BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI - K. K.

BIRLA GOA CAMPUS

Second Semester 2023-24, Comprehensive Examination
Course Title: Security Analysis and Portfolio Management Course No.: ECON F412, FIN F313
Examination Date: 14-05-2024 (FN) Max Marks: 40

Instructions: Use of calculators are allowed. This is an CLOSED-book examination. Please

write with a blue pen. Answers are to be presented in the required format wherever
mentioned for evaluation.

Part A
Q1. i. Suppose a company has two outstanding loans. The first is Rs.30 million loan with no
intermediate interest payment but the interest rate on the loan is 8% p.a. compounded annually.
The second is 3- year loan worth Rs.40 million loan having 9% p.a. interest to be paid annually
and the principal is to be repaid only after 3 years. Assume that the discount rate is 8%. [6M]
a. What is the duration of the company’s loan portfolio?
b. What can be the immunization strategy for the portfolio using 2-year and 7-year zero
coupon bond?
c. What is the objective of an immunization strategy?
d. Using duration approximation, what will be the change in value of loan 2 if discount rate
changes by 1 percentage point?

ii. Justify whether the statement is true or false: Bond investors like convexity. [1M]

Solution:
i. The duration of the first loan is 3 years since it is a zero-coupon loan. The duration of the
second loan is as follows:
Year 1 Year 2 Year 3
Payment 3.60 3.60 43.60
PV of payment 3.33 3.09 34.61
Time weighted PV of payment 3.33 6.18 103.83
Time Weighted PV of
Payments Divided by Price 0.083 0.154 2.596 2.833

a. By default, duration of the zero-coupon bond is its yield to maturity. Hence, the duration of
a portfolio is the weighted average duration of its individual securities. So, the
portfolio’s duration = 3/7 * (3) + 4/7 * (2.83) = 2.905
2w+7(1-w)=2.905
W=82%.

b. Invest 58 million in 2-year zero coupon bond and rest in 7-year zero coupon bond.

c. The objective of the immunization strategy to insulate the bond portfolio through interest
rate risk.
It is structured in such a way so that the interest rate risk exactly offsets the reinvestment risk.

d. D* =2.83/(1+0.08)=2.62
Delta P/p= -2.62*1=-2.62%
ii. Bond investors like convexity as price gain is more when yield falls and the fall in price is
lower when yield increases.

Q2. Consider following information regarding two bonds with par of Rs.1000:

Time to maturity Yield to maturity Coupon rate Bond price

Bond A 2 6% 8% 1037.17
Bond B 5 8% 6% 918.89

If the interest rate increases by 1 percentage point, find the new bond prices. Based on the
results, comment on the relationship between interest rate and time to maturity. Assume semi-
annual coupon payments. [3M]

Q3. Consider the following information regarding two securities A and B, that lie on the
security market line: E(rA)=12%, β1=1; E(rB)=15%, β2=1.5. What can we say about the pricing
of another fund C in the market that has an expected return of 14% with β of 0.8. Based on
your findings, state the investment strategy. [2M]

Solution:
E(r)=rf + β E(RM)
rf + E(RM)=0.12…. (1)
rf + 1.5E(RM)=0.15
E(RM)=0.06; rf =0.06
For security C, E(rC)=0.06+0.8*0.06=0.108 <14%
Hence, security C is underpriced.
Investment strategy will be to long the asset.

Q4. Consider investor 1 and investor 2 have risk aversion index of 6 and 3 respectively. Given the
characteristics of funds below, find the fund where each of the two investors will invest if both the
investors are utility maximizers. [2M]
Expected return Risk
Fund A 10% 12%
Fund B 15% 10%
Fund C 18% 12%

Solution: Risk A=6 A=3

Expected return
Fund A 10% 12% 5.68% 7.84%
Fund B 15% 10% 12.00% 13.50%
Fund C 18% 12% 13.68% 15.84%

Both the investors will choose Fund C.

