Investment Planning - Khemkaz

Q1). Calculate for securities A and B based on the data given below : Probability 0.1 0.2 0.4 0.2 0.1

Security A - % 40 20 0 -5 -10

Security B - % 40 30 15 0 -20

A) what is the rate of return and Std. dev on portfolio A and B B) Calculate the Co Variance ? C) SD of the portfolio for equal investments Q2) With the following data shown in the table below , compute the risk on the portfolio. Security A B Corr. Coeff

STD Deviation 14.5% 18.5%

Proportion 60% 40% 0.91

( Negative Correalted Problem) 2 marks and 3 question like this ( easy Scoring ) Q3. Consider two stock P and Q Stock Expected return P 16% Q 18%

Standard deviation 25% 30%

The return on the two stocks are perfectly negatively correlated. What is the expected return of a portfolio constructed to derive the standard of portfolio return to zero? Q4) Consider two stock A and B Stock Expected return A 12% B 20%

Standard deviation 20% 40%

The return on the two stocks are perfectly negatively correlated. What is the expected return of a portfolio constructed to derive the standard of portfolio return to zero?

( Co Variance Problem ) 4 marks Q5 The following information is available Stock A Expected return 16% Standard Deviation 15% Co Efficient of correlation 0.60

Stock B 12% 8%

A) What is the co variance between stock A and B? B) What is the expected return and risk of a portfolio in which A and B has weight 0.6 and 0.4. Q6) (3 stock portfolio problems) (4 marks and 2 to 3 questions) ( solve first question wrong and get 3 more such questions, do not forget to correct 1st ans) ( Easiest score here) ( V V Imp) A portfolio consists of 3 securities, 1,2,and 3. The proportion of these securities are w1 = 0.5 , w2 = 0.3 and w3 = 0.2. the standard deviations of returns on these securities ( in percentage terms) are SD 1 = 10, sd 2 = 15 and sd 3 = 20. the correlaton coefficients among security returns are p12 = 0.3, p13 = 0.5 and p23 = 0.6. what is the standard deviation of portfolio return? Q7) A portfolio consists of 3 securities, 1,2,and 3. The proportion of these securities are w1 = 0.3 , w2 = 0.5 and w3 = 0.2. the standard deviations of returns on these securities ( in percentage terms) are SD 1 = 6, sd 2 = 9 and sd 3 = 10. the correlaton coefficients among security returns are p12 = 0.4, p13 = 0.6 and p23 = 0.7. what is the standard deviation of portfolio return? (3 Stock Portfolio – Completely Uncorrelated) Q8) Manoj kumar owns three stocks and has estimate the following joint probability distribution of returns: Outcome 1 2 3 4

Stock A -10 0 10 20

Stock B 10 10 5 -10

Stock C 0 10 15 5

Probability .30 .20 .30 .20

Calculate the portfolio’s expected return and standard deviation if manoj invest 20% in stock A, 50% in stock B and 30% in stock C. assume that each security’s return is Completely Uncorrelated, with the return of other securities. (4) (v v imp) 09) the expected returns and standard deviations of stock A and are : Stock Expected Return Standard Deviation A 13% 10% B 5 18

Rahul buys Rs 20,000 of stock A and sells short rs !0,000 of stock B, using all the proceeds to buy more of stock A. the correlation between the two securities is .25. what are the expected return and std deviation of Rahuls Portfolio? (Mutual Fund) Q10). Mr Nikhil has 2 options firstly on FD for 5 years at 8% returns as he is a risk taker to invest in MF over same period. MF charges 2.25% as entry load and 1.1% as fund management charges. How much should MF give return which is equivalent to FD? ( v v imp) (Price of a Share) Q11) If ABS’s price is Rs 40 per share and its current dividend of Rs 3.85 per share which is growing at a 7% rate per year, determine irs required returns? Q 12) If ABS’s pays dividend of Rs 3.85 per share which is growing at 7 % rate per year and is expected to grow at the same rate in future. Its required rate of return is 14.5%. determine its share value. Q13) the price of stellar ltd is currently at Rs 40. the dividend next year is expected to be Rs 4. required return on the stock is 12%. Find the expexted growth rate under the constant growth model. ( 4 Marks) Q14) The Equity stock of Rax Limited is currently selling for Rs 30 per share. The dividend expected next year is Rs 2. The investor’s required rate of return on this stock is 15%. If the constant growth model applies to Rax Ltd, what is expected growth rate? Q 15) Vardhman ltd’s earning 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 investors required rate of return on vardhaman’s equity is 15%, what is the intrinsic value per share? (4) (v v Imp) ( Portfolio Return) ( Easiest Chapter High scoring ch) Q16) Determine the expected return on the following portfolio : Securities

