graph representing
portfolios’ expected return as well as combined
risk.
• CML represents the linear relationship between
required rate of return for efficient portfolio and
their risk.
• CML represents the equilibrium condition that
prevails in market for portfolios consisting of Risk
free and risky investments.
• The line represents the risk premium an investor
earns when he or she takes additional risk.
CAPITAL MARKET LINE
 EQUATION OF CML

Rp = Rf + [(Rm - Rf)/ 𝝈𝒎]* 𝝈𝒑

Where,
Rp = Expected return of the portfolio
Rf = Risk free rate of return or interest
Rm = Return on the market portfolio
𝜎𝑝 = Portfolio risk
𝜎𝑚 = Risk of the market portfolio
LIMITATIONS OF MARKOWITZ MODEL
• This model requires a lot of information
• As the number of securities increases,
computations become complex.
 CML: PRACTISE QUESTION (1)
• Following portfolios are available to investors:
PORTFOLIO EXPECTED RETURN (%) RISK (%)

X 14 2
Y 18 5
Z 30.5 9

Find whether these portfolios are efficient or not

given that the risk free interest rate is 8%. Return
from market portfolio is 18% and risk of market
portfolio is 4%.
 CML: SOLUTION (1)
• For an efficient portfolio, expected return
should lie on CML.
• Calculating the expected returns of X,Y,Z using
CML equation Rp = Rf + [(Rm - Rf)/ 𝝈𝒎]* 𝝈𝒑
Rf = 0.08; Rm = 0.18; 𝜎𝑚 = 0.04
PORTFOLIO EXPECTED RETURN (%) COMMENT
X 13 X LIES ABOVE CML.
BUY X
Y 20.5 Y LIES BELOW CML.
SELL Y
Z 30.5 EFFICIENT
 CML: PRACTISE QUESTION (2)
Q. The expected return on market portfolio is 18%
and its risk is 30%. Find the slope of the CML if
return on risk free asset is 6%. Also find the
required rate of return of a mutual fund whose risk
is 13%

Soln (i): Slope of CML is given by (Rm - Rf)/ 𝝈𝒎

=(0.18-0.06)/ 0.3 = 0.4
(ii) Rp = Rf + [(Rm - Rf)/ 𝝈𝒎]* 𝝈𝒑
Rp= 0.06 + 0.4 * 0.13 = 11.2%
 CML: PRACTISE QUESTION (3)
Q. If the risk free rate of return is 5% and the expected
return on Sensex is 15% and its risk is 8%. Find the
proportion of funds to be invested in each of the
alternatives so as to have a portfolio with a return of 13%.
Also find the risk of the portfolio so formed.

Soln (i): Given: Rf = 0.05; Rm = 0.15; 𝜎𝑚 = 0.08; R𝑝 = 0.13

• Let proportion of funds to be invested risk free asset be
‘w’. Then ‘1-w’ is invested in Sensex.
• Then Rp = ∑ wi Ri i.e. 0.13= 0.05 w + 0.15(1-w)
• W= 20% in risk free asset and 80% in Sensex.
(ii) Rp = Rf + [(Rm - Rf)/ 𝜎𝑚]* 𝜎𝑝
𝝈𝒑= 6.4%
 CAPM: BASIC CONCEPTS
• CAPM assumes that investors hold the market
portfolio. i.e. hold same securities in the same
proportion as in market index.
• Market index in barometer of economy and
represents the Systematic risk
Total Risk = Systematic Risk + Unsystematic Risk
𝝈𝒑𝟐 = 𝜷𝒊𝟐 𝝈𝒎𝟐 + 𝒆𝒊𝟐
Where, 𝜎𝑝2 is variance of the portfolio
𝛽𝑖 is systematic risk of the security
𝜎𝑚2 is expected variance of market index
𝑒𝑖 2 is the variation in security return not related to
the market index (unsystematic risk)
 ASSUMPTIONS OF CAPM
• Individuals are risk averse
• Make choices on basis of risk & return
• Have homogeneous expectations regarding risk &
return
• Can borrow & lend freely at riskless rate of return
• There are no taxes transaction costs or
restrictions (perfect market)
• Information is freely & simultaneously available
to investors
• No problems of liquidity in market.
 CAPITAL ASSET PRICING METHOD
(CAPM): USES
• Finding price of any security for given level of
systematic risk.
• Studying risk return characteristics of
inefficient portfolios besides efficient
portfolios
• Studying impact of risk on portfolio due to
addition of a new security in the portfolio.
 CAPM: BETA
• 𝛽 is the coefficient of systematic risk.
• It indicates the sensitivity of the security’s
price to a change in market index.
β = Percentage change in market price
of security/ Percentage change in market
index
= Cov (i,m)/ 𝝈𝒎𝟐 = r 𝝈𝒊 /𝝈𝒎
• β Can be positive, negative or zero
 INTERPRETATION OF β
VALUE OF β INTERPRETATION
POSITIVE Market index and security return move in same
direction
NEGATIVE Market index and security return move in
opposite direction
0 Security return not affected by market index.
LARGE Security return Highly sensitive to change in
MAGNITUDE market index
SMALL Security return Less sensitive to change in
MAGNITUDE market index
 QUESTION- CALCULATION OF BETA
Following information is available for security A and
Market Portfolio M:
Security A (%) Market Portfolio
M (%)
10 15
18 12
14 18
20 16
11 19

