Page 87 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes obscure technical term, but beta simply measures the amount of variance in a portfolio in
relation to the market. If using the S&P CNX Nifty as a proxy for the market, then  would
indicate how much the portfolio moves when the Nifty changes by 1%. For example, if the
portfolio changes by 2% whenever the Nifty moves up 1%, then the portfolio has a  of 2.0.
If the portfolio changes by 0.5%, then  = 0.5.
Source: financialexpress.com

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Case Study To Invest or Not?

ipro Company has asked the investors to invest in their securities and while
making an offer, they have provided you with the following information. For
Wa period of 10 years, company has provided you with the rate of return on
security & return on the market portfolio of its securities as:

Period Return on security WIPRO (%) Return on market portfolio
(%)
1 20 22
2 22 20
3 25 18
4 21 16
5 18 20
6 -5 8
7 17 -6
8 19 5
9 -7 6
10 20 11

You as an investor have decided to invest in the securities of the company. The anticipated
return with the associated probabilities is as:

Return % –10 –15 5 12 10 20 13
Probability 0.03 0.02 0.15 0.25 0.3 0.1 0.05

Question
Now after getting all the details, what would you suggest, whether to invest in the
securities or not and what would be your expected rate of return and risk in terms of
standard deviation. Also give your comments based on the average rate of return, variance
and beta value for the company's securities.

4.9 Summary

 Corporations operate in a highly dynamic and competitive environment, and many operate
both nationally and internationally. As a result, the judgment factor still dominates
investment decisions.
 Risk can be defined as the probability that the expected return from the security will not
materialize.

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