Mr. A is interested to invest Rs. 1,00,000 in the securities market.
He selected two securities B a
Expected
Security Risk (s) Return
(ER)
B 10% 12%
D 18% 20%
Co-efficient of correlation between B and D is 0.15.
You are required to calculate the portfolio return of the following portfolios of B and D to be co
(i) 100 percent investment in B only;
(ii) 50 percent of the fund in B and the rest 50 percent in D;
(iii) 75 percent of the fund in B and the rest 25 percent in D; and
(iv) 100 percent investment in D only.
Also indicate that which portfolio is best for him from risk as well as return point of view?. Usin
Solution
Given,
Security Risk (s) Expected Return (ER)
B 10% 12%
D 18% 20%
Correlatio 0.15
Portfolio No. Wb Wd σp
1 100% 0% 10.00%
2 95% 5% 9.68%
3 90% 10% 9.44%
4 85% 15% 9.30%
5 80% 20% 9.25%
6 75% 25% 9.31%
7 70% 30% 9.46%
8 65% 35% 9.71%
9 60% 40% 10.04%
10 55% 45% 10.45%
11 50% 50% 10.93%
12 45% 55% 11.47%
13 40% 60% 12.07%
14 35% 65% 12.71%
15 30% 70% 13.38%
16 25% 75% 14.09%
17 20% 80% 14.83%
18 15% 85% 15.60%
19 10% 90% 16.38%
20 5% 95% 17.18%
21 0% 100% 18.00%
Among the portfolios given in the question
In terms of risk, Portfolio 6 is best
In terms of return, portfolio 21 is best
In terms of both risk and return, Portfolio 6 is best
et. He selected two securities B and D for this purpose. The risk return profile of these securities are as f
ing portfolios of B and D to be considered by A for his investment.
ent in D;
ent in D; and
well as return point of view?. Using a scatter diagram, graphically represent them
µp C.V
12.00% 0.83
12.40% 0.78
12.80% 0.74
13.20% 0.70
13.60% 0.68
14.00% 0.66
14.40% 0.66
14.80% 0.66
15.20% 0.66
15.60% 0.67
16.00% 0.68
16.40% 0.70
16.80% 0.72
17.20% 0.74
17.60% 0.76
18.00% 0.78
18.40% 0.81
18.80% 0.83
19.20% 0.85
19.60% 0.88
20.00% 0.90
turn profile of these securities are as follows :
epresent them
Mr. A is interested to invest Rs. 1,00,000 in the securities market. He selected two securities B a
Expected
Security Risk (s) Return
(ER)
B 10% 12%
D 18% 20%
Co-efficient of correlation between B and D is 0.15.
You are required to calculate the portfolio return of the following portfolios of B and D to be co
(i) 100 percent investment in B only;
(ii) 50 percent of the fund in B and the rest 50 percent in D;
(iii) 75 percent of the fund in B and the rest 25 percent in D; and
(iv) 100 percent investment in D only.
Also indicate that which portfolio is best for him from risk as well as return point of view?. Usin
Solution
Given,
Security Risk (s) Expected Return (ER)
B 10% 12%
D 18% 20%
Correlatio 0.15
Portfolio No. Wb Wd σp
1 100% 0% 10.00%
2 95% 5% 9.68%
3 90% 10% 9.44%
4 85% 15% 9.30%
5 80% 20% 9.25%
6 75% 25% 9.31%
7 70% 30% 9.46%
8 65% 35% 9.71%
9 60% 40% 10.04%
10 55% 45% 10.45%
11 50% 50% 10.93%
12 45% 55% 11.47%
13 40% 60% 12.07%
14 35% 65% 12.71%
15 30% 70% 13.38%
16 25% 75% 14.09%
17 20% 80% 14.83%
18 15% 85% 15.60%
19 10% 90% 16.38%
20 5% 95% 17.18%
21 0% 100% 18.00%
Among the portfolios given in the question
In terms of risk, Portfolio 6 is best
In terms of return, portfolio 21 is best
In terms of both risk and return, Portfolio 6 is best
et. He selected two securities B and D for this purpose. The risk return profile of these securities are as f
ing portfolios of B and D to be considered by A for his investment.
