1

Probability A A_Avg(A) A_Avg(A)^2*Prob B B - Avg(B)

0.3 10 1.4 0.59 18 9.6
0.4 5 -3.6 5.18 3 3
0.3 12 3.4 3.47 6 6
Avg return 8.6 8.4
Standard deviation 3.04

2
Probability A B
10 18
5 3
12 6
Avg return 9 9
Standard deviation 2.94 6.48

3
Index return Scrip return
(X) (Y) X^2 Y^2 XY
5 9 25 81 45
8 3 64 9 24
12 6 144 36 72
14 10 196 100 140
16 2 256 4 32
10 4 100 16 40
-5 7 25 49 -35
-7 8 49 64 -56
22 9 484 81 198
-3 12 9 144 -36
Total 72 70 1352 584 424
N 10
Beta
n*Sum(XY) 4240
Sum (X) * Sum (Y) 5040
Difference - A -800

n*Sum(X^2) 13520
Sum(X)^2 5184
Difference - B 8336
Square root 91.3

n*Sum(Y^2) 5840
Sum(Y)^2 4900
Difference - C 940
Square root 30.66

Beta = A / B -0.096 -0.096

R Squared 0.08
Co-eff of correlation -0.29
 -0.29

Alpha 7.69

Punithavathy Pandian
8
Probability Price Price - Avg PricePrice - Avg price ^2 * Prob
0.1 60 -10 10
0.2 65 -5 5
0.4 70 0 0
0.2 75 5 5
0.1 80 10 10
Expected return 70
Standard deviation 5.48

9
A B C
Beta 0.8 -0.21 1.2
Standard deviation 4.39 1.93 5.39
Correlation 0.54 -0.33 0.8
R squared 0.29 0.11 0.63

Given low R squared for A and B, Beta is not reliable; even for C, it is not very healthy
Going by SD, one would choose B assuming returns are the same

Returns
10 NSE (X) A B NSE (X) A
857.07 24 50.28 - -
862.46 25 48.88 0.01 0.04
858.89 23.63 47.75 0.00 -0.05
861.33 23.63 48.88 0.00 0.00
853.78 25 51.38 -0.01 0.06
872.02 26.75 48.5 0.02 0.07
859.68 27.25 55.38 -0.01 0.02
871.91 26 54.38 0.01 -0.05
878.53 26.7 55.28 0.01 0.03
807.23 27.7 41.38 -0.08 0.04
877.72 25.6 48.3 0.09 -0.08
893.82 24.5 49.5 0.02 -0.04
Total 0.0498 0.0333
N 11

Beta A B
n*Sum(XY) -0.11 0.35
Sum (X) * Sum (Y) 0 0
Difference - A -0.11 0.35

n*Sum(X^2) 0.17 0.17

Sum(X)^2 0 0
Difference - B 0.17 0.17
Beta = A / B -0.64 2.04
Higher returns B

12 A B C D Market
Alpha 0.1 0.07 0.08 0.05
Beta 1.19 -0.8 0.9 -0.88 1
Correlation 1 -0.7 1 -0.72 1
Standard deviation 0.43 0.43 0.19 0.36
Average return 0.27 -0.05 0.21 -0.08 0.15
R squared 1 0.49 1 0.52

Average returns are high

Beta is reliable given R squared

16 Absolute #s %
1500 0.1
6000 0.4
Average return 3750 0.25
SD 2250 0.15

17 X Y
0.42 0.27
0.34 0.23
Average return 0.38 0.25
SD 0.04 0.02
B_Avg(B)^2*Prob
27.65
3.6
10.8

6.48
Returns
B X^2 A^2 B^2 X*A X*B
-
-0.03 0.000 0.002 0.001 0.000 0.000
-0.02 0.000 0.003 0.001 0.000 0.000
0.02 0.000 0.000 0.001 0.000 0.000
0.05 0.000 0.003 0.003 -0.001 0.000
-0.06 0.000 0.005 0.003 0.001 -0.001
0.14 0.000 0.000 0.020 0.000 -0.002
-0.02 0.000 0.002 0.000 -0.001 0.000
0.02 0.000 0.001 0.000 0.000 0.000
-0.25 0.007 0.001 0.063 -0.003 0.020
0.17 0.008 0.006 0.028 -0.007 0.015
0.02 0.000 0.002 0.001 -0.001 0.000
0.0488 0.016 0.025 0.120 -0.010 0.032
 8
X Y
1994 14 12
1995 16 18
1996 20 15
Average ret 16.67 15
SD 2.49 2.45
Variance 6.22 6
Correl 0.33
Covar 2

