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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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