ent in D;
ent in D; and
well as return point of view?. Using a scatter diagram, graphically represent them
Riska and Return of 2 security portfolio
0.25
0.2
µp C.V
0.15
Return
12.00% 0.83
0.1
12.40% 0.78
12.80% 0.74
0.05
13.20% 0.70
0
13.60% 0.68
0.08 0.1 0.12 0.14 0.16 0.18
14.00% 0.66 Risk
14.40% 0.66
14.80% 0.66
15.20% 0.66
15.60% 0.67
16.00% 0.68
16.40% 0.70
16.80% 0.72
17.20% 0.74
17.60% 0.76
18.00% 0.78
18.40% 0.81
18.80% 0.83
19.20% 0.85
19.60% 0.88
20.00% 0.90
turn profile of these securities are as follows :
epresent them
a and Return of 2 security portfolio
.1 0.12 0.14 0.16 0.18 0.2
Risk
L Ltd. And M Ltd. Have the following risk and return estimates.
RL = 20%; RM = 22%, sL = 18%; s M = 15%; Correlation Coefficient ( rLM )= – 1 Calculate the prop
minimize the risk of portfolio using the WminA formula
B.Com
Solution
Given
σ µ
L 18% 20%
M 15% 22%
Corr(L,M) -1
Co. µ σ Weight
L 20% 18% 45.45%
M 22% 15% 54.55%
Correl= -1
WL= σm/(σl+σm)=
WM
B.Sc Fin
Given,
µ σ Weight
L 20% 18% 45.455%
M 22% 15% 54.55%
Corr(l,m) -1
σp= 0.000000
WL= σl/(σl+σm) 45.454545454545500%
Formula Method
┴
Expected Return Standard Deviation Weight
20% 18% 45.45455%
22% 15% 54.54545%
-1.00
Portfolio SD 0.0000000
Sdy
SDx+Sdy
45.454545454545500%
1 Calculate the proportion of investment of L Ltd. and M Ltd. to
0.454545
L Ltd. And M Ltd. Have the following risk and return estimates.
RL = 20%; RM = 22%, sL = 18%; s M = 15%; Correlation Coefficient ( rLM )= – 1 Calculate the prop
minimize the risk of portfolio using the WminA formula
B.Com
Solution
Given
σ µ
L 18% 20%
M 15% 22%
Corr(L,M) -1
Co. µ σ Weight
L 20% 18% 45.45%
M 22% 15% 54.55%
Correl= -1
WL= σm/(σl+σm)= 0.45 0.454545454545455
WM 0.545454545454545
B.Sc Fin
Given,
µ σ Weight
L 20% 18% 45.455%
M 22% 15% 54.55%
Corr(l,m) -1
σp= 0.000000
WL= σl/(σl+σm) 45.454545454545500%
Formula Method
┴
Expected Return Standard Deviation Weight
20% 18% 45.45455%
22% 15% 54.54545%
-1.00
Portfolio SD 0.0000000
Sdy
SDx+Sdy
45.454545454545500%
1 Calculate the proportion of investment of L Ltd. and M Ltd. to
0.454545
Novex owns a portfolio of two securities with the following expected return, standard deviation an
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.4
Y 15% 20% 0.6
1 What are the maximum and minimum portfolio standard deviations for varying levels of co
securities?
2 If correlation is -1, calculate the proportion of the individual securities in the portfolio to re
Given,
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.4
Y 15% 20% 0.6
Correlation σp
-1 0.0600
-0.9 0.0710
-0.8 0.0805
-0.7 0.0890
-0.6 0.0967
-0.5 0.1039
-0.4 0.1106
-0.3 0.1170
-0.2 0.1230
-0.1 0.1287
0 0.1342
0.1 0.1394
0.2 0.1445
0.3 0.1494
0.4 0.1541
0.5 0.1587
0.6 0.1632
0.7 0.1676
0.8 0.1718
0.9 0.1760
1 0.1800
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.57
Y 15% 20% 0.43
Correlation -1
Wx=
n, standard deviation and weights:
ns for varying levels of correlation between two
ties in the portfolio to reduce the risk to zero?
