Sapm Notes (Problems)

K.
HARI KRISHNA
M.B.A, M.Com, M.Phil, (Ph.D), (ICWAI)
Facultu & Director - Black Swan 91 77 567 568
MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

JOB ORIENTED TRAINING IN FINANCE & ACCOUNTS
WITH 100% PLACEMENT ASSISTANCE - 91 77 567 568
Problems on Calculation of Risk and Return

1. Stocks X and Y display the following returns over the past three years.
Year
Return of X
Return of Y
1994
14 %
12%
1996
16%
18%
1996
20%
15%
a) What is the expected return on portfolio made up of 40% of X and 60% of Y.
b) What is the standard deviation (risk) of each stock X and Y.
c) What is the portfolio risk of a portfolio made up of 40% of X and 60% of Y.
d) Determine the correlation coefficient of stock X and Y.
2. Stocks A and B had the following returns over the past three years.
Year
A
B
1995
9%
11%
1996
10%
12%
1997
14%
19%
Calculate the risk and return of the portfolio.
3. The returns of security SAIL and security TATA steel for the past 8 years are given below:
Year
Security of SAIL return (%)
Security of TATA steel return (%)
2000
8
9
2001
11
14
2002
13
10
2003
10
-4
2004
7
9
2005
6
7
2006
5
4
2007
9
11
Calculate the risk and return of portfolio consisting of SAIL and TATA steel.
4. Refer to the following observations of securities X and Y.
Time period
Observed Returns
X
Y
1
0.10
0.02
2
0.14
-0.02
3
0.12
0.08
4
0.08
0.17
a) Compute the sample mean returns for X and Y.
b) Compute sample standard deviations of X and Y.
c) Compute covariance between returns of X and Y.
d) Compute the correlation between the returns of X and Y.
5. Calculate the co-variance and coefficient of correlation from the following data. Stocks X and Y
and their returns and expected returns are given below.
Return
Expected Return
Stock X
14
18
Stock Y
26
18
Stock X
22
18
Stock Y
10
18
K. HARI KRISHNA


6. The expected rates of return and the possibility of their occurrence for Alpha and Beta Company
Scrips are given below.
Probability
Return on Alpha
Return on Beta
0.05
-2%
-3%
0.20
9%
6%
0.50
12%
11%
0.20
15%
14%
0.05
26%
19%
Find out the portfolio return if investor invests in equal proportions.
Find out portfolio risk.
If the portfolio is charged to 25% and 75% and then took 75% and 25% what would be
the portfolio returns.
7. The J and S Corporation have the following probability distribution of return for the next year.
State of economy
Probability
Rj
Rs
Boom
0.1
16%
22%
Recession
0.2
-7%
-4%
Normal
0.4
12%
11%
Recovery
0.1
11%
16%
Slow growth
0.2
14%
20%
Calculate the risk and return of the portfolio.
8. Stock A and B showed the following returns.
Stock A
Stock B
Return %
Probability
Return %
Probability
10
0.20
20
0.05
12
0.10
30
0.25
15
0.30
10
0.40
20
0.20
15
0.20
30
0.20
25
0.10
You are required to find out the following:
i)
What is the expected return on a portfolio made up of 50% A and 50% of B stock. And
what is the portfolio risk?
ii)
What is the standard deviation of each stock?
iii)
What is the co-variance of stock A and B?
iv)
Determine the coefficient of correlation of stocks A and B.
9. The following are the returns for shares of new bike ltd. and for the representative equity price
index (Market).
Year
New bike Ltd. return (Rs)
Index Return (Rm)
1
1%
-2%
2
14%
16%
3
19%
13%
4
-8%
-7%
5
-12%
-13%
6
3%
4%
7
8%
8%
8
17%
10%
K. HARI KRISHNA


9
14%
15%
10
14%
16%
Find out for the equity shares of New bike Ltd.
If the risk free rate is 6% and the market rate of return is 12%, what would be the
expected return of equity share New bike Ltd.
10. Find the correlation coefficient and beta of Security Zs return and return on the market index
from the following: (Figures are in percentages)
Return Z
:
10
12
8
13
10
9
12
14
Return on Market Index:
8
10
7
9
10
8
7
10
11. Following data give the market return and the Sun company scrips return for a particular period.
Index Return (Rm)
Scrip Return (Ri)
0.50
0.30
0.60
0.60
0.50
0.40
0.60
0.50
0.80
0.60
0.50
0.30
0.80
0.70
0.40
0.50
0.70
0.60
a) What is the Beta value of the sun company scrip?
b) If the market return is 2, what would be the scrip return?
Bond Valuation/Valuation of Bonds

