Answer the following questions.

Q1) A portfolio consists of the following stocks. Calculate the expected portfolio return.

Name Number of shares held Current price Expected return

OGDC 2,00,000 260.00 15%
MCB 3,00,000 280.00 11%
SHELL 1,000,000 275.00 14%
BOP 15,000,000 8.20 20%
MLCF 4,00,000 27.50 16%
UBL 7,00,000 180.00 18%

Q2) Your rate of return expectations for the stock of Kayleigh Computer Company during the next year
is:

Kayleigh Computer CO.

Possible rate of return Probability
-0.60 0.15
-0.30 0.10
-0.10 0.05
0.20 0.40
0.40 0.20
0.80 0.10

Q3) Lauren has a margin account and deposits $50,000. Assuming the prevailing margin requirement is
40 percent, commissions are ignored, and The Gentry Shoe corporation is selling at $35 per share:

a) How many shares of Gentry shoe can Lauren purchase using the maximum allowable margin?
b) What is Lauren’s profit (loss) if the price of Gentry’s stock:
1) Rises to $45.
2) Falls to $25.
c) If the maintenance margin is 30 percent, to what price can Gentry Shoe fall before Lauren will
receive a margin call?

Q4) The following are the monthly rates of return for Madison Software Corp. and for Kayleigh Electrics
during a six-month period:

Month Madison Software Kayleigh Electric

1 -0.04 0.07
2 0.06 -0.02
3 -0.07 -0.10
4 0.12 0.15
5 -0.02 -0.06
6 0.05 0.02
Required:

a) Expected monthly rate of return [E(Ri)] for each stock.

b) Standard deviation of returns for each stock.
c) The covariance between the rates of return.
d) The correlation coefficient between the rates of return.

What level of correlation did you expect? How did your expectations compare with the computed
Correlation? Would these two stocks offer a good chance for diversification? Why or why not?

Q5) Assume an initial margin requirement is 50 percent and maintenance margin requirement is 30
percent. An investor buys 200 shares of stock on margin at $40 per share. The price of the stock
subsequently drops to 32.

a) What is actual margin at $32.

b) If the price declines to $30, is there a margin call?
c) Assume that the price declines to $25, what is the amount of the margin call, if:
1) Cash is added to the account and leave in the form of cash.
2) Cash is provided to repay some of its loan.
3) Sell some shares and repay a portion of the loan.

Q6) HSE 10 index consist of 10 companies. This is a capitalization weighted stock index. This stock index
was started with a 1,000 base points. Previous market capitalization (base devisor) is $12,000,000.
Current market prices and number of shares outstanding of these companies are as under:

Companies Market price per No. of shares Market Capitalization

shares ($) outstanding ($)
1 115 26,000 2,990,000
2 38 17,000 646,000
3 15 20,000 300,000
4 58 18,000 1,044,000
5 47 11,000 517,000
6 52 40,000 2,080,000
7 19 38,000 722,000
8 28 30,000 840,000
9 49 50,000 2,450,000
10 44 20,000 880,000
Total 12,649,000

a) Calculate new HSE 10 index.

b) Assume that 3rd company which is presently included in the index is replaced by a new company
11, with 20,000 shares outstanding. The market price per share of a new company 11 is $17.
Calculate the new base devisor.
c) Now on the next day companies 1st, 2nd, and 4th stocks prices increased by 10%, 7% and 5%
respectively and companies 5th, 6th, and 7th stock price reduced by 12%, 8% and 2% respectively.
While companies 8th, 9th,10th and 11th stock prices remained constant. Calculate new HSE 10
index. (Note: all values used here are hypothetical.)
Q7) your rate of return expectations of Excel Company and Milestone Company stock during the
next year is:

Possible rate of return Probability

Excel Company Milestone Company Excel Company Milestone Company
-0.10 -0.60 0.25 0.15
0.00 -0.30 0.15 0.10
0.10 -0.10 0.35 0.05
0.25 0.2 0.25 0.40
0.20 0.4 0.20 0.20
0.10 0.8 0.15 0.10
a) Compute the expected rate of return, variance, and standard deviation of these stocks.
b) Compute the coefficient of variation of these stocks.
c) On the basis of above calculation of these risk and return, discuss which stock is preferable.