No Of shares

Cost price

A B C D

200 150 300 100

100 75 125 65

A) B) C) D)

what is the weight of security B The expected return on security C ? Determine the return on security A is ? What is the return on the portfolio?

Expected year – end Price 140 78 140 95

Q17) at the beginning of the year Ray decides to take Rs 50,000 in savings out of the bank and invest it in a portfolio of stocks and bonds. Rs 20,000 was placed into common stocks and Rs 30,000 into cororate bonds. A year later, Ray’s stock and bond holdings were worth Rs 25000 and Rs 23000 respectively. During the year Rs 1000 cash dividends was received on the stocks Rs 3000 in coupon payments was received on the bonds. The stock and the bond income was not invested in Ray’s portfolio. A) Find out the ray stock portfolio during the year. B) What was the return on Ray’s bond portfolio during the year. C) Find out ray’s total portfolio during the year. (Fund Performance Measurement) ( 12 marks ) ( very easy chapter high scoring ) ( ratio’s : - Sharpe , Treynor, Jenser) ( 4 marks Each ratio ) Q 18 ) Consider the following info for 3 Mutual funds A B and C and the market . Mean return% Standard Deviation Beta % A 12 18 1.10 B 10 15 0.90 C 13 20 1.20 Market Index 11 17 1.00 The mean risk free was 6% . Calculate treynor measure (4 marks ), sharp ratio ( 4 Marks) and Jensen measure for three mutual funds and the market index. (12 marks ) Q 19) the risk free rate is 8% and the expected return on the market portfolio is 14%. The Beta of the stock Qis 1.25. Investor believe that the stock will provide an expected return of 17%. A) The fair return as per SML is B) The alpha of the stock is ? ( Real Estate ) ( 10 marks ) ( High scoring. Easy Chapter) Q20) there are 300 apartments which are rented for Rs 1000 per month. The occupancy rate of the village is 75% and the cost of maintenance of the village is Rs 10 lacs annual. If the return expected is 10% what should be the price of the village? Q21) Ms Madhu is in business of buying houses, getting them repaired and selling them at profit. She is considering purchasing a house and she knows that she has to invest 2,50,000 at the end of first month and Rs 50,000 at the end of 6 months before selling. She expects to sell property 18 months down the line for 17 lacs 60 thousand. If Madhu expects 25% return on annual and 6% brokerage is involved for both transactions ( Buying and selling) At what price should she buy this property. ( 4 marks IP and RP) Q22) Rachna takes a personal loan of Rs 2 lacs with down payment of Rs 10,000. she pays 10% compounded semi annually. She pays after 1.5 years in next 5 half yearly instalments . What be her instalments. ( 4 marks RP and IP)

