Page 307 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Solution:
Comparing the ratio of excess return to to the cut-off rate, C

Security (R – T)/  R  T
it im (R – T)/ im it im im
it
im
ei
ei
SBI 12.00 0.300 .025 0.300 0.025
RBL 8.00 0.229 .029 0.529 0.054
ITC 7.50 0.179 0.26 0.708 0.080
IDBI 5.63 0.480 .085 1.188 0.165
ICICI 4.00 0.714 .179 1.902 0.344
MRPL 3.50 0.400 .114 2.302 0.458
CNBC 2.67 0.200 .064 2.502 0.522
NDTV 1.67 0.160 .026 2.662 0.618

Possible cut-off Rate C
i (R T)
m i im
2
C i 1 ei
i i
1 m
im
SBI 2.769 1
RBL 3.852 2
ITC 4.414 3
IDBI 4.836 4
ICICI 4.481 5
MRPL 4.276 6
CNBC 4.155 7
NDTV 3.814 8

The value of cut-off rate, C is 4.836 and equal to G cut-off rate. Finding the percentage is each
security:

im i R T C
Z = 2
1
ei im
Z = **(AQ) (12 – 4.836) = 0.1791
1
Z = ** (AQ) (8 – 4.836) = 0.0904
3
Z = **(AQ)(5.63 – 4.836) = 0.0423
4
4
Z = 0.3971
i
i 1
By dividing each Z by the sum of Z we get the fund to be invested in each security.
i
i
In A = 45.10%; in D = 22.77%; in E = 21.48%; and in G = 10.65%.

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