Nothing Special   »   [go: up one dir, main page]
Scribd Logo
Upload

Welcome to Scribd!

  • 104 views

    05 - Risk and Return Practice Questions

    Uploaded by

    ANUJA RAPURKAR
    The document contains 15 numerical problems related to risk and return calculations involving portfolios, CAPM, and security pricing. Some of the problems involve calculating portfolio returns and risk given the individual security returns and weights. Other problems apply CAPM to determine if a security is correctly priced given its expected return, beta, and the risk-free rate and market return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    05 - Risk and Return Practice Questions

    Uploaded by

    ANUJA RAPURKAR
    104 views4 pages
    The document contains 15 numerical problems related to risk and return calculations involving portfolios, CAPM, and security pricing. Some of the problems involve calculating portfolio returns and risk given the individual security returns and weights. Other problems apply CAPM to determine if a security is correctly priced given its expected return, beta, and the risk-free rate and market return.

    Original Description:

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document contains 15 numerical problems related to risk and return calculations involving portfolios, CAPM, and security pricing. Some of the problems involve calculating portfolio returns and risk given the individual security returns and weights. Other problems apply CAPM to determine if a security is correctly priced given its expected return, beta, and the risk-free rate and market return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    104 views4 pages

    05 - Risk and Return Practice Questions

    Uploaded by

    ANUJA RAPURKAR
    The document contains 15 numerical problems related to risk and return calculations involving portfolios, CAPM, and security pricing. Some of the problems involve calculating portfolio returns and risk given the individual security returns and weights. Other problems apply CAPM to determine if a security is correctly priced given its expected return, beta, and the risk-free rate and market return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Risk and Return Sheet 1 Numerical

    U8

    1. An investor in security X and Y wherein X yields 19% return while Y yields 16% return.
    The standard deviation of X is 21% while that of Y is 18%. The correlation of the two
    securities is 0.72. Determine the return on the portfolio constituting the two securities in
    equal amount. Also determine the risk of the portfolio.

    2. The correlation coefficient between the returns on the equity shares of ABC Ltd and the
    market return is 0.90. The variance of return on equity shares of the company is 49(%)^2
    and the same for the market is 36(%)^2. Presently the government securities are traded
    at a return of 5.5% while the market return is 12%. What is required rate of return from
    the equity shares of the above company?

    3. Calculate the standard deviation and return of portfolio consisting of 70% of Security A
    and 30% of Security B.

    Year Security A return(%) Security B return(%)


    2001 9 8
    2002 6 7
    2003 7 9
    2004 10 8
    2005 8 5

    4. The stocks of Suburban Travellers’ Ltd. are currently trading at Rs.50 per share and are
    expected to pay a dividend of Rs.2.00 per share in this year. The stock price expected one
    year hence has the following probability distribution: Ignoring the time value of
    dividend income, find the expected return for a holding period of one year.
    Probability 0.35 0.40 0.25
    Price (Rs.) 52 56 62

    5. Mr. Amit is seeking to know whether the security of SAT Industries Ltd, is correctly
    priced or not. The standard deviation of the stock is 24 percent. The correlation
    coefficient for the security with the market is 0.8 and the market standard deviation is 16
    percent. The return from the Government Securities is 6.5 percent and that from the
    market portfolio is 10.5 percent. If the expected return on the stock is 12.5%, find the
    required return on the security is and identify whether it is rightly priced.

    6. The following information is given with respect to Foren Kapital Services Ltd.
    Current dividend Rs.2.00 per share
    Constant rate of growth in dividends (%) 5
    Expected return from the market index (%) 12
    Beta of the stock 1.50
    Risk free rate of return (%) 6
    The present market price per share will be approximately equal to
    (a) Rs.14 (b) Rs.16 (c) Rs.20 (d) Rs.21 (e) Rs.30.

    7. The following information is available in respect of the return from security X under
    different economic conditions:
    Economic conditions Return Probability
    Prosperity 22% 0.1
    Normal 18% 0.4
    Recession 12% 0.3
    Depression 6% 0.2
    What is the risk associated with this security?

    8. The following data is available for the security of Pradyumna solutions Ltd.
    Expected return = 18%
    (Beta factor) = 1.2
    Risk free rate of return = 8%
    Market return = 20%
    Is the security correctly priced? Where does it lie on the SML? If the expected dividend is Rs
    5, and the current market price is Rs 75, by how much should the price change to be in
    equilibrium?

    9. The probability distribution of the rates of return on the shares of Anuradha Ltd. and
    that of Bharati Ltd. is as follows:
    Probability Return (%)
    (%) Anuradha Ltd. Bharati Ltd.
    10 –5 –2
    20 15 10
    40 27 30
    20 13 15
    10 8 5
    A portfolio consisting of 40% of Anuradha Ltd. stocks and 60% of Bharati Ltd. stocks is
    formed. Find the expected rate of return and the standard deviation of returns on the
    portfolio.

    10. Following information is provided:

    Stock A B
    Expected return 32% 27%
    Beta 1.5 0.7
    Returns of T- Bill is 20% and return of Sensex is 28%. Calculate the return as per
    CAPM for each of the company’s stock. Plot them on SML. Identify whether they are
    underpriced, overpriced or correctly priced and advise accordingly.

    11. Neha is seeking to know whether the security of ABC Ltd, is correctly priced or not. The
    following details are available about the stock: The standard deviation of the stock is 27
    percent. The correlation coefficient for the security with the market is 0.75 and the
    market standard deviation is 20 percent. The return from the Government Securities is 8
    percent and that from the market portfolio is 22 percent. If the expected return on the
    stock is 19%, find the required return as per CAPM and advise.

    12. Returns of T- Bill is 7%. Calculate the return as per CAPM for each of the company’s
    stock. Plot them on SML. Identify whether they are underpriced, overpriced or correctly
    priced and advise accordingly.

    Stock expected Standard Beta


    Return Deviation

    Infosys 24% 43% 0.7

    HUL 19% 26% 0.5

    Reliance 11% 39% 1.2


    Industries

    SBI 15% 39% 1.2

    Sensex 15% 24%

    13. Consider the following information:


    Expected return on market 15%
    Required rate of return on stock X as per 13.2%
    CAPM
    Beta of stock X 0.8
    Expected rate of return on stock X 15%

    Is the stock underpriced or over priced?


    14. Security AB is expected to incur the forecasted returns as shown below:

    Market condition Probability Stock market return Return on security


    AB
    Stagnant 0.30 (20%) (25%)
    Slow growth 0.40 20% 25%
    Average growth 0.20 35% 45%
    Rapid growth 0.10 50% 60%
    The risk free return prevailing in the market is currently 6%.
    a) Determine the expected returns on the stock market and on security AB.
    b) What is security AB’s beta?
    c) Determine the required return on the security AB according to the CAPM.

    15. Amit has the following stocks in her portfolio:

    Beta Proportion of
    investment(%)
    Reliance 0.75 20
    Satyam 0.9 25
    GE 1.2 30
    Raymonds 1.1 25

    Calculate the expected return of the portfolio if risk free return is 6% and return on
    market is 15%. Also calculate the proportion of investment in each stock if the total
    investment amount is ₹ 1Lakh.

    You might also like