1. A bond of Rs.1,000 bearing a coupon rate of 12% is redeemable at par in 10 years. Find
out the value of the bond if (i) required rate of return is 12%, 10% and 14% (ii) required
rate of return is 14% and the maturity period is 8 years or 12 years. (iii) Required rate of
return is 12% and redeemable at the 950 or 1050 after 10 years.
2. Company E is contemplating a debenture issue on the following terms. Face value
Rs.100 per debenture, term to maturity 7 years.
Coupon rate of interest:
Year 1 & 2 - 8% per annum
Year 3 & 4 12% per annum
Year 5 to 7 15% per annum
The current market rate of interest on similar debenture is 15% per annum. The
company proposes to price the issue so as to yield a return of 16% per annum.
Determine the issue price assuming the redemption of debenture at a premium of 5%.
3. ABC Ltd. issues 10% bonds with 3 years maturity. Interest is paid semi annually and the
bond is redeemable at Rs.1000. Find out the value of the bond if the required rate of
return of the investor is 14%.
K. HARI KRISHNA

4. A bond of Rs.1000 bearing a coupon rate of 12% payable half yearly is redeemable after
5 years. Find out the value of the bond and compare with the value of bond if interest is
paid annually. The required rate of return is 14%.
5. Find the present value of the following bonds.
Bond
A
B
C
Face value
Rs.100
Rs.100
Rs.100
Coupon rate
15%
13%
16%
Maturity
6 years
5 years
10 years
Redemption price
Rs.110
Rs.100
Rs.100
Current price
Rs.90
Rs.83
Rs.85
Coupon payment
Annual
Annual
Semi Annual
Required rate of return
17%
18%
8%
6. A bond of Rs.10000 bearing a coupon rate of 12% and redeemable in 8 years at par is
being traded at Rs.10600. find out the YTM of the bond.
7. Following information is available in respect of a bond.
Face value - Rs.10000
Market price Rs.8790
Coupon rate 8%
Investor yield (required rate of return) - 10%
Time to maturity 4 years
Find out the YTM and intrinsic value of the bond. Should an investor buy this bond
based on YTM and intrinsic value of the bond.
8. Calculate the approximate YTM on the bonds A,B and C.
Bond A
Bond B
Bond C
Face value
Rs.1000
Rs.1000
Rs.1000
Coupon rate
10%
12%
8%
Term to maturity
5 years
8 years
4 years
Coupon payment
Annual
Annual
Annual
Purchase price
Rs.950
Rs.980
Rs.960
9. A 8% of bond of Rs.1000 has a redemption period of 3 years. The bond is currently sell
at Rs. 950. The YTM of the bond comes to 10%. Calculate the duration of the bond.
10. A 5% bond with face value of Rs.1000 is being traded in the market at Rs.1000. it is
redeemable at par after 10 years. Find out the duration of the bond if the required rate
of return or YTM of the investor is 5%.
11. Following information is available in respect of a bond.
K. HARI KRISHNA

Face value Rs.100, Market value Rs.96.48, coupon rate 8%, YTM - 10%, Duration
1.92 years. Find out the duration if there is a decrease in YTM to 9%. Find out the new
expected market price.
12. We make you rich limited had issued bonds with a face value of Rs.200 each carrying a
coupon of 14% payable semi annually with 18 years for maturity. The market rate of
interest is 12%.
You are to find:
(i)
Macaulays duration when it was issued.
(ii)
Macaulays duration, 3 years after the issue
(iii)
Macaulays duration, 5 years after the issue.
13. A 8% bond face value of Rs.1000 has a maturity of 30 years with YTM of 9%. It is
currently traded at 897.6. The duration of bond is 11.37 years. Find out the modified
duration. What will be the change in price if yield is increased to 9.1%.
14. A bond of face value of Rs.100 has YTM of 7.5% and duration of 4.26 years. At present it
is traded at par. it will be re priced if there is an increase or decrease in market by 2.5%.
Find out modified duration and new price in both the cases.
Equity Valuation
1. ABC Ltd. is currently paying a dividend of Rs. 1 per share and it is expected to grow at
7% per annum infinitely. What is the value if
a) The equity capitalization rate is 15%
b) The equity capitalization rate is 10%
c) The growth rate is 8% instead of 7%
d) Equity capitalization rate is 16% and growth rate is 4%
2. A firm had paid dividend of Rs. 2 per share last year. The estimated growth of the
dividend from the company is estimated to be 5% per annum. Determine the estimated
market price of the equity share if the estimated growth rate of dividends
a) Raises to 8%
b) Falls to 3%
Also find out the present market price of the share given that the required rate of return
of the investor is 15.5%.
3. A firm is paying a dividend of Rs.1.5 per share. the rate of dividend is expected to grow
at 10% for next 3 years and 5% there after infinitely. Find out the value of share given
that the required rate of return of the investor is 15%.
4. Airmail Ltd. has just paid a dividend of Rs. 2 per share in view of the rapid growth of the
company. The dividend is expected to grow at 20% per annum for next 3 years. After
that the growth process will slow down and the earnings are expected to grow only at
7% per annum infinitely. In view of the risk involved in the investment a return of 22% is
considered appropriate. Find the price an investor is ready to pay for the shares.
K. HARI KRISHNA

