ASSIGNMENT 1- Financial Modelling

1. Explain the following terms:

(a) Time value of Money
(b)Portfolio
(c) Annuity
(d)Perpetuity
(e) Equity Shares
2. Distinguish between the following:
(a) Primary Market and Secondary Market
(b)Effective interest rate and nominal rate
(c) Market Risk and Unique Risk
3. Shyam borrows Rs 80,000 for a music system at a monthly interest of
1.25 per cent. The loan is to be repaid in 12 equal monthly
installments, payable at the end of each month. Prepare the loan
amortization schedule.
4. The stock of Alpha Company performs well relative to other stocks
during recessionary periods. The stock of Beta Company, on the other
hand, does well during growth periods. Both the stocks are currently
selling for Rs 50 per share. The rupee return (dividend plus price) on
these stocks for the next year would be as follows:

Probability
Return on Alpha
Stock
Return on Beta

High

Low

growth
0.3
55

growth
0.3
50

75

65

Economic Condition
Stagnation
Recession
0.2
60

0.2
70

50

40

Stock

Calculate the expected return and standard deviation of investing:

(a) Rs 1,000 in the equity stock of Alpha
(b)Rs 1,000 in the equity stock of Beta
(c) Rs 500 in the equity stock of Alpha and Rs 500 in the equity stock
of Beta
(d)Rs 700 in the equity stock of Alpha and Rs 300 in the equity stock
of Beta

Which of the four options would you choose and why?

5. The returns on 4 stocks A, B, C and D over a period of 6 years have
been as follows:
1
A
10%
B
8%
C
7%
D
9%
Calculate the

2
3
12%
-8%
4%
15%
8%
12%
9%
11%
return on:

4
15%
12%
9%
4%

5
-2%
10%
6%
8%

6
20%
6%
12%
16%

(A)Portfolio of one stock at a time

(B)Portfolio of two stocks at a time
(C)Portfolio of three stocks at a time
(D)
A portfolio of all the four stocks
Assume equiproportional investment.
6. What is the present value of the following cash flow streams when the
discount rate is 12%.
End of Strea Strea
Strea
Year
mA
mB
mC
1
100
1000
500
2
200
900
500
3
300
800
500
4
400
700
500
5
500
600
500
6
600
500
500
7
700
400
500
8
800
300
500
9
900
200
500
10
1000
100
500
7. XX Compare the future value in 2 years of Rs 100 to be invested today
at 8% under the following schemes:
(1)Annual compounding
(2)Half-yearly compounding
(3)Quarterly compounding
8. The following is the scenario of returns from two channels of
investment:

Scenario

Probabilit
y

Returns

1
2
3

0.3
0.4
0.3

X
0.10
0.16
0.12

Y
0.08
0.15
0.20

Find out:
(a) Expected return on each investment
(b)Variance and standard deviation of X and Y
(c) Co-variance and correlation coefficient between X and Y
(d)The expected return, variance and standard deviation of the total
portfolio, if you create a total portfolio of 60% for X and 40% for Y.
9. At what interest rate (compounded continuously) would $3,000 grow
to $300,000 in 25 years?
10.
A company is expecting to earn Rs 5000, Rs 5500, Rs 5700 and
Rs 6000 during the next four years. What will be the present value of
earning, given a discount rate of 10%?
11.

The risk-free return is 8 percent and the expected return on

market portfolio is 12 percent. If the required return on a stock is 15

percent, what is its beta?
12.

The risk free return is 9 percent. The required return on a stock

whose beta is 1.5 is 15 percent. What is the return on the market

portfolio.

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