Portfolio share 0.4 0.6

Portfolio ret 15.67
Portfolio Var 4.12
Portfolio SD 2.03

9
a b c
Ret 15 20 25
Exp variance 9 16 4
Exp SD 3

10 R S R^2 S^2 R*S R-Mean(R)S-Mean(S)

0.2 -8 -9 64 81 72 -10.3 -7.5
0.4 12 -4 144 16 -48 9.7 -2.5
0.3 -6 10 36 100 -60 -8.3 11.5
0.1 9 -11 81 121 -99 6.7 -9.5
Mean 2.3 -1.5
Variance
SD
Covariance
Correlation -0.4
a b
11 J S J-Mean(J) S-Mean(S) a*b*prob a^2*prob b^2*prob
0.1 16 22 7.1 10.6 7.53 5.04 11.24
0.2 -7 -4 -15.9 -15.4 48.97 50.56 47.43
0.4 12 11 3.1 -0.4 -0.5 3.84 0.06
0.1 11 16 2.1 4.6 0.97 0.44 2.12
0.2 14 20 5.1 8.6 8.77 5.2 14.79
Mean 8.9 11.4
Variance 65.09 75.64
Covariance 65.74

12 23800

13
9 11
-10 -13
15 19
17 21
 21 15
Correl 0.95
SD 10.91 12.29
Ratio of smaller SD to larger SD 0.89
Since correl > ratio of smaller SD to larger SD, combination of securities will not produce a lower SD than when either of them a

15 Roe Boa
R 20 23
SD 21 25
r 0.4
Share 0.5 0.5

Portfolio var 371.5

Portfolio risk 19.27 14.46

14
S T
Ret 20 15
SD 25 20
Correl -0.3
Weights
A 0.9 0.1
B 0.1 0.9
C 0.5 0.5

Portfolio variance SD
A 483.25 21.98
B 330.25 18.17
C 481.25 21.94

16 Dew Raindrop
Ret 25 35
SD 20 30
r ?

17
Rock Reed
Ret 14 16
SD 22 25
r 0.5

Prop in Rock 62.61%

a b c
18 X Y Z X-MeanX Y-MeanY z-Meanz
0.25 22 25 10 4.5 6.25 -5
0.5 18 20 15 0.5 1.25 0
0.25 12 10 20 -5.5 -8.75 5
Exp Return 17.5 18.75 15
Variance
Covariance
SD 3.57 5.45 3.54
 Correl
AB 1
AC -0.99
BC -0.97

Min risk portfolio

A B C
AB NA Since correl ~ 1
AC 0.5 0 0.5
BC 0 0.61 0.39

Returns on the above portfolio

AC 16.26
BC 17.28

Portfolio risk
AC 0.06
BC 3.95

Optimal portfolio AC
Product of deviations
R-Mean(R)^2*Prob
and
S-Mean(S)^2*Prob
prob
15.45 21.22 11.25
-9.7 37.64 2.5
-28.64 20.67 39.68
-6.37 4.49 9.03

84.01 62.45
9.17 7.9
-29.25
lower SD than when either of them are taken alone

a^2*prob b^2*prob c^2*prob a*b*prob a*c*prob b*c*prob

5.06 9.77 6.25 7.03 -5.63 -7.81
0.13 0.78 0 0.31 0 0
7.56 19.14 6.25 12.03 -6.88 -10.94

12.75 29.69 12.5

19.38 -12.5 -18.75
Questions 1 through 4
Rf 0.08
Rm 0.16
Beta A 0.7
Beta B 1.4

1 0.14 CAPM: Rp = Rf + Beta * (Rm - Rf)

2 0.19 CAPM: Rp = Rf + Beta * (Rm - Rf)
3 1.5 CAPM: (Rp - Rf) / (Rm - Rf)
4 1.4 CAPM: (Rp - Rf) / (Rm - Rf)

Market Risk free Security

Return 0.1 0.03
SD 0.04 0.07
Correl 0.75

Questions 5 through 8
# of sharesCost Mkt val Total Cost Mkt value Returns
A 100 50 65 5000 6500 30.0%
B 150 30 40 4500 6000 33.3%
C 75 20 25 1500 1875 25.0%
D 100 35 32 3500 3200 -8.6%
E 125 40 47 5000 5875 17.5%
19500 23450 20.3%

Weight of D in the portfolo 0.18

Questions 9 and 10
Equity Bond Real estate
SD 0.17 0.07 0.03
Corr
Eq-Bond 0.45
Bond - RE 0.2
Eq - RE 0.35
Share - Option I 0.25 0.5 0.25
Share - Option II 0.2 0.4 0.4
Covar
Eq-Bond 0.01
Bond - RE 0
Eq - RE 0

