1. A financial analyst is analyzing two investment alternatives of Z and Y. The estimated rates of return and their chances of occurrence for the next year are given in the table below:

Probability of Occurrence

Rates of ReturnY Z

20.20 22% 5%0.60 14% 15%0.20 (4%) 25%

a) Determine each alternative’s expected rate of return, variance and standard deviation.b) Is “Y” comparatively riskless?c) If the financial analyst wishes to invest half in “Z” and another half in “Y”. Calculate Portfolio

Return and Risk would the risk be reduced by this combination. Explain the reasons for it. What should be the ideal proportion in the securities “Y” and “Z” to reduce the risk to its minimum level?

2. Assume that risk free return is 8% and the variance of the index returns is 12%. Find the Optimal Portfolio using Sharpe’s Optimization Model (SOM).

Security Expected Return E(Ri)

B (beta) ei^2 (residual)

A 20 1.0 40B 18 2.5 35C 12 1.5 30D 16 1.0 35E 14 0.8 25F 10 1.2 15G 17 1.6 30H 15 2.0 35

33. From the following data compute: a) Expected return and risk on individual securities “A” and “B”.

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Case Studies – COMPULSORY QUESTION

MBA 3RD SEMESTER, F1-investment analysis & MANAGEMENT

SECTION: D

b) Expected return and risk on portfolio if the share of investment in each of the securities is 50% each. c) Coefficient Correlation.

Scenario Chance Return (%)A B

1 0.25 20 302 0.50 18 263 0.25 16 12

4. Mr. Florence Emperador is a disabled person along with his wife who are in their late fifties. He spent 30 years in Westminster Bank as an executive. He sold his car because he could not drive and depends upon public transport for his travel. He gets pension from the bank of `96,000 p.a. (after tax). He and his wife need `1,60,000 annually for livelihood.

The couple have accumulated a portfolio of secuties over the past 30 years and funds provided from the estate of his mother, who died several years ago. Exhibit I details their current holdings.

Exhibit: IPortfolio of Mr. and Mrs. Florence Emperador as on March 31, 2012

Common/ Equity Shares Cost Name of the Company Dividend200 10 HCL Info systems 25%100 10 Bright Software 20%100 10 Satyam 25%300 10 Nestle 20%100 10 Godfrey Philips 30%500 10 Glaxo India Limited 30%

Bonds Institution/ Company

Maturity Date Coupon Cost(% of par)

10,000 ICICI 2010 12.0% 95%1,00,000 I.W.B.I 2005 11.5% 96%1,00,000 Bond 2007 11.0% 100%1,00,000 G.O.I Bond 2002 10.5% 107%50,000 Karnataka State 2008 10.5% 100%

1,50,000 Konkan Railway 2005 11.0% 100%1,00,000 H.D.F.C 2009 11.5% 96%

Reserves Cash/ Equivalent Coupon% Cost1,21,000 Current Account 0% 1,21,0003,60,000 Savings 4.5% 3,60,000

The real estate fetched a rent of `10,000 per month. The book price of the estate is `1,00,000 but market value is ` 20,000 paying dividend of 5% with current market value of ` 25,000.

Questions:-

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a) Identify and describe an appropriate set of investment objectives and investment constraints for Mr. Florence Emperador and write a comprehensive investment policy statement based on the objectives and constraints.

b) Does the present portfolio fulfill their objectives? Why or why not?c) State and explain your asset allocation recommendation for Mr. Florence Emperador based on

your answer to question (a).d) Identify current holdings you would eliminate from the portfolio and justify your action in each case.

5. A financial analyst is analyzing two investment alternatives of A and B. The estimated rates of return and their chances of occurrence for the next year are given in the table below:

Probability of Occurrence

Rates of ReturnA B

40.40 22% 5%1.20 14% 15%0.40 (4%) 25%

d) Determine each alternative’s expected rate of return, variance and standard deviation.e) Is “A” comparatively riskless?f) If the financial analyst wishes to invest half in “B” and another half in “A”. Calculate Portfolio

Return and Risk would the risk be reduced by this combination. Explain the reasons for it. What should be the ideal proportion in the securities “A” and “B” to reduce the risk to its minimum level?

6. Assume that risk free return is 8% and the variance of the index returns is 12%. Find the Optimal Portfolio using Sharpe’s Optimization Model (SOM).

Security Expected Return E(Ri)

B (beta) ei^2 (residual)

A 40 2.0 80B 36 5.0 70C 24 3.0 60D 32 2.0 70E 28 1.6 50F 20 2.4 30G 34 3.2 60H 30 4.0 70

37. From the following data compute: a) Expected return and risk on individual securities “X” and “Y”. b) Expected return and risk on portfolio if the share of investment in each of the securities is 50% each. c) Coefficient Correlation.

Scenario Chance Return (%)X Y

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1 0.50 40 602 1.00 36 523 0.50 32 24

8. Mr. Shaifudeen is a disabled person along with his wife who are in their late fifties. He spent 30 years in Westminster Bank as an executive. He sold his car because he could not drive and depends upon public transport for his travel. He gets pension from the bank of `192,000 p.a. (after tax). He and his wife need `3,20,000 annually for livelihood.

The couple have accumulated a portfolio of secuties over the past 30 years and funds provided from the estate of his mother, who died several years ago. Exhibit I details their current holdings.

Exhibit: IPortfolio of Mr. and Mrs. Shaifudeen as on March 31, 2012

Common/ Equity Shares Cost Name of the Company Dividend400 10 HCL Info systems 25%200 10 Bright Software 20%200 10 Satyam 25%600 10 Nestle 20%200 10 Godfrey Philips 30%1000 10 Glaxo India Limited 30%

Bonds Institution/ Company

Maturity Date Coupon Cost(% of par)

10,000 ICICI 2010 12.0% 95%1,00,000 I.W.B.I 2005 11.5% 96%1,00,000 Bond 2007 11.0% 100%1,00,000 G.O.I Bond 2002 10.5% 107%50,000 Karnataka State 2008 10.5% 100%

1,50,000 Konkan Railway 2005 11.0% 100%1,00,000 H.D.F.C 2009 11.5% 96%

Reserves Cash/ Equivalent Coupon% Cost2,42,000 Current Account 0% 2,42,0007,20,000 Savings 4.5% 7,20,000

The real estate fetched a rent of `10,000 per month. The book price of the estate is `2,00,000 but market value is ` 40,000 paying dividend of 5% with current market value of ` 50,000.

Questions:-e) Identify and describe an appropriate set of investment objectives and investment constraints for Mr.

Shaifudeen and write a comprehensive investment policy statement based on the objectives and constraints.

f) Does the present portfolio fulfill their objectives? Why or why not?g) State and explain your asset allocation recommendation for Mr. Shaifudeen based on your answer

to question (a).

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h) Identify current holdings you would eliminate from the portfolio and justify your action in each case.

“ALL THE BEST IN THE FORTHCOMING EXAMINATIONS”

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