Novex owns a portfolio of two securities with the following expected return, standard deviation an
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.4
Y 15% 20% 0.6
1 What are the maximum and minimum portfolio standard deviations for varying levels of co
securities?
2 If correlation is -1, calculate the proportion of the individual securities in the portfolio to re
Given,
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.4
Y 15% 20% 0.6
Correlation σp
-1 0.0600
-0.9 0.0710
-0.8 0.0805
-0.7 0.0890
-0.6 0.0967
-0.5 0.1039
-0.4 0.1106
-0.3 0.1170
-0.2 0.1230
Correlati
-0.1 0.1287
Correlati
0 0.1342
0.1 0.1394
0.2 0.1445
σ
0.3 0.1494
0.4 0.1541
0.5 0.1587
0.6 0.1632 -1.5 -1 -0.5
0.7 0.1676
0.8 0.1718
0.9 0.1760
1 0.1800
Securit Expected
y Return Standard Deviation Weight
X 12% 15% 0.57
Y 15% 20% 0.43
Correlation -1
Wx= 0.57142857
S.D.p= 0
n, standard deviation and weights:
ns for varying levels of correlation between two
ties in the portfolio to reduce the risk to zero?
Correlation Vs. Risk
0.2
0.18
0.16
0.14
0.12
0.1
Correlation Vs. Risk
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
-1.5 -1 -0.5 0 0.5 1 1.5
Correlation
Following is the data regarding six securities:
A B C D E F
Return (%) 8 8 12 4 9 8
Risk (%)
(Standard 4 5 12 4 5 6
Deviation)
Which of the securities will be selected?
(1) From the chart it is visible that, Portfolio A, E and F are in the top left corner and they are efficient securitie
Risk (%)
(Standar
Return
d
(%)
Deviatio
n)
A 4 8
B 5 8
C 12 12
D 4 4
E 5 9
ey are efficient securities F 6 8
Chart Title
14
12
10
0
3 4 5 6 7 8 9 10 11 12 13
Following is the data regarding six securities:
A B C D E F
Return (%) 8 8 12 4 9 8
Risk (%)
(Standard 4 5 12 4 5 6
Deviation)
Which of the securities will be selected?
(1) From the chart it is visible that, Portfolio A, E and F are in the top left corner and they are efficient securitie
14
12 3; 12
10
5; 9
8 1; 8 2; 8 6; 8
Return
6
4 4; 4
2
0
3 4 5 6 7 8 9 10 11 12 13
Risk
From the chart, it is visible that Portfolio A, E, F are efficient
portfolios
Risk (%)
(Standar
Return
d
(%)
Deviatio
n)
A 4 8
B 5 8
C 12 12
D 4 4
E 5 9
ey are efficient securities F 6 8
Chart Title
14
12
10
0
3 4 5 6 7 8 9 10 11 12 13
The following data relate to two securities, A and B
Particulars Security A Security B
Expected
22% 17%
return
Beta factor 1.512 0.72
Assume: The risk –free interest rate is, 10%
The expected return on the market portfolio is, 18%
Find out the required return and also comment on the pricing as under valued, over valued or o
Solution
Given,
Rf 10%
Rm 18%
Beta 1.512
Sec A
Expected Ret or Actual Return 22.00%
Req. return as per CAPM
Result
Rf 9%
Rm 18%
Beta Expected Return
1.4 21.600%
1 18.000%
2.3 29.700%
Market
Particulars Security A Security B
portfolio
Actual return 20% 15% 15%
Beta 1.50 1.2 1
Return of treasury bill is 7%
Req. return 19 16.6
Undervalued Overvalued
Best choice
ued, over valued or otherwise.
