CA FINAL

STRATEGIC FINANCIAL MANAGEMENT

PORTFOLIO MANAGEMENT
QUESTIONS

Question 1
Following are risk and return estimates for two stocks
Stock Expected returns Beta Specific SD of expected return
(%) (%)
A 14 0.8 35
B 18 1.2 45
The market index has a Standard Deviation (SD) of 25% and risk free rate on
Treasury Bills is 6%.
You are required to calculate:
i. The standard deviation of expected returns on A and B.
ii. Suppose a portfolio is to be constructed with the proportions of 25%, 40%
and 35% in stock A, B and Treasury Bills respectively, what would be the
expected return, standard deviation of expected return of the portfolio?
Question 2

Mr. X holds the following portfolio:

Cost Dividends Market Price
Securities Beta
(`) (`) (`)
Equity shares:
A Ltd. 16,000 1,600 16,400 0.9
B Ltd. 20,000 1,600 21,000 0.8
C Ltd. 32,000 1,600 44,000 0.6
PSU Bonds 68,000 6,800 64,600 0.4
The risk-free rate of return is 12%.
Calculate the following:
i. The expected rate of return on his portfolio using Capital Asset Pricing
Model (CAPM).
ii. The average return on his portfolio. (Calculate up to two decimal points)

SANJAY SARAF SIR 1

Question 3
Following are the details of a portfolio consisting of 3 shares:
Portfolio Expected Total
Shares Beta
Weight Return (%) Variance
X Ltd. 0.3 0.50 15 0.020
Y Ltd. 0.5 0.60 16 0.010
Z Ltd. 0.2 1.20 20 0.120
Standard Deviation of Market Portfolio Return = 12%
You are required to calculate the following:
i. The Portfolio Beta.
ii. Residual Variance of each of the three shares.
iii. Portfolio Variance using Sharpe Index Model.

Question 4
Expected returns on two stocks for particular market returns are given in
the following table:

Market Return Aggressive Defensive

7% 4% 9%
25% 40% 18%
You are required to calculate:
i. The Betas of the two stocks.
ii. Expected return of each stock, if the market return is equally likely to be
7% or 25%.
iii. The Security Market Line (SML), if the risk free rate is 7.5% and
market return is equally likely to be 7% or 25%.
iv. The Alphas of the two stocks.

SANJAY SARAF SIR 2

Question 5
Details about portfolio of shares of an investor is as below:
Shares No. of shares (Lakh) Price per share Beta
A Ltd. 3.00 Rs. 500 1.40
B Ltd. 4.00 Rs. 750 1.20
C Ltd. 2.00 Rs. 250 1.60
The investor thinks that the risk of portfolio is very high and wants to
reduce the portfolio beta to 0.91. He is considering two below mentioned
alternative strategies:
i. Dispose off a part of his existing portfolio to acquire risk free securities,
or
ii. Take appropriate position on Nifty Futures which are currently
traded at Rs. 8125 and each Nifty points is worth Rs.200.
You are required to determine:
1. portfolio beta,
2. the value of risk free securities to be acquired,
3. the number of shares of each company to be disposed off,
4. the number of Nifty contracts to be bought/sold; and
5. the value of portfolio beta for 2% rise in Nifty.
Question 6
An investor has decided to invest to invest ` 1,00,000 in the shares of
two companies, namely, ABC and XYZ. The projections of returns from the
shares of the two companies along with their probabilities are as follows:

Probability ABC(%) XYZ(%)

20 12 16
25 14 10
25 -7 28
30 28 -2
You are required to
i. Comment on return and risk of investment in individual shares.
ii. Compare the risk and return of these two shares with a Portfolio of these
shares in equal proportions.
iii. Find out the proportion of each of the above shares to formulate a
minimum risk portfolio.

SANJAY SARAF SIR 3

Question 7
X Co., Ltd., invested on 1.4.2009 in certain equity shares as below:

Name of Co. No. of shares Cost (`)

M Ltd. 1,000 (` 100 each) 2,00,000
N Ltd. 500 (` 10 each) 1,50,000
In September, 2009, 10% dividend was paid out by M Ltd. and in
October, 2009, 30% dividend paid out by N Ltd. On 31.3.2010 market
quotations showed a value of ` 220 and ` 290 per share for M Ltd. and N Ltd.
respectively.
On 1.4.2010, investment advisors indicate (a) that the dividends from M Ltd.
and N Ltd. for the year ending 31.3.2011 are likely to be 20% and 35%,
respectively and (b) that the probabilities of market quotations on 31.3.2011
are as below:
Probability factor Price/share of M Ltd. Price/share of N Ltd.
0.2 220 290
0.5 250 310
0.3 280 330
You are required to:
i. Calculate the average return from the portfolio for the year ended
31.3.2010;
ii. Calculate the expected average return from the portfolio for the year 2010
-11; and
iii. Advise X Co. Ltd., of the comparative risk in the two investments by
calculating the standard deviation in each case.

SANJAY SARAF SIR 4

Question 8
Consider the following information on two stocks, A and B:

Year Return on A (%) Return on B (%)

2016 10 12
2017 16 18
You are required to determine:
i. The expected return on a portfolio containing A and B in the
proportion of 40% and 60% respectively.
ii. The Standard Deviation of return from each of the two stocks.
iii. The covariance of returns from the two stocks.
iv. Correlation coefficient between the returns of the two stocks.
v. The risk of a portfolio containing A and B in the proportion of 40% and
60%.
Question 9

A company has a choice of investments between several different equity

oriented mutual funds. The company has an amount of `1 crore to invest.
The details of the mutual funds are as follows:

Mutual Fund Beta

A 1.6
B 1.0
C 0.9
D 2.0
E 0.6
Required:
i. If the company invests 20% of its investment in each of the first two
mutual funds and an equal amount in the mutual funds C, D and E, what
is the beta of the portfolio?
ii. If the company invests 15% of its investment in C, 15% in A, 10% in E
and the balance in equal amount in the other two mutual funds, what is
the beta of the portfolio?
iii. If the expected return of market portfolio is 12% at a beta factor of 1.0,
what will be the portfolios expected return in both the situations given
above?

SANJAY SARAF SIR 5

Question 10
The distribution of return of security ‘F’ and the market portfolio ‘P’ is given
below:
Probability Return %
F P
0.30 30 -10
0.40 20 20
0.30 0 30
You are required to calculate the expected return of security ‘F’ and the
market portfolio ‘P’, the covariance between the market portfolio and security
and beta for the security.
Question 11
A Portfolio Manager (PM) has the following four stocks in his portfolio:

Security No. of Shares Market Price per share (`) β

VSL 10,000 50 0.9
CSL 5,000 20 1.0
SML 8,000 25 1.5
APL 2,000 200 1.2
Compute the following:
i. Portfolio beta.
ii. If the PM seeks to reduce the beta to 0.8, how much risk free investment
should he bring in?
iii. If the PM seeks to increase the beta to 1.2, how much risk free investment
should he bring in?

SANJAY SARAF SIR 6