5. An investor has invested his savings in a company from whom dividends are expected to
grow @ 20% for 15 years and there after @ 7% forever. Find out the value of the equity
share given that the current dividend per share is Rs. 1 and the required rate of return
of the investor is 9%.
6. Markwell Industries Ltd. (MIL) had been experiencing a healthy growth rate in its
dividend of 18% per year for the last four years and this is expected to continue for the
next four years. After this supernormal growth period the dividends are expected to
grow at 8% per year perpetually. Last year MIL paid a dividend of Rs. 1.34 per share. if
the required rate of return is 14% what would be the current market price per share of
MIL?
7. ABC Company Ltd. earnings and dividends have been growing at a rate of 18% per
annum. This growth rate is expected to continue for 4 years. After that the growth rate
will fall to 12% for the next 4 years, thereafter the growth rate is expected to be 6%
forever. If the last dividend per share was Rs.2 and the investor required rate of return
on ABC companys equity is 15%, what is the intrinsic value per share.
8. The current dividend on an equity share of Dixy Ltd. is Rs.3.00. Dixy is expected to enjoy
an above normal growth rate of 18% for 6 years. Thereafter the growth rate will fall and
stabilize at 12%. Equity investors require a return of 16% from Dixys stock. What price
would you like place on the stock of the Dixy.
9. The return of ABC company at present is 21%. This is assumed to continue for the next
five years and after that it is assumed to have a growth rate of 10% indefinitely. The
dividend paid for the year 2006-07 is Rs. 3.20 per share. the required rate of return is
20% and the present price is Rs.57. what is the estimated price according to two stage
model.
10. Fabric Starch India Ltd. paid a dividend of Rs.2.45 per share this year. The required rate
of return is 18%. Find the growth rate in dividends, if the current market price of the
company is i) Rs.36 and ii) Rs.63.
11. The risk free return is 10% and return on market portfolio is 15%. Stock As beta is 1.5,
its dividends and earnings are expected to grow at a constant rate of 8%. If the last
dividend per share of stock A was Rs.2.00 and has a dividend growth rate of 7.5%, what
should be the intrinsic value per share of stock A?
12. Van products currently pays a dividend of Rs.2.00 per share and this dividend is
expected to grow at 15% annual rate for 3 years, then at a rate of 12% for the next 3
years, afterwards it is expected to grow at a 5% rate forever. What value would you
place on the equity of 9% rate of return were required?
K. HARI KRISHNA

HARRY MARKOWITZ MODEL

1. An investor wants to build a portfolio with the following four stocks with the given
details. Find out his portfolio return and variance. The investment is spread equally
over the four stocks.
Company
Residual Variance (ei)

TCS
0.17
0.93
45.15
Infosys
2.48
1.37
132.25
Wipro
1.47
1.73
196.28
Satyam
2.52
1.17
51.98
Market return (Rm) 11%
Market return variance
26%
2. Mr.David is constructing an optimum portfolio. The market return forecast says that
it could be 13.5% for the next 2 years with the market variance of 10%. The
following securities are under review. Calculate the portfolio return and risk.
Company
Residual Variance (ei)

A
3.75
0.99
9.35
B
0.60
1.27
5.92
C
0.41
0.96
9.79
D
-0.22
1.21
5.39
E
0.45
0.75
4.52
CAPITAL ASSET PRICING MODEL (CAPM)

1. The following table gives an analysts expected return on 2 stocks for particular market
returns.
Market return
Aggressive stock
Defensive stock
6%
2%
8%
20%
30%
16%
What are the s of the two stocks
What is the expected return on each stock if the market return equally likely
to be 6% or 20%
If the risk free rate is 7% and the market return is equally likely to be 6% or
20%, what is the Security Market Line (SML)
K. HARI KRISHNA

