CML/SML PROBLEMS

Q-1 The expected return for the market is 12%,with a standard deviation of 21%.The
expected risk free rate is 8%.Information is available for five mutual funds, all
assumed to be efficient, as follows:
Mutual funds S.d (%)
1 14
2 16
3 21
4 25
5 30
i) Calculate the slope of the CML
ii) Calculate the expected return for each portfolio
iii) Do any portfolios have the same return as the market? Why?
Q.2 Assume the following information:
S.D(m)=22%

Stock COV(i,m)
1 0.9
2 1.3
3 0.5
4 1.1
5 1
Calculate the beta of each stock
Q-3 You are given the following information:
Rm=14% Rf=8%

Stock Beta
1 0.9
2 1.3
3 0.5
4 1.1
5 1
Calculate the expected return of each stock.
Q-4 You are given the SML for PTC and Shell:
E (rptc) =5%+1.2Rm
E (rshell) =5%+1.8Rm
Cov(ptc, market)=80, S.D ptc=12, Cov (shell, market)=90,S.D shell=10 , S.D market=8
(i)-which asset is more risky?
(ii)-what is systematic and unsystematic risk in each asset?
Q-5 Assume the following information:
б²m=0.0017
Stock б²i r im
A 0.007 0.10
B 0.009 0.4
C 0.004 0.2
Calculate the Beta, systematic risk, and unsystematic risk of each stock
Q-6
Assume the risk free rate is 10%,the expected return on the market portfolio is 20%,and
the standard deviation of returns on the market portfolio is 20%
a) What is the market price of risk
b) What percentage of your wealth would you have to put into the riskless asset and
into the market portfolio in order to have a 25% rate of return?
c) What would be the variance of the portfolio in part(b)?
d) What is the correlation between the portfolio in part(b) and the market portfolio?
Q-7
If the risk free return is 10% and the expected return on KSE-100 index is 18% and
standard deviation on index is 5%, how would you construct an efficient portfolio to
produce a 16% return and what would be its risk?
Q-8
Given the information in Q.7 and the fact that you have personal funds of Rs.100,000 to
invest, how would you construct a portfolio giving an expected return of 20% and what
would be its risk?
Q-9
After a thorough analysis of both the stock market and the stock of shell, you develop
the following opinion:
State of Economy Return on Market Return on Shell Probability
Stable 16% 20 .4
Ok 12 13 .4
Weak 3 -5 .2

Would you invest in shell if risk free rate is 7%.

Q-10
Assume that risk free rate is 8%, the market has an estimated risk premium of 6% and
standard deviation of 10%.Calculate the standard deviation of returns for each portfolio
below:
Portfolio 1: 30% risk free, 70% market
Portfolio 2: diversified portfolio with beta 1.5.
Q-11
You expect the stock of PTC to sell for Rs.70 a year from now and to pay a dividend of
Rs.4.If the stock’s correlation with market portfolio is -0.3, S.D of PTC= 0.40, S.D of
market= 20%,Rf=5%, and Rp=10%.What would the stock be selling for?