Portfolio risk 7.0%

Port risk - Option II 5.9%

Questions 11 through 15
Shares Ret - Avg ret
Ret - Avg ret
Ret
^2- Avg ret
Bonds
^2*Prob Ret - Avg ret
Ret - Avg ret ^2
0.05 74 60.8 3696.64 184.83 4 -5.7 32.49
0.2 20 6.8 46.24 9.25 -10 -19.7 388.09
0.5 14 0.8 0.64 0.32 9 -0.7 0.49
0.2 0 -13.2 174.24 34.85 35 25.3 640.09
0.05 -30 -43.2 1866.24 93.31 0 -9.7 94.09
 Exp Ret 13.2 9.7
Variance 322.56
Std. Dev 17.96
Covariance
Correlation between stocks and bonds

Questions 18 through 20
A B Risk free Market return
Ret 18 16 8 12
SD 20 15
Beta 0.8 0.5
Sharpe 0.5 0.53
Treynor 12.5 16
Jensen's measure 6.8 6
Ret - Avg ret
Cash
^2*Prob Share ret - Share
Avg Ret
ret* -Bond
Avg Ret
Ret *- Bond
Avg ret
Ret - Avg ret * Prob
1.62 6 -346.56 -17.33
77.62 6 -133.96 -26.79
0.25 6 -0.56 -0.28
128.02 6 -333.96 -66.79
4.7 6 419.04 20.95
212.21
14.57
-90.24
-0.34
YTM
4 FV 1000
pmt 100
nper 7
PV -750
YTM 16.2328% Rate Formula in excel

OR
FV 1000
pmt 100
nper 7
PV 750
settlement date 1/1/2005
maturity date 12/31/2011
YTM 16.2339% Yield Formula in excel

OR Year Cash flows

0 -750
1 100
2 100
3 100
4 100
5 100
6 100
7 1100
YTM 16.2328% IRR formula in excel

5 FV 1000
PMT 50
NPER 14
PV -750
YTM 8.0394% For 6 months
Annual YTM 16.0787%
OR
FV 1000
pmt 50
nper 14
PV 750
settlement date 1/1/2005
maturity date 12/31/2011
YTM 16.0800% Yield Formula in excel
OR
-750
50
50
50
50
50
50
50
50
 50
50
50
50
50
1050
YTM 8.04% For 6 months
Annual YTM 16% IRR formula in excel

6 PV -82
PMT 11
NPER 5
FV 100
YTM 0.15
True PV ($86.59)

Since actual PV < true PV, bond is undervalued and must be purchased

7 PV 85
PMT 8
NPER 6
FV 100
Settlement date 1/1/2005
Maturity Date 12/31/2010
YTM 11.61%
True PV ($85.00)

Bond golden rules

A FV 100 100 100

NPER 3 3 3
PMT 10 10 10
YTM 0.12 0.06 0.15
PV ($95.20) ($110.69) ($88.58)

B FV 100 100 100 100

NPER 2 3 4 5
PMT 10 10 10 10
YTM 0.12 0.12 0.12 0.12
PV ($96.62) ($95.20) ($93.93) ($92.79)
Discount $3.38 $4.80 $6.07 $7.21

C FV 100 100 100 100

NPER 2 3 4 5
PMT 10 10 10 10
YTM 0.12 0.12 0.12 0.12
PV ($96.62) ($95.20) ($93.93) ($92.79)
Discount $3.38 $4.80 $6.07 $7.21
30% 21% 16%
D FV 100 100 100
NPER 3 3 3
PMT 10 10 10
YTM 0.12 0.06 0.18
PV ($95.20) ($110.69) ($82.61)
Increase in bond price due to fall in yield 16%
Decrease in bond price due to rise in yield 13%

E FV 100 100 100

NPER 2 2 2
PMT 8 16 24
YTM 0.12 0.12 0.12
PV ($93.24) ($106.76) ($120.28)
Revised YTM $0.15 $0.15 $0.15
Revised PV ($88.62) ($101.63) ($114.63)
Difference in PV (%) 4.95% 4.81% 4.70%

8 A B
Int 0.07 0.08
Nper 4 4
FV 1000 1000
YTM 0.06 0.06
Settlement date 1/1/2005 1/1/2005
Maturity date 12/31/2008 12/31/2008
Duration 3.63 3.59
Modified duration 3.43 3.39
Price ($1,034.65)

9 Year A B
PV / Po *
Cash flow PV of CF PV / Po Cash flow
Time
1 70.00 66.04 0.06 0.06 80.00
2 70.00 62.30 0.06 0.12 80.00
3 70.00 58.77 0.06 0.17 80.00
4 1070.00 847.54 0.82 3.28 1080.00
1034.65 3.63