2. The following table fives an analysts expected return on two stocks for particular market
returns.
Market return
Aggressive stocks
Defensive stock
5%
-5%
8%
25%
40%
18%
What is the expected return on each stock
If the risk free rate is 8% what is SML?
3. Following information is provided in respect to the security.
Irf
=
8%
Rm
=
16%
=
0.7
Find out the expected return of the security
If the other security has an expected of 24%, what must be its
4. Given Rf = 6%, Rm = 15% and expected return and expected betas are as follows,
Stock
expected returns
expected betas
A
14%
1.2
B
15
0.75
C
13
1.5
D
20
1.6
E
10
0.80
Which stock is overvalued and which is undervalued, relative to expected return?
5. XYZ Ltd. has investment in 3 companies A,B & C Ltd. following information is available in
respect of the investment.
Company
Investment
value
A
6,00,000
1.3
B
3,00,000
1.4
C
1,00,000
0.9
Expected return on the market portfolio is 15% and risk free rate of interest is 6%. Find
out the expected and return of the portfolio.
6. An investment company manages an equity fund consisting of five stocks, with the
following market values and betas.
Stock
expected return
expected betas
A
1,00,000
1.10
B
25,000
1.20
C
50,000
0.75
D
1,25,000
0.60
E
1,65,000
1.30
K. HARI KRISHNA

If rf = 7% and rm = 14%, what is the portfolios expected return?
7. Find the portfolio return from the information given below. Risk free rate is 3% and the
mean of the market index is 10%.
Security
beta
Investment
A
1.5
30,000
B
1.2
30,000
C
0.8
60,000
D
1.3
20,000
What would portfolio return be if equal amounts were invested in all 4 assets?
CAPITAL MARKET LINE
1. The following portfolios are available to an investor.
Portfolio
Expected return
Risk
X
14%
2%
Y
18%
5%
Z
30.5%
9%
Find out whether these portfolios are efficient or not? Given that the risk free interest
rate is 8%. Return of the market portfolio is 18% and the risk of the market portfolio is
4%.
2. The risk and return of the market portfolio means 12% and 19% respectively. The risk
free interest rate is 10% and unlimited lending and borrowing is possible at this rate.
Comment on the efficiency of the following portfolios.
Portfolio
expected return
Risk
A
24%
30%
B
22%
16%
C
17%
10%
3. ABC Ltd. and XYZ Ltd. have the following risk-return data.
Company
Return
Risk
ABC
16%
25%
XYZ
14%
22%
If the coefficient of correlation between the returns is 0.50, determine the minimum risk
portfolio.
K. HARI KRISHNA

Mutual Funds
1. The following three portfolio provides the particulars given below.
Portfolio
Average
Standard
Correlation
Annual return
deviation
coefficient
A
18
27
0.8
B
14
18
0.6
C
15
8
0.9
Risk free interest is 9.
(a) Rank these portfolios using Sharpes and Treynors method..
(b) Compare both the indices.
2. Portfolio X, Y and Z have the following statistics over the past several years.
Portfolio Mean return
Standard
Beta Alpha
X
.17
.24
.85
.012
Y
.21
.29
1.15 .008
Z
.12
.20
.75
.006
Over the time period, mean return of Treasury bill was 0.09. for each
portfolio computer Sharpe, Treynor and Jensen measure of investment
performance. Rank the portfolio using each measure.
3. An investor owns units in 4 different mutual funds (A,B,C and D). he wants to
dispose off the units in any one of these funds. Under Sharpes measure and
treynors measure, which mutual should he dispose off.
Mutual Standard
Beta
Risk free
Return on
Fund
deviation
rate
Fund
A
8
0.50
5%
15%
B
2
1.25
5%
12%
C
10
2.10
5%
8%
D
6
0.90
5%
10%
4. Consider the following information for three mutual funds and the market.
Fund
Mean Return
Standard Deviation Beta
SBI
15%
20%
0.9
BOI
17%
24%
1.10
TATA
19%
27%
1.20
Market Index
16%
20%
The mean risk free rate was 10%. Calculate the Jensen measure and Treynor
measure for the three mutual funds.
K. HARI KRISHNA

5. An investor holds units in three mutual funds X,Y and Z. The risk free rate of
return is 9%. Find the missing figures in the table.
Fund
Sharpess
Standard
Return on Fund
Measure
deviation
____________________
X
?
41.30
71
Y
0.43
?
17
Z
0.54
13
?
Arrange the funds in descending order of Sharpes measure.

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Facultu & Director - Black Swan 91 77 567 568

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

Problems on Calculation of Risk and Return

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

Facultu & Director - Black Swan 91 77 567 568

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

Facultu & Director - Black Swan 91 77 567 568

Bond Valuation/Valuation of Bonds

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

Facultu & Director - Black Swan 91 77 567 568

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

HARRY MARKOWITZ MODEL

Residual Variance (ei)

Residual Variance (ei)

CAPITAL ASSET PRICING MODEL (CAPM)

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

Facultu & Director - Black Swan 91 77 567 568

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

MBA TUITIONS, LIVE PROJECTS, NCFM AMFI CERTIFICATION

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