Q5. (a) Consider that a fund manager offers a portfolio of two securities. Given the security
characteristic line, answer the following. [4M]
E(R1) =2%+2 E(RM); E(R2) =1%+1.4E(RM); 𝜎e1=0.2; 𝜎 e2=0.3

If the weightage of the security 1 is 70% and security 2 is 30%, find the (i) correlation among
securities, (ii) expected return, (iii) systematic, (iv) unsystematic and (v) total portfolio
variance. Assume market risk is 60% and E(RM)= 10%.

(b) Suppose a hedge fund manager finds one fund with alpha of 5% and beta of 1.5.
Formulate the strategy to capture the alpha while being market neutral. [2M]

Solution:
α1=0.02; α2=0.01; β1 =2; β2 =1.4
αp=(0.7*0.02+0.3*0.01)=0.017
βp =(0.7*2+0.3*1.4)=1.82
A.
(i) Covariance: 2*1.4*0.6^2=1.008; correlation: 0.929
(ii) Expected return: 0.017+1.82*0.1=0.199
(iii) Systematic risk: (βp *ϭM )^2=(1.82*0.6)^2 =1.192
(iv) Unsystematic risk: ϭp^2==(0.7*0.2)^2+(0.3*0.3)^2=0.0277
(v) Total variance= ((βp *ϭM )^2+ ϭp ^2) =1.219

B. 𝑅𝑃=.05+1.5𝑅𝑀+𝑒𝑃

Hence weight of risk-free asset is -0.5.

Long the fund with alpha 5% and short tracking portfolio with Wm=1.5 and Wrf= (-)0.5

PART B

Q.6. Complete the following: (2 marks)

a) The RSI indicator was developed by ____________.
b) RSI Double top at 70 signals ___________________trend.

c)
d) When entering into a long position, stop loss is done at _______(top/bottom).
Ans. a) J. Welles Wilder. b) bearish c) Doji d) bottom

Q.7 a. Royal Ltd. is considering an investment in the shares of Goldmines Ltd.; below are the
economic forces that influence Goldmines Ltd. returns. You are required to calculate the total
return on the share. The risk-free rate is 6%. (3.5
marks)
Economic Forces Beta Expected value (%) Actual value (%)
CPI 1.02 7 7.5
Oil Prices 0.76 5 6
Inflation 1.3 7.5 8
GDP 1.5 8.1 10
Interest rate 0.65 9.8 11
Stock Market Index 0.89 8.7 9
b. The arbitrage pricing theory was propounded by __________________. (0.5
marks)
Sol.

Factor Beta Factor Risk Premium Factor Return

GNP 1.02 0.5 0.51
Inflation 0.76 1 0.76
Interest Rate 1.3 0.5 0.65
Stock Market Index 1.5 1.9 2.85
Industrial Production 0.65 1.2 0.78
0.89 0.3 0.267
6
11.817
11.817%
8. Rony wants to buy Omega Ltd.’s share, trading at Rs. 400, which he plans to sell after two
years at Rs. 500. But he is unsure of buying it and cannot decide. The expected dividends to be
paid by the company in the first and second years are Rs. 25 and Rs. 30. As a financial analyst,
you must assist Rony in making the right decision; assume the company's expected growth rate
is 12%.
(2
marks)
Sol.

