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Unit 12: Models




          Solution:                                                                             Notes
          1.
                           Security                            Beta
                DH WELDING                            (14.7 +4.3) (0.48)  = 1.64
                DEF                                   (6.3 + 4.3) (0.25)  = 0.37
                GHI                                   (11.3 +4.3)(0.51) = 1.34

                JKL                                   (5.2 + 4.3) (0.95) = 1.15
                INDEX                                 (4.3 +4.3) (1.00)  = 1.00

          2.   Beta estimate smaller than 1.0 will probably increase towards 1.0. Beta estimates larger
               than 1.0 will probably decrease towards 1.0
          3.                Security                            E(R)
                DH WELDING                              20.48  = 9 + 1.64 (7)

                DEF                                     11.59  = 9 + 0.37 (7)
                GHI                                     18.38  = 9 + 1.34 (7)
                JKL                                     17.46  = 9 + 5.2(7/4.3)
                Index                                   16.00 =  9 + 4.3 (7/4.3)

          4.    pm  = 0.25(1.64) + 0.25(0.37) + 0.25(1.34) + 0.25(1.15) = 1.125


                 Example: Mr Fool Vijay provides you the following information. You are required to
          calculate the optimum portfolio in choosing among the following securities and assuming the
          risk-free return is 8% and variance in the market index (  2  ) = 12%.
                                                         m
               Security    Expected Return     Beta       Security’s unsystematic risk
                                 
                No.i            R               im                   2 ei
                                  i
                 SBI            20              1.0                  40
                RBL             18              2.5                  35
                 ITC            12              1.5                  30
                IDBI            16              1.0                  35
                ICICI           14              0.8                  25
                MRPL            10              1.2                  15
                CNBC            17              1.6                  30
                NDTV            15              2.0                  35















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