Calculate variance of security A. Find the beta of

the security A.
 SOLUTION (CALCULATION OF BETA)
i. Calculation of Security and Market Average Return
RA = ∑Ri /N= 14.6% RM = ∑Ri /N= 16%
ii. Calculation of Variance
RAi (RAi -RA)2 RMi (RMi –RM)2
10 21.16 15 1
18 11.56 12 16
14 0.36 18 4
20 29.16 16 0
11 12.96 19 9
∑= 75.2 30
Variance of 75.2/5= 15.04 𝑴𝒂𝒓𝒌𝒆𝒕
𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆
30/5 = 6
A
 SOLUTION contd
iii. Calculation of Covariance and Beta

RAi (RAi - RMi (RMi – (RAi -RA)*(RMi –RM)

RA) RM)
10 -4.6 15 -1 4.6
18 3.4 12 -4 -13.6
14 -0.6 18 2 -1.2
20 5.4 16 0 0
11 -3.6 19 3 -10.8
Covariance = -21/5 = -4.2

Beta= Covim / σ2m= -4.2/6 = -0.7

 CAPM: RISK-RETURN RELATION -INDIVIDUAL
SECURITY
Ri = Rf + (Rm - Rf)* 𝛃𝐢
Where,
Ri = Expected return of the security ‘i’
Rf = Risk free rate of return or interest
Rm = Return on the market index
β𝑖 = Coefficient of systematic risk of security ‘i'

Implications: Return depends on:

• Return on Risk free asset
• Amount of risk taken by the investor: reflected by beta.
• Price of risk or Premium for taking risk (Rm-Rf)
 RELATIONSHIP BETWEEN SECURITY
AND PORTFOLIO β

βp = ∑ wi βi
Where,
βp = Coefficient of systematic risk of portfolio made
of n securities
βi =Coefficient of systematic risk of security ‘i'
i = Securities in the portfolio. i=1to n
wi =Proportion of security ‘i' in the portfolio
 CAPM: RISK-RETURN RELATION –
PORTFOLIO OF SECURITIES

Rp = Rf + (Rm - Rf)* 𝜷𝒑
Where,
Rp = Expected return of the portfolio
Rf = Risk free rate of return or interest
Rm = Return on the market index
β𝑝 = Coefficient of systematic risk for portfolio
SECURITY MARKET LINE
 SECURITY MARKET LINE
• SML explains the relationship between rate of
return of a security or portfolio with its β.
• It is a straight line with intercept ‘Rf’and slope
(Rm-Rf).
• If the return according to SML equation is >
actual return, security is overpriced. Don’t hold
security
• If the return according to SML equation is <
actual return, security is underpriced. Hold
security
 LIMITATIONS OF CAPM
• Unrealistic assumption of no transaction cost
• Information is not simultaneously available
• Investors do not have homogeneous
expectations.
• Measuring beta is complex and may not
provide correct result in actual situations
 COMPARISON OF CML & SML
CML SML
CML shows relationship between SML shows relationship between
required rate of return and total required rate of return and
risk systematic risk
CML can be used to study risk – SML can be used to study risk –
return relationship of only efficient return relationship of all portfolios
portfolios
CML cannot be used to study risk – SML can be used to study risk –
return relationship of individual return relationship of individual
securities securities as well as portfolios
CML is used to find optimal SML is used for determining over
portfolio and undervalued securities
CML is the outcome of Markowitz SML is the outcome of CAPM
model
 CAPM: PRACTICE QUESTION (1)
• From the data given below, find which of the following
securities are under priced & overpriced using SML
equation or CAPM. The return on market index is 16%
and return on risk free asset is 5%.
Security Betai Actual Return (%)
A 1.6 20
B 0.5 12
C 1.8 22
D 2.5 30
E 0 8
 CAPM: SOLUTION (1)
Ri = Rf + (Rm - Rf)* βi
• If the return according to SML equation is > actual return,
security is overpriced.
• If the return according to SML equation is < actual return,
security is underpriced.
Security Betai Actual Return RETURN (SML) REMARKS
(%) (%)
A 1.6 20 22.6 OVERPRICED

