Module 2
1) The returns of two assets under 4 possible states of nature are given below
P Returns on A1 Returns on A2
0.1 5% 0%
0.3 10% 8%
0.5 15% 18%
0.1 20% 26%
a) What is the standard deviation of the return on asset A1 and A2?
b) What is the covariance between the returns on asset A1 and A2?
c) What is the coefficient of correlation between the returns on asset A1 and A2?
2) The returns on securities of ABB and BFL are given below
Probability ABB BFL
0.5 4 0
0.4 2 3
0.1 0 3
Give the security of your preference. The security has to be selected on the basis of
return and risk.
3) The stocks L and M have yielded the following returns for the past two years
Return (%)
Year
L M
2023 12 14
2024 18 12
Calculate the risk and standard deviation of L and M
4) An investor has a choice of 4 stocks for investment. Their rates of return and
probabilities are given below
BHEL HDFC Sun Pharma India Cem
r p r p r p r p
-0.3 0.2 -0.2 0.15 -0.2 0.2 -0.1 0.1
0 0.4 0 0.35 0.1 0.4 0 0.25
0.3 0.3 0.2 0.45 0.4 0.3 0.1 0.4
0.7 0.1 0.4 0.05 0.8 0.1 0.2 0.25
i. Are all these stocks attractive investments?
ii. Of those that are attractive, how should the investor choose one to buy?
5) Calculate the standard deviation and expected return on BOB and Canara Bank
BOB Can Bank
State of Economy r p r p
Boom 16 0.3 40 0.3
Normal 11 0.5 10 0.5
Recession 6 0.2 -20 0.2
6) The closing values and prices pertaining to index Sensex and security Voltas are
given below
Day Sensex Voltas
1 17800 115
2 17880 120
3 17900 122
4 17914 119
5 17880 122
6 17920 108
7 17976 116
You are required to
• Calculate the value of Beta
• Calculate the value of Alpha
Module 3
7) Arvind considers Rs.1000 par value bond bearing a coupon rate of 11% that matures
after 5 years. He wants a minimum yield to maturity of 15%. The bond is currently sold
at Rs.870. should he buy the bond?
8) A bond of Rs.1000 face value, bearing a coupon rate of 12% will mature after 7 years.
What is the value of bond if the discount rate are 14% and 12%.
9) You are offered with the opportunity to purchase two bonds A and B with face value of
Rs 100. The following information is provided
Particulars Bond A Bond B
Coupon rate 10% 9%
Period to Maturity 15 years 10 years
Current market price Rs 117 Rs 108
10) You are evaluating three bonds A, B and C with coupon rates of interest 4%,6% and
8% which have YTM of 6% and a term to maturity of 5 years with a face value Rs
1000. Determine
i. Market price of the three bonds
ii. YTM
iii. Duration of the bonds
iv. Current yield of the three bonds
11) Calculate the duration for Bond A and Bond B with 7% and 8% coupons, having
a maturity period of 4 years. The face value is Rs 1000 for both bonds, yielding
6%.
.Module 3 Valuation of Shares
12) ABC earnings and dividends have been growing at a rate of 18% pa. Its growth rate is
expected to continue for 4 years after that the growth rate will fall to 12% for next 4
years. Thereafter the growth rate is expected to be 6% forever. If the last dividend per
share was Rs 2 and the investor’s rate of return on ABC is 15%, what is the intrinsic
value per share?
13) The Company ABC’s next year dividend per share is expected to be Rs 3.5. The dividend in
subsequent years is expected to grow at a rate of 10% per year. If the required rate of return
is 15% per year, what should be its price? The prevailing market price is Rs 75.
14) An investor owns a share of Rise Company whose current cash dividend is Rs 3. The constant
growth rate in dividends is 16% per year, and the required rate of return is 20%. What is the
value of the Rise Company’s share?
Modules 5 and 6
1) The stocks L and M have yielded the following returns for the past two years
Return (%)
Year
L M
2015 12 14
2016 18 12
a) What is the expected return on portfolio made up of 60% of L and 40% of M?
b) Find out the standard deviation of each stock
c) What is the covariance and coefficient of correlation between stock L and M?
d) What is the portfolio risk of a portfolio made up of 60% of L and 40% of M?