0.72
Sec B
17% Investor expectation/actual return
SML
The following data relate to two securities, A and B
Particulars Security A Security B
Expected
22% 17%
return
Beta factor 1.512 0.72
Assume: The risk –free interest rate is, 10%
The expected return on the market portfolio is, 18%
Find out the required return and also comment on the pricing as under valued, over valued or o
Solution
Given,
Rf 10%
Rm 18%
Beta 1.512
Sec A
Expected Ret or Actual Return 22.00%
Req. return as per CAPM 22.09600%
Result overvalued
Rf 9%
Rm 18%
Beta Expected Return
1.4 21.600%
1 18.000%
2.3 29.700%
Market
Particulars Security A Security B
portfolio
Actual return 20% 15% 15%
Beta 1.50 1.2 1
Return of treasury bill is 7%
Req. return 19 16.6
Undervalued Overvalued
Best choice
ued, over valued or otherwise.
0.72
Sec B
17% Investor expectation/actual return
15.76000% SML
undervalued
You are analyzing a Portfolio consisting of 4 securities. Data are:
Amount in
Beta of Expected
invested
Security
Return Million
security
(%) (Rs.)
A 1.4 16 3.8
B 0 6 5.2
C 0.7 10 6.1
D 1.1 13 2.9
Calculate portfolio return and beta and analyse the individual securities. Rm = 10%,
Risk free rate = 6%
Given
Rf 6%
Rm 10%
Expected Amount in
Beta of
Or Actual invested Required
Security return Decision Weight
Return Million
security
(%) (Rs.)
A 1.4 16% 3.8
B 0 6% 5.2
C 0.7 10% 6.1
D 1.1 13% 2.9
Total Investment 18 0.00%
Portfolio Actual Expected Return 0.000%
Portfolio Beta 0
Portfolio Required Return 0.00%
Rm = 10%,
You are analyzing a Portfolio consisting of 4 securities. Data are:
Amount in
Beta of Expected
invested
Security
Return Million
security
(%) (Rs.)
A 1.4 16 3.8
B 0 6 5.2
C 0.7 10 6.1
D 1.1 13 2.9
Calculate portfolio return and beta and analyse the individual securities. Rm = 10%,
Risk free rate = 6%
Given
Rf 6%
Rm 10%
Expected Amount in
Beta of
Or Actual invested Required
Security return Decision Weight
Return Million
security
(%) (Rs.)
A 1.4 16% 3.8 11.60% Invest 21.11%
B 0 6% 5.2 6.00% Invest 28.89%
C 0.7 10% 6.1 8.80% Invest 33.89%
D 1.1 13% 2.9 10.40% Invest 16.11%
Total Investment 18 100.00%
Portfolio Actual Expected Return 10.594%
Portfolio Beta 0.71
Portfolio Required Return 8.84%
Rm = 10%,
Mr. X is attempting to evaluate two possible portfolios, which contains the same set
of five assets but in different proportions. He is particularly interested in using beta
to compute the risks of the portfolios. So he has gathered the following
information:
Stock Beta Portfolio A Portfolio B
Essar Shipping 1.3 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
(a) Calculate betas of portfolio A and B.
(b) Which portfolio is more risky?
(c) If Mr. X sells Essar shipping, which portfolio is more risky?
(d) If Mr. X replaces Essar shipping with Clariant, which portfolio is more risky?
(a)
Stock Beta Portfolio A Portfolio B
Essar Shipping 1.3 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta
(b)
(c )
Stock Beta Portfolio A Portfolio B
Cash 0 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta
(d)
Stock Beta Portfolio A Portfolio B
Clariant 0.7 40% 40%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta
a Beta of Portfolio A
Beta of Portfolio B
b Portfolio B is more risky
Stock Beta Portfolio A Portfolio B
Essar Shipping
Clariant
Vijaya bank
M&M
BSAF
Cash
Beta
more risky?
0
Mr. X is attempting to evaluate two possible portfolios, which contains the same set
of five assets but in different proportions. He is particularly interested in using beta
to compute the risks of the portfolios. So he has gathered the following
information:
Stock Beta Portfolio A Portfolio B
Essar Shipping 1.3 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
(a) Calculate betas of portfolio A and B.
(b) Which portfolio is more risky?
(c) If Mr. X sells Essar shipping, which portfolio is more risky?
(d) If Mr. X replaces Essar shipping with Clariant, which portfolio is more risky?
