LOYOLA COLLEGE (AUTONOMOUS), CHENNAI – 600 034 B.A. DEGREE EXAMINATION – ECONOMICS
SIXTH SEMESTER – APRIL 2007
EC 6600 – PORTFOLIO MANAGEMENT
Date & Time : 16.04.2007/9.00-12.00 Dept. No. Max. : 100 Marks
PART A (5 X 4 = 20 marks)
Answer any FIVE questions in 75 words each. Each question carries FOUR marks.
- Explain the concepts of risk and return employed in portfolio management.
- What is a mutual fund? Give suitable examples.
- The current annual interest rate in India is 6% while its UK counterpart is 4%. The price of £1 in the spot market is Rs.85. Price a one-year forward contract for the Rupee-Pound exchange rate.
- Define the concept of excess return used in efficient market hypothesis.
- What are the three forms of market efficiency identified by Fama?
- State Paul Cootner’s price-value interaction model.
- Calculate expected return and the standard deviation of returns for a stock with the following probability distribution:
|Condition returns (%)
PART B (4 X 10 = 40 marks)
Answer any FOUR questions in 250 words each. Each question carries TEN marks.
- Differentiate between forward/future contracts and options.
- What are factor models? How are they relevant for Arbitrage Pricing Theory?
- Present the various empirical evidences supporting market efficiency.
- Stocks A and B have yielded the following returns for the past three years:
- a) What is the expected return on a portfolio made up of 60% of A and 40% of B?
- b) Find out the standard deviation of each stock.
- c) What is the covariance and coefficient of correlation between A and B?
- d) What is the portfolio risk of the portfolio made up of A and B?
- Using a numerical example show how an interest rate swap can result in a win-win solution for the two parties to the swap contract.
- Consider the following single period binomial process for a given stock price.
The current stock price is $18 and with probability 0.5 this price will rise to $23.
With the complementary probability, the price will fall to $11. Assuming that the
risk-free rate is 9% and the exercise price is $15 determine the price of a one-
period European call option and a one-period European put option.
- In the absence of arbitrage, derive the formula employed in the pricing of forward contracts.
PART C (2 X 20 = 40 marks)
Answer any TWO questions in 900 words each. Each question carries TWENTY marks.
- Explain the importance of Arrow-Debreu securities, replicating portfolios and
arbitrage opportunities within the state preference model of asset pricing.
- What is portfolio management? Discuss the various functions of portfolio
- a) Within the context of mean-variance analysis, explain the importance of
correlation, the efficient set, the risk-free asset and the tangency portfolio.
- b) The following table presents the expected returns and standard deviations for
three stocks and the market index. The risk-free interest rate is 5% and the stock market is in CAPM equilibrium. (10 marks)
- i) What are the ‘beta’ values for each of the three stocks? Explain which
stock would be the best investment if the market was expected to rise?
- ii) What are the covariances of the returns of each of these stocks with the
returns on the market?
iii) What is the numerical equation of the capital market line (CML) for this
market? Identify whether the stocks plot on the CML and explain what
you conclude from this.
- a) The Black-Scholes formula for the price of a European call option is derived
in a continuous-time framework. How do Black-Scholes call option prices
depend on i) the exercise price, ii) the risk-free interest rate and iii) the
volatility of the underlying asset price? (10 marks)
- The current stock price of IOB is Rs.72. Both a call and a put option are
to be written on IOB’s equity with an expiry of 6 months and an exercise
price of Rs.70. Assume that volatility is 20% per annum and risk-free interest
rate is 10% per annum. Determine the price of the call and put options using
the Black-Scholes model. (10 marks)
Go To Main Page