Second Semester: 2018 -19

Security Analysis and Portfolio Management

Mid-semester Examination (Closed Book)

Course code:ECONF412/FIN F313 Date:16/03/19(11:00-12.30PM)

Duration: 90Mins Max.Marks:60 (Weightage:30%)
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Answer all the questions. Sub parts of EACH question should be answered at one place in
sequential order.

1.
a. Why money market securities sometimes referred to as “cash equivalents”?

b. What changes would you expect in the standard deviation for a portfolio of between 4
and 10 stocks, between 10 and 20 stocks, and between 50 to 100 stocks.

c. CAPM contends that there is systematic and unsystematic risk for an individual
security. Which is relevant risk variable and why is it relevant? why is the other risk
variable is not relevant?

d. At the beginning of last year, you invested $4,000 in 80 shares of the Pranavi
Corporation. During the year Company paid dividends of $5 per share. At the end of
the year, you sold the 80 shares for $59 a share. Compute your total HPY on these
shares and indicate how much was due to the price change and how much was due to
the dividend income. [2+2+2+4=10]

2. Mr Rajan has a margin account and deposits $50,000. Assume the prevailing margin
requirements is 40 percent, commissions are ignored, and the Jio Corporation is selling at
$35 per share.

a. How many shares can Rajan purchase using the maximum allowable margin?

b. What is Rajan’s profit(Loss) if the price of Jio’s stock

i. Rises to $45?
ii. Falls to $25

c. If the maintenance margin is 30 percent, to what price can Jio corporation fall before
Rajan will receive a margin call? [3+3+4=10]

(P.T.O)
3. The following are the monthly rates of return for companies’ X and Y during a six-month
period

Month Stock X Stock Y

1 -0.04 0.07
2 0.06 -0.02
3 -0.07 -0.1
4 0.12 0.15
5 -0.02 -0.06
6 0.05 0.02

a. Average monthly rate of return for each Stock.

b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return.
e. What level of correlation did you expect? How did your expectations compare
with the computed correlation? Would these two stocks be good choices for
diversification? Why or why not? [5X2=10]

4. You manage a Risky portfolio with expected rate of return of 18% and Standard
deviation of 28%. The T-bill rate is 8%.

a. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill
money market fund. What is expected value and standard deviation of the rate of
return on his portfolio.

b. Suppose that your risky portfolio includes the following investments in given
proportions:
Stock A - 25%
Stock B - 32%
Stock C - 43%
What are the investment proportions of your client’s overall portfolio, including
the position in T- bills?
c. Suppose that your client decides to invest in your portfolio a proportion y of the total
investment budget so that the overall portfolio will have an expected rate of return of
16%.
i. What is the proportion y?
ii. What are your client’s investment proportions in your three stocks and the
T-bill fund?
iii. What is the standard deviation of the rate of return on your client’s
portfolio?

d. Suppose that your client prefers to invest in your fund a proportion y that maximizes
the expected return on the complete portfolio subject to the constraint that the
complete portfolio’s standard deviation will not exceed 18%.
 i. What is the investment proportion, y?
ii. What is expected rate of return on the complete portfolio?

e. Your client’s degree of risk aversion is A=3.5

i. What proportion, y, of the total investment should be invested in your
fund?
ii. What is expected value and standard deviation of the rate of return on your
client’s optimised portfolio?
[2+1+5+2+4=14]
5. The Royal Bank has issued bonds that pay semi-annually with following characteristics

Yield to
Coupon Maturity Maturity Macaulay Duration
15
8% 8% Years 10 Years

a. Calculate modified duration using the information provided

b. Explain why modified duration is a better measure than maturity when
calculating the Bond’s sensitivity to changes in interest rates.
c. Identify the direction of change in modified duration if:
i. The coupon of the bond were 4 percent, not 8 percent
ii. The maturity of the bond were 7 years, not 15 years
d. Define Convexity and explain how modified duration and convexity are used
to approximate the bond’s percentage change in price, given a large change in
interest rates. [4X2=8]

6. A Pension fund manager is considering three mutual funds. The first is stock fund, the
second is a long term government and corporate bond fund, and third is a T-bill money
market fund that yields a rate of 8%. The probability distribution of the risky fund is as
follows:
Standard
Expected Return Deviation
Stock fund(S) 20% 30%
Bond fund(B) 12% 15%
The correlation between the fund returns is 0.10

a. What are the investment proportions in the minimum – variance portfolio of the two
risky funds, and what is the expected value and standard deviation of its rate of
return.
b. What is the value of Sharpe ratio of the best feasible CAL?
c. If you were to use only two risky funds, and still require an expected return of 14%,
what would be the investment proportions of your portfolio? Estimate its standard
deviation. [4+2+2=8]

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