Solution:
2) You have been given the following returns information, calculate
Year TCS BSE
2000 0.2 0.1
2001 0.3 0.2
2002 0.5 0.3
2003 0.4 0.4
2004 0.6 0.5
a) Beta value
b) Alpha value
c) Coefficient of correlation
d) Coefficient of Determination
Solution:
3) The stock of LG Ltd performs relatively well compared to other stocks during recessionary
periods. The stock of Samsung Ltd, on the other hand, does well during growth periods. Both the
stocks are currently selling for Rs 100/share. The financial analysts assessment of the rupee return
(dividend plus price) of these stocks for the next year are as follows
Economic Condition
High Low Stagnation Recession
Probability 0.3 0.4 0.2 0.1
LG Returns 100 110 120 140
Samsung Returns 150 130 90 60
a) Based on the above data calculate the expected return and standard deviation of investing
[Link] 1000 in equity stock of LG Ltd
[Link] 1000 in equity stock of Samsung Ltd
[Link] 500 each in equity stock of LG Ltd and Samsung Ltd
b) Which option would you prefer (out of i,ii, and iii) based on expected return and standard
deviation of returns.
b) Based on the expected return, and standard deviation option iii will be selected
4) A financial analyst is analyzing two investment alternatives of Z and Y. The estimated rates of
return and their chances of occurrence for the next year are given below
P Y Z
0.2 22% 5%
0.6 14% 15%
0.2 -4% 25%
a) Determine each alternatives expected rate of return, variance and standard deviation
b) Is Y comparatively riskless? C) If the financial analyst wishes to invest half in Z and other half in Y,
would it reduce risk? Explain the reason for it.
5) The returns on Stock I and market portfolio M for a period of 6 years are given as follows:
Return on stock I (%) Return on Market (%)
12 8
15 12
11 11
2 -4
10 9.5
-12 -2
You are required to
a) Establish the characteristic line for stock I
b) Find out the systematic risk and unsystematic risk of stock I
6) Vinod received Rs 10 lakhs from his pension fund. He wants to invest in the stock market.
The Treasury bill rate is 5% and the market return variance is 10. The following table gives the details
regarding the expected return, Beta and residual variance of the individual security. What is the
optimum portfolio assuming no short sales?
Security E (r) % Beta Residual Variance
A 15 1 30
B 12 1.5 20
C 11 2 40
D 8 0.8 10
E 9 1 20
F 14 1.5 10
Solution:
Problems on Performance Evaluation of Mutual Fund - Sharpe, Jensen and Treynor
7) What is the optimum portfolio in choosing among the following securities and assuming the
risk free rate as 8% and variance of the market index is 12%.
Security Return (Ri) % Beta Unsystematic risk
A 20 1.0 40
B 18 2.5 35
C 12 1.5 30
D 16 1.0 35
E 14 0.8 25
F 10 1.2 15
G 17 1.6 30
H 15 2.0 35
8) The following table gives the information about 3 portfolios
Portfolio Avg annual return (%) Standard Deviation (%) Coefficient of correlation
A 18 27 0.8
B 14 18 0.6
C 15 8 0.9
Market 13 12 -
Risk free rate of interest is 9%. Rank the portfolios using Sharpe’s and Treynor’s measure and
interpret the results.
9) Consider the following information for 3 mutual funds A,B and C and the market
Portfolio Mean return (%) Standard Deviation (%) Beta
A 12 18 1.1
B 10 15 0.9
C 13 20 1.2
Market 11 17 1
The mean risk free rate is 6%. Calculate the Sharpe, Treynor and Jensen’s measure for the 3 mutual
funds and the market index.
10) Data for 2 mutual funds and one market portfolio is given. Assume a risk free rate of 4%
Portfolio Returns (%) SD (%) Beta
DSP 22 10 1.21
ICICI 15 6 0.75
BSE SENSEX 18 8 1
Evaluate the portfolio using Sharpe, Treynor and Jensen’s measure.
Problems on CML and SML and CAPM
11) An investor wants to build a portfolio with the following four stocks. With the given details,
find out his portfolio return and portfolio variance. The investment is spread equally over the stocks
Company Alpha Beta Residual Variance
Sun 0.17 0.93 45.15
Neptune 2.48 1.37 132.25
Asteroid 1.47 1.73 196.28
Planet 2.57 1.17 51.98
The market return is 11 and variance on market return is 26.
