CAPM
1. Calculate the Expected Returns of Securities A, B and C for the given
β values:
β (A)= 1.1
β (B)= 1.2
β (C)= 0.7
Assume the Expected market risk premium to be 8% and the risk-
free rate of return to be 7%.
2. Assume that risk- free rate of return is 7% and the market portfolio
has an expected return of 14% and the standard deviation of 25%
under equilibrium conditions as described in CAPM. What would be
the Expected rate of a portfolio which a standard deviation of 20%.
3. From the following information determine securities that are
overpriced and underpriced in terms of SML. Assume R f = 9% and RM
= 13%
Stocks Actual β Standard
Return (%) Deviation
A 33 1.7 0.5
B 13 1.4 0.35
C 26 1.1 0.40
D 12 0.95 0.24
E 21 1.05 0.28
F 15 0.7 0.18
Nifty Index 13 1 0.2
4. Mr. Shetty is considering in investing in stock of Company X. He
expects the stock to earn a return of 17% the next year. Co. X β
value is 1.3. Rf = 7% and RM= 15%. Should Mr. Shetty Invest in this
stock.
5. Vimal Enterprises has a β= 1.5. The Rf= 7% and the expected
return on market is 14%. The Co pays a dividend of rupees 2.5 per
share and investor expects a growth in dividend of 12% p. a. for
many years to come. Compute the required rate of return on equity
according to CAPM. What is the present market price of the equity
assuming the computed return as the required rate of return?
Markowitz mean-variance model
6. Find the return of the following portfolio.
Securities Expected return Proportion
(%) invested (%)
1 10 25
2 20 75
Also find the return of the portfolio if 75% is invested in security 1
and 25% in security 2.
7. Calculate the risk of the following portfolio & advice the investor. If
the proportion invested is 50:50, 20:80 or 80:20
Status of the Probability Return of X Return of Y
economy
A 0.2 -4 7
B 0.1 4 -2
C 0.3 6 5
D 0.2 5 8
E 0.2 -3 18
8. Calculate the expected return & variance of the portfolio comprising
two securities assuming that the portfolio weights are 0.75 for
security 1 and 0.25 for security 2. The expected return for security 1
is 18% and standard deviation is 12% while expected return and
standard deviation of security 2 are 22% and 20% respectively. The
correlation between 2 securities is -0.6.
9. The historical rates of return of 2 securities over the past 10 years
are given below. Calculate the covariance and correlation of the 2
securities.
Year Return of security Return of security
1 (%) 2 (%)
1 12 20
2 8 22
3 7 24
4 14 18
5 16 15
6 15 20
7 18 24
8 20 25
9 16 22
10 22 20
Sharpe’s Single Index Model:
10. Following are the details of stocks X, Y & Sensex for a given
period. If equal amount is allocated for the stocks. Calculate risk of
the portfolio.
Particulars X Y
Average returns 15% 25%
Variance Residual 6.3% 5.86%
Beta (β) 0.71 0.27
Variance of the market is 2.25%, also calculate if the proportion
invested is 80:20 & 20:80.
11. From the following calculate portfolio return and variance.
Securities Weightage Alpha (%) Beta Residual
variance (%)
A 0.2 2 1.7 370
B 0.1 3.5 0.5 240
C 0.4 1.5 0.7 410
D 0.3 0.75 1.3 285
Given: Market return is 15% & variance of the market return is
320%.
Securities Weightage Alpha Beta Residual
variance
A 0.2 2 1.7 370
B 0.1 3.5 0.5 240
C 0.4 1.5 0.7 410
D 0.3 0.75 1.3 285