Modified duration 3.43

10 A B
PV / Po *
Cash flow PV of CF PV / Po Cash flow
Time
1 70.00 63.64 0.07 0.07 1060.00
2 70.00 57.85 0.06 0.13 0.00
3 70.00 52.59 0.06 0.17 0.00
4 1070.00 730.82 0.81 3.23 0.00
904.90 3.60

% of inv Quantum of inv

Number of bonds
Rounded off
Investment in A 38.42% 15875 17.54 18
Investment in B 61.58% 25447 26.41 26

Amount of investment needed 41322.31

 B
PV / Po *
PV of CF PV / Po
Time
79.70 0.07 0.07
79.44 0.07 0.14
79.21 0.07 0.21
892.29 0.79 3.16
1130.64 3.58

3.38

B
PV / Po *
PV of CF PV / Po
Time
963.64 1.00 1.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
963.64 1.00
 1 Year Cash flow Present value
0 17.86
1 20

2 Current dividend 2 Do
Next year's dividend 2.1 D1
Growth rate 0.05 g
Exp rate of return 0.12 r
Present value 30 Po = D1 / (r-g)

3 Po 50
g 6%
Do 5
r = Do/P + g 16.00%

4 Do 2
r 0.12
P 16.67

5
Scene I - First 6 years
Do 2
Growth rate 20%
Disc rate 15%

Year PV
0 2
1 2.4 2.09
2 2.88 2.18
3 3.46 2.27
4 4.15 2.37
5 4.98 2.47
6 5.97 2.58
PV at t = 0 13.96 --> A

Scene II - 7th year onwards

Do 5.97
Growth rate 10%
Disc rate 15%

7 6.57
PV at end of year 6 131.38
PV at t = 0 56.8 --> B

Intrinsic value 70.76

6
Scene I - First 5 years
Do 5
Growth rate 18%
Disc rate 22%
 Year PV
0 5
1 5.9 4.84
2 6.96 4.68
3 8.22 4.52
4 9.69 4.38
5 11.44 4.23

PV at t = 0 22.65 --> A

Scene II - 6th year onwards

Do 11.44
Growth rate 12%
Disc rate 22%

6 12.81
PV at end of year 5 128.11
PV at t = 0 47.4 --> B

Intrinsic value 70.05

7 D1 1.44
Po 8
D1 / Po 0.18
g -0.04
r 0.22

8r 18%

Year Growth rate

Div PV
0 4.00
1 18.75% 4.75 4.03
2 17.50% 5.58 4.01
3 16.25% 6.49 3.95
4 15.00% 7.46 3.85
5 13.75% 8.49 3.71
6 12.50% 9.55 3.54
7 11.25% 10.62 3.33
8 10.00% 11.68 3.11
29.52 --> A
9 10.00% 12.85

P8 160.67 --> B
Po 42.74

Price of the share 72.26

9 RoE 0.25
Div 0.4
r 0.2
 Eo 100

Plough back ratio 0.6 1 - Dividend ratio

Growth rate 0.15 RoE * Ploughback ratio
D1 46
Po 920

10
r 0.2
g1 0.16
P
0 4
1 4.65 3.88
2 5.41 3.76
3 6.29 3.64
4 7.31 3.53
14.79 --> A

Price
t=0 168 P/E * EPS
t=4 307.03 Price * (1 + growth rate)^4
t=5 356.98

Present value at t = 0 172.16 --> B

Present value of share 186.95

11
Po 30
E1 2.5
r 0.16

Po = E1/r + PVGO
PVGO = Po - E1/r
PVGO 14.38
 6
S 200
u 1.4
d 0.9
E 220
r 0.1

Cu 60
Cd 0
R 1.1

Cu - Cd / S*(u-d) 0.6
B d*Cu - u*Cd / (R*(u-d) 54
54 0.55
0 98.18
54
S-B 21.82

5
a
Cost of call premium 3
Cost of share @ exercise price 50
Market value 57
Profit /(Loss) per share 4
Profit /(Loss) for the contract 400

b Market price on maturity 35

Strike price 45
Put option status In the money
Put option premium 6
Value (net of premium) 4
Option value for 6 contracts 2400

c Cost of call premium 6

Cost of share @ exercise price 30
Market value 32
Profit /(Loss) per share -4
Profit /(Loss) for the contract -2000

d Cost of put premium 0.45

Exercise price 30
Market value 32
Profit /(Loss) per share -0.45
Profit /(Loss) for the contract -225

e Call premium received 6.3

Exercise price 45
Market price 43
Profit /(Loss) per share 6.3
Profit /(Loss) for the contract 3150
f Put premium received 6
Exercise price 45
Market price 43
Profit /(Loss) per share 4
Profit /(Loss) for the contract 2000