12) The information pertaining to the portfolio consisting of securities A, B, C and D is given below
Security Amount Expected Beta
Invested Return
A 1000 8% 0.8
B 2000 12% 0.95
C 3000 15% 1.1
D 4000 18% 1.4
What is the expected return on this portfolio? What is the beta of this portfolio?
13) The market information regarding the following stocks is given in the table
Stock Alpha Beta Residual variance
ABC -0.05 1.6 0.04
RSE 0.08 -0.3 0
GIV 0 1.1 0.1
a) If the market index is expected to have a return of 0.2 and a variance of 0.2, which single stock
would the investor prefer to own from the risk and return point of view?
b) Interpret the residual variance value and the alpha value of RSE
14) A vimal enterprise has a Beta of 1.5. The risk free rate is 7% and the expected rate of return
on the market portfolio is 14%. The company presently pays a dividend of Rs 2.5 per share and the
investors expects 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 equity share assuming the computed return as expected return?
15) The following table gives an analysts expected return on two stocks for a particular market
returns.
Condition Market Return Stock A Stock B
Low 6% 2% 8%
High 20% 30% 16%
a) What are the Beta’s of the two stocks?
b) What is the expected return on each stock if the market return is equally likely to be 6% or
20%?
c) If the risk free rate is 7% and the market return is equally likely to be 6% or 20%. What is the
Security Market Line (SML)?
d) What are the Alpha’s of two stocks?
16) Mr. Singh owns a portfolio, which he estimates to have a standard deviation of 0.37. The
return on short-term T-bills is 0.09. He estimates the expected market return to be 0.14 and market
standard deviation to be 0.28. What is the expected return on Singh’s portfolio according to CML?
17) The Beta and weights of four securities are as follows
Security Beta Weight
HPCL 0.89 25
NTPC 0.75 30
ONGC 1.25 15
RIL 0.58 30
The expected returns from the market are 20%. Assuming a risk free rate of 4%.
Calculate a) Expected return for each security using CAPM b) Beta of a portfolio
18) A stock’s beta is 2.0 and its mean rate of return is 15%. The expected market portfolio return
is 10%. What is the risk free rate of interest as implied by CAPM model?
19) If risk free rate is 5% and market return is 14% and the Beta is 1.5 for a security.
a) Determine the expected return for the security
b) What happens to expected return if return on market increases to 16% assuming that other
variables do not change?
C) What happens if Beta falls to 0.75?
20) Mohan Lal is considering several investments. The risk free rate of return is currently 6.75%
and the expected return for the market is 12%. What would be the required rate of return for each
investment (using CAPM)
Security A B C D E
Beta 1.2 0.8 1.5 0.6 1.25
21) Assume yourself as a portfolio manager and with the help of the following details find out the
securities that are over-priced and under-priced in terms of security market line (SML)
Security Expected Return Beta Standard Deviation
A 0.33 1.7 0.5
B 0.13 1.4 0.35
C 0.26 1.1 0.40
D 0.12 0.95 0.27
E 0.21 1.05 0.28
F 0.14 0.7 0.18
Nifty 0.13 1 0.20
T-Bills 0.09 0 0
Solution:
Ri Rf Beta RM RF RM-Rf SML
A 0.09 1.7 0.13 0.09 0.04 0.158
B 0.09 1.4 0.13 0.09 0.04 0.146
C 0.09 1.1 0.13 0.09 0.04 0.134
D 0.09 0.95 0.13 0.09 0.04 0.128
E 0.09 1.05 0.13 0.09 0.04 0.132
F 0.09 0.7 0.13 0.09 0.04 0.118
For Example A expected return is 0.33 Ri (Required) is 0.158. If expected return is greater than the
required rate of return than Stock is Undervalued ie 0.33>0.158
Security B Expected 0.13 required 0.146 hence overvalued ie 0.13<0.146
For Case Study
1) Construction of Optimum Portfolio
2) Performance Evaluation of Sharpe, Treynor’s and Jensen
3) Calculation of Alpha and Beta for market price and stock price ( first you need to calculate
return)
4) Duration of Bond