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# RISK OF A PORTFOLIO

YEAR 1 2 3 4

Rx

## Ques-1 Calculate the Covariance Uisng the following table: Ry 10 17 12 13 16 10 18 8

Ques-2 Consider the following portfolio consisting of four securities having the following characterstics: Prpoprtion of Security Returns(%) investment A B C D 12 17 23 20 0.2 0.3 0.1 0.4 Calculate the expected return of the portfolio using the above table.

Ques-3 Calculate the protfolio variance and standard deviation for a portfolio with the following characterstics: Corelation coefficient Security Xi SD P Q R 0.35 0.25 0.4 7 P&Q 0.7 16 P&R 0.3 9 Q&R 0.4

Ques-4 The estimated rate of return and beta coefficients of some of the securities are as given below: Estimated retuns (%) Security Beta A 30 1.6 The risk free rate of return is 10% while the market re B 24 1.4 expecetd to be 18%. Using the CAPM model , determine C 18 1.2 the securities is correctly priced? D 15 0.9 E 15 1.1 F 12 0.7

Ques-5 Vimal enterprise has a beta of 1.5 . The risk free rate is 7% and the expected return on the market portfolio is 14%. The compoany presently pays a dividend of Rs2.50 per share and investors expect a growth in dividend of 12% per annum for many years to come.Compute the required rate of return on the equity according to CAPM. What is the present market price of the equity share assuming the computed return as required return?

Ques-6 A financial Analyst is analysing two investment alternatives of Z and Y.The estimated rates of return and their chances of occurance for the next year are given in the table below:

## Rate of return Y 22% 14% -4%

Z 5% 15% 25%

a) Determine each alternatives expected rate of return, variance and standard deviation. b) Is Y comparitively riskless? c) If the financial analyst wishes to invest half in z and half in Y , would it reduce the risk? Explain the reason for it?

Ques-7 Assume yourself as the portfolio manager and with the help of the following details find out the securities that are overpriced and underpriced in terms of Security market line. Security Expected return SD A 0.33 1.7 0.5 B 0.13 1.4 0.35 C 0.26 1.1 0.4 D 0.12 0.95 0.24 E 0.21 1.05 0.28 F 0.14 0.7 0.18 Nifty Index 0.13 1 0.2 t-bills 0.09 0 0 Ques-8 Assume CAPM Model with unlimited borrowing and lending at the riskless rate of interest. Complete the blanks in the following table: Security Expected return SD e A 0.15 _ 2 0.1 B _ 0.25 0.75 0.04 C 0.09 _ 0.5 0.17

Ques-9 Estimate the stock return by using CAPM Model and the arbiterage model. The particulars are given below: a) The expected return of the market is 15% and the equity's beta is 1.2. The risk free rate of interest is 8% b) Market price of risk Factor Sensitivity Index Inflation 6% 1.1 Industrial production 2% 0.8 Risk premium 3% 1 Interest rate 4% -0.09 What explanation can you offer to explain the difference in two estimates?

Ques-10 Assume the CAPM with the risk free lending but no risk free borrowing . The return on the market protfolio is 10% and the return on the zero betra portfolio is 6%. The market standard deviation is 30%. Complete the following table: Residual variance 0.0375 0.0775

Security X Y

## Expected Return SD 0.15 _ 0.1 _

Beta _ _

Ques- 11 An investor is able to borrow and lend @ 12% risk free rate. The market portfolio of securities has an expected return of 20% and a SD of 25%. Determine the expected return and standard deviation of the portfolio's if: a) All wealth is invested in the risk free asset. b) Two thirds are invested in risk free assets and Remaining in the market portfolio. c) All wealth is invested in the market portfolio.Additionally the investor borrows one third of his wealth to invest in the market portfolio.

Ques-12 The evergreen investment company manages a stock fund consisting of Four stocks with the following market values and betas. Stock Bell Sell Grill Shrill Market Value(Rs) Beta 200,000 100,000 150,000 50,000

## 1.16 1.2 0.8 0.5

If the risk free rate of interest is 9% and market return is 15%, What is the protfolio's expected return?

Ques-13 Mr Shetty is considering an Investment in the stock of X corporation. Shetty expects X corp to earn a return Of 17 % in the next year. X's beta is 1.3 , R is 7% and market return is 15%. Should Mr Shetty invest in X's Corporation?

## xpected return of the portfolio ng the above table.

ee rate of return is 10% while the market return is be 18%. Using the CAPM model , determine which of the securities is correctly priced?

## k? Explain the reason for it?

ate of interest is 8%