St. Joseph’s College of Commerce (Autonomous)
End Semester Examination- MARCH / April 2014
MIB – IV Semester
SECURITIES ANALYSIS AND PORTFOLIO MANAGEMENT
Duration: 3 Hours Max. Marks: 100
Section – A
- Answer any SEVEN questions out of TEN. Each carries 5 marks. (7 x 5 = 35)
- Many people advocate mutual funds for small investors. They suggest that the best strategy for small investors is to buy shares in a good mutual fund and put them away. What do you think of this advice.
- Assume that a group of securities has the following characteristics : a) the standard deviation of each security is equal to σA and b) covariance of returns σAB is equal for each pair of securities in the group. What is the portfolio variance for a portfolio containing four securities which are equally weighted?
- “Investing in levered companies is profitable during the boom period and voiding it during recession is more wise”- Elucidate.
- What is listing? Why do companies get their shares listed on the stock exchange?
- Explain the assumptions of CAPM.
- Pearl and Diamond are the two mutual funds. Pearl has a mean success of 0.15 and Diamond has 0.22. The Diamond has double the beta of pearl fund’s 1.5. the Standard deviations of Pearl and Diamond funds are 15% and 21.43%. The mean return of market index is 12% and its standard deviation is 7. The risk rate is 8%.
- Compute the Jensen Index for each fund.
- Compute the Treynor and Sharpe indices for the funds. Interpret the results.
- The market price of a Rs. 1,000 par value bond carrying a coupon rate of 14 percent and maturing after five years is Rs 1050. What is the yield to maturity (YTM) on this bond? What is the approximate YTM? What will be the realized yield to maturity if the reinvestment rate is 12 percent?
- Discuss the forces that drive competition and influence profit potential for industries according to Michael porter.
- Explain the nature of a risk-return indifference curve.
- Briefly explain the risks involved in construction of portfolio as per Sharpe’s Single Index model.
Section – B
- Answer any THREE out of FIVE Each carries 15 marks. (3x 15 = 45)
(7+8)
- (a) What is the significance of Economic Analysis in making Investment decision.
(b) An investor has a choice of four stocks for investment. Their rates of return and probabilities are given below:
| A | B | C | D | ||||
| r | P% | r | P% | r | P% | r | P% |
| -30 | 20 | -20 | 15 | -20 | 20 | -10 | 10 |
| 0 | 40 | 0 | 35 | 10 | 40 | 0 | 25 |
| 30 | 30 | 20 | 45 | 40 | 30 | 10 | 40 |
| 70 | 10 | 40 | 5 | 80 | 10 | 20 | 25 |
- Are all these stocks attractive investments? Give reasons.
- Of those that are attractive, how should the investor choose one to buy?
(8+7) (8+7)
- (a) The following details are given for X and Y companies stocks and the Bombay Sensex for a period of one year. Calculate the systematic and unsystematic risk for the companies stocks. If equal amount of money is allocated for the stocks what would be the portfolio risk?
| X stock | Y stock | Sensex | |
| Average return | 0.15 | 0.25 | 0.06 |
| Variance of return | 6.30 | 5.86 | 2.25 |
| β | 0.71 | 0.27 | |
| Correlation co-efficient | 0.424 | ||
| Co-efficient of determination (r2) | 0.18 |
(b) The returns of two assets under four possible states of nature are given below:
| State of nature | Probability | Return on asset 1 | Return on asset 2 |
| 1 | 0.10 | 5% | 0% |
| 2 | 0.30 | 10% | 8% |
| 3 | 0.50 | 15% | 18% |
| 4 | 0.10 | 20% | 26% |
- What is the standard deviation of the return on Asset 1 & Asset 2?
- What is the covariance between the returns on assets 1 and 2?
- What is the coefficient of correlation between the returns on assets 1 and 2?
(8+7)
13 (a) The following information is available on a bond:
Face value: Rs.100
Coupon rate: 12 percent payable annually
Years to maturity:6
Current market price: Rs 110
What is the duration of the bond? Use the approximate formula for calculating the yield to maturity.
(b) Discuss the arbitrage pricing theory.
- Explain the Black and Scholes model and its underlying assumptions. (15 marks)
(7+8)
- (a) What do SML and CML represent?
(b) Estimate the stock return by using the CAPM model and arbitrage model. The particulars are given below:
- The expected return of the market is 15% and the equity’s beta is 1.2. The risk free rate of interest is 8 percent.
- Factor Market price of Risk Sensitivity Index
Inflation 6% 1.1
Industrial Production 2% 0.8
Risk premium 3% 1.0
Interest rate 4% -0.9
What explanations can you offer to explain the difference in two estimates?
(7+8)
- (a) “The technical analysts studies the behavior of the price of the stock to determine the future price of the stock”. Discuss.
(b) Anand is considering the purchase of three securities A, B and C for the next year. The returns of the securities depend on next year’s state of the stock market. The estimated rates of return are shown in the table.
| State of market | Probability of Occurrence | Rates of return of securities | ||
| A | B | c | ||
| Recession | 0.25 | 10% | 9% | 14% |
| Average | 0.50 | 14% | 13% | 12% |
| Boom | 0.25 | 16% | 18% | 10% |
- Find each stock’s expected rate of return standard deviation and co-efficient of variation.
- Apply mean, variance criterion to the alternative investments.
- If Anand invest one third on each security what would be his portfolio return?
- What are the covariances between security A and B, B and C and A and C?
Section – C
- Compulsory Question (1 x 20 = 20)
(15+5)
- a)The rates of return on Stock A and market portfolio for 15 periods are given below:
|
Period |
Return on stock A (%) | Return of market portfolio (%) |
Period |
Return on stock A (%) | Return of market portfolio (%) |
| 1 | 24 | 7 | 9 | -8 | 1 |
| 2 | 13 | 14 | 10 | 13 | 12 |
| 3 | 17 | 13 | 11 | 14 | -11 |
| 4 | 15 | 9 | 12 | -15 | 16 |
| 5 | 14 | 10 | 13 | 25 | 8 |
| 6 | 18 | 13 | 14 | 9 | 7 |
| 7 | 16 | 14 | 15 | -9 | 10 |
| 8 | 6 | 7 |
- What is the beta for stock A?
- What is the characteristic line for stock A?
(b) Write a note on Portfolio Revision strategies.
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