(a)
Stock Beta Portfolio A Portfolio B
Essar Shipping 1.3 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta 0.935 1.11
(b) More Risky
(c )
Stock Beta Portfolio A Portfolio B
Cash 0 10% 30%
Clariant 0.7 30% 10%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta 0.805 0.72
More Risky
(d)
Stock Beta Portfolio A Portfolio B
Clariant 0.7 40% 40%
Vijaya bank 1.25 10% 20%
M&M 1.1 10% 20%
BSAF 0.9 40% 20%
Portfolio beta 0.875 0.93
More Risky
a Beta of Portfolio A
Beta of Portfolio B
b Portfolio B is more risky
Stock Beta Portfolio A Portfolio B
Essar Shipping
Clariant
Vijaya bank
M&M
BSAF
Cash
Beta
more risky?
0
The estimated factor sensitivity of TEC to the five macro economic factors are given in th
Factor Risk
Factor
sensitivity premium (%)
Confidence risk 0.25 2.59
Time horizon risk 0.3 -0.66
Inflation risk -0.45 -4.32
Business cycle risk 1.6 1.49
Market timing risk 0.8 3.61
Use APT model to calculate the required rate of return for TEC. The treasury bill rate is 4.1%.
SOLUTION
Risk Free rate= 4.1 %
Required Return (excess return) %
Ri = αi + βiGDP *(GDP factor risk premium) + βiIR *(Int. factor risk premium)+..+ ei
OR
ri-rf = βiGDP *(GDP factor risk premium) + βiIR *(Int. factor risk premium)+..+ ei
Where, αi = Intercept or RF rate
TRUE
tors are given in the table below
APT PPT Slide then sums
y bill rate is 4.1%. CROSS CHECK QT 50 and Q52 answeres with divisions
A
B
C
mium)+..+ ei
um)+..+ ei
nsweres with divisions
The estimated factor sensitivity of TEC to the five macro economic factors are given in th
Factor Risk
Factor
sensitivity premium (%)
Confidence risk 0.25 2.59
Time horizon risk 0.3 -0.66
Inflation risk -0.45 -4.32
Business cycle risk 1.6 1.49
Market timing risk 0.8 3.61
Use APT model to calculate the required rate of return for TEC. The treasury bill rate is 4.1%.
SOLUTION
Risk Free rate= 4.1 %
Required Return (excess return) 11.77 %
Ri = αi + βiGDP *(GDP factor risk premium) + βiIR *(Int. factor risk premium)+..+ ei
OR
ri-rf = βiGDP *(GDP factor risk premium) + βiIR *(Int. factor risk premium)+..+ ei
Where, αi = Intercept or RF rate
TRUE
tors are given in the table below
APT PPT Slide then sums
y bill rate is 4.1%. CROSS CHECK QT 50 and Q52 answeres with divisions
A
B
C
mium)+..+ ei
um)+..+ ei
nsweres with divisions
Module 4 Formula
F1 Utility
Utility U= E(r ) -0.5*A*σ^2
Where,
E(R )=µ=Expected return
S.D=σ=Standard deviation
S.D^2=Variance
A=Investors level of risk aversion
F2 Portfolio risk and Return
By varying the weights or correlation, risk and return will change
F3 WminA formula
Weight of security in a portfolio, to find minimum standard devation p
F4 Efficient Frontier
Efficient Frontier = Top left corner portfolio
Risk Tolerance= Maximum risk investor can bear
If s.d of one security is 0 in two security portfolio; σp=W*s.d of othersecurity
F5 CML
F6 Sharpe's Ratio
Rp-Rf
Risk Premium= Rp-Rf
Sharpe Ratio= (Rp-Rf)
σp
F6 Beta
Beta= Slope(Return of Portfolio, Return of Market)
Beta = Cov(Rp, Rm)
Variance of Market
=Corr (Rp, Rm) x σp xσm
σm^2
=Corr(Rp,Rm) x σp
σm
F7 SML or CAPM
Required return as per SML and CAPM= Rf + Beta (Rm-Rf)
If Acual and expected return>Return as per CAPM, Undervalued
If Acual and expected return<Return as per CAPM, Overvalued
F8
F9
n will change
andard devation portfolio
d of othersecurity
n of Market) Excel function
ta (Rm-Rf)