Q8) Mr. Jerry decided to sell short 5000 shares of PIA when it is selling at its yearly high of 165. The
broker tells him that this margin requirement is 30 percent and that the commission on the sale is
Rs.1, 905. While he is short the stock, PIA pays Rs.3.50 per share dividend. At the end of one year,
you buy 5000 shares of PIA at 161 to close out his position and is charged a commission of Rs.1, 705
and 11 percent interest on the money borrowed. What is his rate of return on the investment?

Q9) Assume the following information:

𝛿 2 𝑚 = 0.0017

Stock 𝜹𝟐 𝒊 r im
A 0.007 0.10
B 0.007 0.4
C 0.007 0
Calculate the Beta, systematic risk, and unsystematic risk of each stock.

Q10) The XYZ Corporation has just issued a $1,000 par value zero coupon bond with an 8 percent
yield to maturity, due to mature in 15 years from today.

(Assume monthly compounding.)

a) What is the market price of the bond?

b) If interest rate remains constant, what will be the price of the bond in three years?
c) If the interest rate rises to 10 percent, what will be the price of the bond in three years?

Q11) the common stock of Sophia Enterprises serves as the underlying asset for the following:

Derivative securities:

i) Forward contracts
ii) European-style call options
iii) European-style put options
 Assuming that all Sophia derivatives expire at the same date in the future, complete a table
similar to the following for each of the following contract positions:
i) A long position in a forward with a contract price of $50.
ii) A long position in a call option with an exercise price of $50 and a front-end
premium expense of $5.20?
iii) A short position in a call option with an exercise price of $50 and a front-end
premium receipt of $5.20?

Expiration date Expiration date Initial derivative Net profit

stock price Derivative premium
payoff
25
30
35
40
45
50
55
60
65
70
a) In calculating net profit, ignore the time differential between the initial derivative
expense or receipt and the terminal payoff.
b) Briefly describe the belief about the expiration date price of Sophia stock that an
investor using each of these three positions implicitly holds.

Q12) You are considering two assets with the following characteristics:

E(𝑅1 )= 0.15 𝛿1= 0.10 𝑤1 = 0.5

E(𝑅2 )= 0.20 𝛿2 =0.20 𝑤2= 0.5

Required: compute the mean and standard deviation of two portfolios if 𝑟12=0.04
and -0.60 respectively. Plot the two portfolios on a risk-return graph and briefly
explain the results.

Q13) Calculate the total return and the return relative for the following assets:

a) A preferred stock bought for Rs. 95 per share, held one year during which Rs. 11 per share
dividends are collected and sold for Rs.94.
b) A warrant bought for Rs.10 and sold three months later for Rs.13.
c) A 14 percent bond bought for Rs. 990 held two years during which interest is collected and sold
for Rs. 1035.
d) 300 common shares of Microsoft purchased at Rs. 50 per share and sold one year later at Rs.55
and dividend of Rs.3 per share received.

Q14) Home Place Hotel, Inc. is entering into a 3year remodeling and expansion project. The
construction still have a limiting effect on earnings during that time but when it is complete, it
 should allow the company to enjoy much improved growth in earnings and dividends. Last year, the
company paid dividend of $3.40. It expects zero growth in the next year. In year 2&3 , 5% growth is
expected, and in year 4, 15% growth, in year 5 and thereafter growth should be a constant 10% per
year, what is the maximum price per share that an investor who requires a return of 14%should pay
for Home Place Hotels common stock?