Q23) Garry has got an inheritance of Rs 2,00,000. he would like to withdraw money after 10 years as pension. He gets 12 % compounded monthly. How much will he be able to withdraw as annuity. Duration / Coupon. ( 10-20 Marks) Q 24) Ramesh Bajaj purchased a bond with a Rs 1000, face value, a 10% coupon rate, and four years to maturity. The bond makes annual interest payment, the first to be received one year from today. Ramesh Paid Rs 1032.40 for the bond. a) What is the bond’s yield to maturity? b) If the bond can be called two years from now at a price of Rs 1100, what is yield to call (2 -3 question like the above one is expected) Q25) A 5 year annual annuity has a yield of 6% What is the duration? ( 4 Marks ) ( VV IMP) Q26) A 10% coupon bond has a maturity of 12 years. It pays interest semi annually. Its yield to maturity is 4 % per half year period. What is its duration? Q27) a firm’s current assets and current liabilities are 1600 and 1000 respectively. How much can it borrow on a short term basis without reducing the current ration below 1.25.( marks) (Same question will come in exams) Bonds Q28) A growth oriented non- dividend paying share is bought for Rs 250 and sold for Rs 450 after 5 years, the compound annual growth rate is : Q29) A Rs 100 parvalue bond having 10 % coupon rate will mature after 7 years. Find the value of the bond if the discount rate is 8%. Q30) Suppose a company sold an issue of bonds with a 10 year maturity, a 1000 par value, a 10% coupon rate and semi annual interest payments. A) 2 years after the bonds were issued, the YTM of the bond is 6%. At what price (approx) the bond would sell in the market? B) Suppose, after 2 years of issue the YTM rise to 12%, what would be the approximate market price of the bond? Q31) A bond has a face value of Rs 1000 and coupon rate of 8%. The required rate of return is 6%. A) What will be the value of bond if the bond is perpetual? B) If the maturity life of the bond is only 5 years, value of the bond will be? C) If in B Question , the required rate of return is 10%, the value of the bond will be? Futures and Options – 30 Marks ( V V Imp Chapter Practice Thrice) ( Same Q can come) ( 32, 33 , 34 Most imp q’s)

Q32) Share A B C

Current Price 52 40 35

Exercise Price 50 45 30

Call Premium 3 months 3 1 6

Call Premium 6 months 4 1.25 6.3

Put Premium 3 months 0.35 5.5 0.45

Put Premium 6 months 1.05 6.00 0.65

Each Contract is equal to 100 shares. A) if you purchase one 3 months call contract on A, what profit or loss will you make at the maturity date if the price of A at that time is Rs 57. B) If B price is Rs 35 at the maturity of the 6 months options, determine the value of five 6 months put contracts at their maturity date. C) If you had purchase five 3 months call options of C and the price of C share is Rs 32 at maturity. Determine your profit or loss on the investments. D) If you had purchase five 3 months puts on C, what would your profit or loss position have been at maturity if the share’s price was Rs 32. E) Your client wrote five 6 months call options on B’s share. What is his profit or loss on the options at maturity if the price of B at that time is Rs 43? F) If your client had written five 6 months put options on B, what would his profit or loss have been at maturity of the options if the share price was Rs 43 per share? G) Which of the following options are in the money? (a) A’s 3 month call (b) B’s 6 month Put (c) C’s 6 month put (d) a and b (e) none of the above. Q33) Covered call writing is a strategy preferred by risk averse investors. Consider an investor who writes a covered call on xyz share. Spot price is 38, Exercise price is 40 and 3 months call on xyz share is traded at 3. A) What is the initial cash flow incurred at the time of investment? B) What is the maximum profit realizable from this strategy ? C) What is the unannualised rate of return if the share price rises to 42? D) What is the unnanualised rate of return on the investment in share alone ( assume that no call is written) Q34) Subash has bought a 60 call option at 4 and simultaneously sold a 70 call at 2. from this information, find out ; A) what is the breakeven price? B) What is the maximum profit expected from this spread? C) What is the maximum loss expected? ( 4 marks , V V Imp )

Executive Summary 2 stock portfolio – 8 marks 3 stock Portfolio (std dev, Covariance, Return on portfolio) – 16 marks Price of a Share – 4 marks Portfolio Return – 8 Marks Ratio’s : - Sharpe , Treynor, Jenser (12 Marks) ( 4 marks Each ratio ) Real Estate ( 10 marks ) Duration / Coupon. (8 -10 Marks) Bonds ( 6 -10 Marks) Futures and Options – 30 Marks If we can solve the above 35 questions we have ensured we can attempt 100 marks question all correct and score minimum A grade if not A certainly B. No scope of getting C grade.