Year1 Year 2
Dividend 25 30
PV of Div. 22.32143 23.91582

PV of Share 398.5969
Intrinsic
Value 444.8342
It is Undervalued, so buy.
9. The following details are extracted from the financial report of Infinity Ltd. You must find
out the company's intrinsic value using the DCF approach. Comment on a share's valuation and
the trading strategy if the share's Market price is Rs. 60. Assume the company grows
perpetually at 10%.
Years FCFF (in Rs. 000’) Particulars (in Rs.000’)
1 200 Marketable Securities 30
2 210 Long term debt 200
3 220 Short term Debt 10
4 230 Cash 50
5 240 Cost of Capital 15%
The present value of Rs. 1 at a 12% discount rate is 0.892, 0.797, 0.711, 0.635, and 0.567 for
the first five years, respectively. no. of shares are 100,000 (4 marks)
Sol.
Enterprise value 3776.28
Years FCFF Discount rate DCF
Cash 50
0
Marketable Securities 30
1 200 0.8696 173.91
Long term debt 200
2 210 0.7972 167.41
Short term Debt 10
3 220 0.7118 156.59
Equity Value 3646.28
4 230 0.6355 146.17
Share Outstanding 100
5 240 0.5674 136.18
5 5280.00 0.5674 2996
Per share value 36.46281
Enterprise Value 3776.3

Ans. Overvalued, hence sell.

10. Being a financial analyst, comment on the trend to be followed by calculating the RSI for
the given relative strength time series data: (4 marks)
Relative
Strength RSI
3.8 79.1667
2 66.6667
2.3 69.697
2.2 68.75
2.1
Sol. 67.7419, Sideways.
Q.11. You are supposed to recommend the share of Zydie Ltd. to your client. The relative
valuation of Zydie Ltd. with the industry average given, you need to calculate implied
enterprise and market values. The market price of the share is Rs. 494. Kindly value the share
using the following details: (3 marks)
Amt. Rs.
Particulars (000')
 Net Debt 1339
Revenue 16434
No. of
shares 101
EBITDA 2794
Avg. Industry
Valuation
EV/Revenue 4.1
EV/EBITDA 23.7
Sol.

Implied Enterprise Value 67379.4 66217.8

Implied Market Value 66040.4 64878.8
Implied Value per Share 653.865 642.364

12. From the table given below, fill in the blanks: (3 Marks)
a) 27 days EMA___________b) 29 days MACD___________ c) 35 days Signal Line_______
d) 40 days histogram________e) Crossover on 36 day_________f) Trend after
crossover_______
Days ABC 9 days EMA 12 days EMA 26 days EMA MACD Signal Line Histogram
1 100
2 108
3 120
4 130
5 140
6 145
7 150
8 159
9 165 135.222
10 166 141.378
11 156 144.302
12 145 144.442 140.333
13 134 142.353 139.359
14 133 140.483 138.381
15 132 138.786 137.399
16 135 138.029 137.030
17 133 137.023 136.410
18 125 134.619 134.655
19 133 134.295 134.400
20 125 132.436 132.954
21 126 131.149 131.884
22 126 130.119 130.979
23 125 129.095 130.059
24 124 128.076 129.127
25 123 127.061 128.184
26 120 125.649 126.925 133.769 -6.844
27 119 124.319 125.706 BLANK -6.969
28 112 121.855 123.597 131.144 -7.546
29 110 119.484 121.505 129.578 BLANK
30 98 115.187 117.889 127.238 -9.349
31 84 108.950 112.675 124.036 -11.360
32 82 103.560 107.956 120.922 -12.966
33 76 98.048 103.040 117.594 -14.554
 34 100 98.438 102.572 116.291 -13.719 -10.153 -3.565
35 110 100.751 103.715 115.825 -12.110 BLANK -1.565
36 120 104.601 106.220 116.134 -9.914 -10.419 0.505
37 122 108.080 108.648 116.569 -7.921 -9.919 1.998
38 123 111.064 110.856 117.045 -6.189 -9.173 2.984
39 125 113.851 113.032 117.634 -4.602 -8.259 3.656
40 126 116.281 115.027 118.254 -3.227 -7.253 BLANK
41 127 118.425 116.869 118.902 -2.033 -6.209 4.176
Ans.
a) 27 days EMA_ 132.675___b) 29 days MACD -8.0721__c) 35 days Signal Line_ -10.544
d) 40 days histogram 4.025 e) Crossover on 36 day_ Golden_ f) Trend after crossover Bullish