Q-15 a) On August 15, you purchased 100 shares of stock in the Cara Cotton Company at $65 a

share and a year later you sold it for $61 a share. During the year, you received
dividends of $3 a share. Compute your HPR and HPY on your investment in Cara Cotton.

b) Briefly explain the following:

i. Municipal bonds

ii. Mortgage bonds

iii. Sub-ordinate bonds

iv. Euro bonds

v. Exchange traded funds

Q-16 a) What alternatives to direct investment in foreign stocks are available to investors?

b) You decide to sell short 100 shares of Bata when it is selling at its yearly high of Rs.56.
Your broker tells you that your margin requirement is 45 percent and that the
commission on the purchase is Rs.155. While you are short the stock, Bata pays a
Rs.2.50 per share dividend. At the end of one year, you buy 100 shares of Bata at Rs.45
to close out your position and are charged a commission of Rs.145 and 8 percent
interest on the money borrowed. What is your rate of return on the investment?

Q-17 Mr. Waqas Aziz, head of economics department at IMPCC owns a fully diversified portfolio of
Rs.8000,000. He also inherits Engro Fertilizer (EFERT) common stock worth Rs.2000,000. His
financial advisor provided him with the following forecasted information about risk and return
characteristics:

Expected return S.D

Own Portfolio 3.6% 2.40%

EFERT 4.25 2.95

The correlation coefficient of EFERT stock returns with the original portfolio returns is 0.45

a) The inheritance changes his overall portfolio and he is deciding whether to keep
the EFERT stock. Assuming he keeps the EFERT stock, calculate:
i) Expected return of his new portfolio which includes the EFERT stock.
ii) Covariance of EFERT stock returns with the original portfolio returns.
iii) Standard deviation of his new portfolio which includes the EFERT stock

b) If he sells the EFERT stock; he will invest the proceeds in risk-free government securities
yielding 4%. Assuming he sells the EFERT stock and replaces it with government
securities, calculate:
i) Expected return of his new portfolio, which includes the government securities.
ii) Covariance of the government security returns with the original portfolio returns
iii) Standard deviation of his new portfolio which includes the government security

Q-18 a) Assume that you purchased an 8 percent, 20-year, $1,000 par, semiannual payment

bond priced at $1,012.50 when it has 12 years remaining until maturity. Calculate:

i. Its yield to maturity

ii. Its yield to call if the bond is callable in three years with an 8 percent premium

b) Calculate the Macaulay duration of an 8 percent, $1,000 par bond that matures in three
years if the bond’s YTM is 10 percent and interest is paid semiannually. Also calculate an
estimate of the price change if the bond’s YTM goes from 10 percent to 9.5 percent.

Q-19 a) Describe the Dow Theory and its three components. Which component is most

Important and why?

b) Assume the following information:

Rm=13% S.D (m) =22% RF=7%

Stock Beta Ri (%)

1 0.9 12

2 1.3 13
 3 0.5 11

4 1.1 12.5

5 1 12

i) Calculate the expected return of each stock.

ii) Determine which securities are undervalued and overvalued?

iii) Calculate the market risk premium.

Q-20 a) Microtech Corporation is expanding rapidly, and it currently needs to retain all of its

earnings, hence it does not pay any dividends. However, investors expect Microtech to
begin paying dividends, with the first dividend of $1.00 coming 3 years from today. The
dividend should grow rapidly at a rate of 50 percent per year during years 4 and 5. After
year 5, the company would grow at a constant rate of 8 percent per year. If the
required return on the stock is 15 percent, what is the value of the stock today?

b) Assume the following information about prices of three stocks:

Stock No. of shares Price(T) Price(T+1)

X 1,000,000 70 90

Y 10,000,000 25 40

Z 30,000,000 20 30

i. Construct a price weighted index for these three stocks, and compute the
percentage change in the index for the period from T to T+1.
ii. Construct a value weighted index for these three stocks, and compute the
percentage change in the index for the period from T to T+1.
iii. What is the difference in the results for the two indexes?

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