Page 89 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 2. Analyse the effect of Beta in the investment decision-making process.
3. Elucidate the methodology for the measurement of historical return and risk.
4. "It is risky for an investor to hold all their eggs in one basket." Why?
5. RKS Ltd. has an expected return of 22% and standard deviation of 40%. BBS Ltd. has an
expected return of 24% and standard deviation of 38%. RKS Ltd. has a beta of 0.86 and BBS
Ltd. a beta of 1.24. The correlation coefficient between the return of RKS Ltd. and BBS Ltd.
is 0.72. The standard deviation of the market return is 20%. Suggest:
(a) Is investing in BBS Ltd. better than investing in RKS Ltd.?
(b) If you invest 30% in BBS Ltd. and 70% in RKS Ltd.?

(c) What is your expected rate of return and portfolio standard deviation?
(d) What is the market portfolio’s expected rate of return and how much is the risk-free
rate?

6. The probabilities and associated returns of Modern Foods Ltd., are given below:
Return (%) 12 15 18 20 24 26 30
Probability 0.05 0.10 0.24 0.26 0.18 0.12 0.05

Calculate the standard deviation.
7. Elucidate the methodology for measuring risk and return.
8. Analyse the ways in which the portfolio diversification help in reducing risk.
9. Suppose you have 10,000 to invest and would like to sell 5,000 in stock XYZ short to
invest in ABC. Assuming no correlation between the two securities, compute the expected
return and the standard deviation of the portfolio from the following characteristics:

Security ABC XYZ
E(R) .12 .02
σ (R) .08 .10

10. "Risk & expected return are the two key determinants of an investment decision." Justify.
11. The rate of return of equity shares of Anand Rathi Mills Ltd. For past 5 years are given
below:
Year Rate of return (%)
1 12
2 16
3 18
4 20
5 –6

Calculate the average rate of return, standard deviation and variance.
12. Elucidate the mechanism for the calculation of minimum risk portfolio with two assets.

Answers: Self Assessment

1. systematic 2. Market
3. Uncertainties 4. True

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