B 0.5 12 10.5 UNDERPRICED

C 1.8 22 24.8 OVERPRICED

D 2.5 30 32.5 OVERPRICED

E 0 8 5 UNDERPRICED
 CAPM: PRACTISE QUESTION 2
Q. Given the market risk premium is 9% & return on
risk free asset is 6%.
• What should be the return on security if β is 1.5.
• What is the return on market index?
• If market risk premium and return on risk free asset
remain the same; find the coefficient of systematic
risk for a security whose return is 33%.
Solution: Given: Rm – Rf = 9%, Rf = 6%, βi= 1.5
(i) Ri = Rf + (Rm - Rf)* βi = 6 + 1.5*9 = 19.5%
(ii) Rm – Rf = 9%, Rf = 6%. Thus Rm = 15%
(iii) If Ri’ = 33%; then 33=6+9*βi’. Thus, βi’ = 3
 CAPM: PRACTICE QUESTION (3)
• Jardine Investment Ltd. manages a stock fund
consisting of 5 stocks with the following market values
and Betas:
STOCK Betai MARKET VALUE OF STOCK
A 1.08 15,000
B 1.03 25,000
C 0.06 40,000
D 0.08 70,000
E 1.2 50,000

• If the risk free rate of interest is 7% and the market

return is 17%, find the expected return of the
portfolio?
 CAPM: SOLUTION (3)
1. Calculate βp = ∑ wi βi
STOCK βi MARKET PROPORTION OF wi βi
VALUE OF STOCK IN
STOCK (Mi) PORTFOLIO
(Wi= Mi/N)
A 1.08 15,000 0.075 0.081
B 1.03 25,000 0.125 0.12875
C 0.06 40,000 0.2 0.012
D 0.08 70,000 0.35 0.028
E 1.2 50,000 0.25 0.3
Total (N) = 2,00,000 βp = ∑ wi βi = 0.54975

2. Rp = Rf + (Rm - Rf)*β𝑝 = 0.07+(0.17-0.07)*0.54975 = 12.4975%

 READING LIST
• “Investment Management”, Vanita Tripathi, AK Singh, Vandana Jain, 7th
edition, Taxmann Publication
• “Fundamentals of Investment”, Sharma S K and Kaur Gurmeet, 2019 edition
onwards, Sultan Chand Publication
• “Investment Management”, R.P. Rustagi, 8th edition onwards, Sultan Chand &
Sons
• “Fundamentals of Investment”, Y.P. Singh, 6th edition onwards, Galgotia
Publishing Company
• CAPM: https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-
6261.1964.tb02865.x
• Different text documents can be accessed from National digital library @
https://mhrd.gov.in/ict-initiatives. Some links are as follows:
– CAPM:
http://ndl.iitkgp.ac.in/document/MDl5cHdNUUlnd0lnZHNoQXlvOG5lTnh2WUE3OW5UOHgwR
2tyQkdZTCtScz0
– OPTIMAL PORFOLIO SELECTION :
https://nptel.ac.in/content/storage2/courses/110105036/m14l27.pdf
– CAPM:
http://ndl.iitkgp.ac.in/document/MDl5cHdNUUlnd0lnZHNoQXlvOG5lSE1kazNyN21JaS9iRFBLY
XBBN2Rhdz0
• Different Video Lectures can be accessed from National digital library @
https://mhrd.gov.in/ict-initiatives. Some links are as follows:
– RISK AND RETURN: https://www.youtube.com/embed/H9hvDKLI-hQ#0