PRACTICAL MANNUAL

INVESTMENT ANALYSIS AND

PORTFOLIO MANAGEMENT
BANK 3208 (2+1)

DEPARTMENT OF RURAL BANKING AND FINANCE MANAGEMENT

COLLEGE OF CO-OPERATION BANKING AND MANAGEMENT
KERALA AGRICULTURAL UNIVERSITY
 LIST OF CONTENTS

Sl. No. Name of Record Page Number

1 Exercise on Bond Valuation 1
2 Exercise on Share Valuation 2
3 Exercise on Portfolio Analysis 3
4 Exercise on Portfolio Selection 4
5 Exercise on Portfolio Evaluation 5
 Record I

Exercise on Bond Valuation

1. A Rs.100 par value bond bearing a coupon rate of 12 per cent will mature after 5 years. What is
the value of the bond, if the discount rate is 15 per cent?
2. The market price of a Rs. 1000 par value bond, carrying a coupon rate of 14 per cent and
maturing after 5 years is Rs. 1050. What is the yield to maturity (YTM) of this bond?
3. A Rs. 100 par value bond bears a coupon rate of 14 per cent and matures after 5 years. Interest
is payable semi-annually. Compute the value of the bond if the required rate of return is 16 per
cent?
4. RKV recently purchased a bond with Rs. 1000 face value, a 10 per cent coupon rate, and 4 years
to maturity. The bond makes annual interest payments, the first to be received one year from
today. The current market price of the bond is Rs. 1032.40.
a) What is the Bond’s YTM?
b) If the Bond can be called two years from now at a price of Rs.1100, what is its yield to
call (YTC)?
5. Ravi is considering investing in a bond currently selling for Rs.8785.07. The bond has four years
to maturity, a Rs. 10000 face value, an 8 per cent coupon rate. The next annual interest payment
is due one year from today and the approximate discount factor for investments of similar risks
is 10 per cent.
i) Calculate the intrinsic value of the Bond?
ii) Calculate YTM of the Bond. Based on this calculation, Should Ravi purchase the Bond?

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 Record II

Exercise on Share Valuation

1. The equity stock of Rax Ltd., is currently selling for Rs. 30 per share. The dividend expected next
year is Rs.2 per share. The investor’s required rate of return on this stock is 15 per cent. If the
constant growth model applies to Rax Ltd., what is the expected growth rate?
2. On Sudha Enterprises’ equity shares, the dividend was paid at Rs.1.32 per equity share last year
and this is expected to grow indefinitely at an annual 7% rate. What is the value of equity share
of Sudha Enterprises if the investors’ required rate of return is 11%?
3. An investor is expected to pay Rs.3 in dividends next year, and the market price is projected to
be Rs.75 by year end. If the investors required rate of return is 20%, what is the current value of
the stock?
4. An equity share is currently sells at Rs.23 per share. The company’s finance manager anticipates
a constant growth rate of 10.5% and at the end of the year a dividend of Rs.2.50.
a) What is the expected rate of return?
b) If the investor requires a 17% return, should the investor purchase the stock?
5. You own 250 preference shares of ABC Company, which currently sells for Rs. 38.5 per share and
pays annual dividends of Rs.6.5 per share.
a) What is your expected return?
b) If you require a 13% return, given the current price, should you sell or buy more
preference shares?

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Record III
 Exercise on Portfolio Analysis

1. An investor owns a portfolio composed of five securities with the following characteristics:

Security Beta Random error standard Proportion

deviation (%)
1 1.25 4 0.30
2 1.15 9 0.15
3 0.75 5 0.20
4 1.30 8 0.10
5 1.12 12 0.25
If the standard deviation of the market index is 25 per cent, what is the total risk of the portfolio?

2. Consider a portfolio of four securities with the following characteristics

Residual variance
Security Proportion αi βi
(σ2ei)
1 0.30 1.7 1.4 340
2 0.10 2.0 0.9 460
3 0.20 1.3 1.5 280
4 0.40 -0.9 1.6 150
Calculate the return and risk of the portfolio under single index model, if the return on market index is
19.5 per cent and the standard deviation of return on market index is 16 per cent?

3. The data for three stocks are given. The data are obtained from correlating returns on these stocks
with the return on the market index.

Residual variance
Stock αi βi
(σ2ei)
1 -3.1 1.7 16
2 1.6 0.6 09
3 1.4 1.6 18
Which single stock would an investor prefer to own from a risk return view point, if the market index
were expected to have a return of 18 per cent and a variance of return of 21 per cent?

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Record IV
 Exercise on Portfolio Selection

1. An investor has following securities as a portfolio. Compute the risk and expected return using
CAPM, if the risk free rate is 4 per cent and expected market return is 22 per cent.
Security S1 S2 S3 S4 S5 S6 S7 S8 S9 S10
Weights 0.05 0.02 0.09 0.36 0.18 0.14 0.03 0.01 0.05 0.07
Beta 1.6 1.8 2.9 3.4 2.5 2 0.60 0.50 1.3 2.6

2. A security pays a dividend of Rs. 3.60 and sells currently at Rs. 80. The security is expected to sell at
Rs.90 at the end of the year. The security has a beta value of 1.35. The risk free rate is 6 per cent and the
expected return on market index is 13 per cent. Assess whether the security is correctly priced or not?

3. The following data are available to you as portfolio manager.

Security Estimated return (%) Beta Standard deviation (%)

M 28 2.0 50
N 26 1.8 40
O 20 1.0 25
P 12 0.8 30
Q 10 0.5 20
Market Index 15 1.0 18
Govt. Security 8 0 0
a) In terms of security market line, which of the security listed above are under priced?
b) Assuming that a portfolio is constructed using equal proportions in all the five securities,
calculate the expected return and risk of such portfolio?

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Record V

Exercise on Portfolio Evaluation

1. Calculate Sharpe Ratio and Treynor’s Ratio for the the following portfolios. Assume a risk free
return of 4.5 per cent and market return as 15 per cent and standared deviation of market
return as 20 per cent.
Portfolio P1 P2 P3 P4 P5
Annual return (%) 14 18 20 16 22
Standard deviation 25 30 28 22 36
Beta 1.05 0.90 1.20 0.95 1.45

2. Performances of portfolios are given below. Assume the risk free rate of return a 4.5 per cent
and the market return is 30 per cent. Compute Jensen’s alpha.
Portfolio P1 P2 P3 P4 P5
Return (%) 42 40 38 35 39
Beta 1.2 1.4 1.05 1.02 0.80

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