Page 317 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 6. Mr. Daruwals supplies you the following information. What is the expected return on this
portfolio? What is the beta of this portfolio? Does the portfolio have more or less systematic
risk than an average asset?
Security Amount Invested ( ) Expected Return Beta
Alfa 1,000 8% .80
Micro Lab 2,000 12 .95
ABB 3,000 15 1.10
ACC 4,000 18 1.40

7. Stocks DH Welding and BHEL have the following historical returns:
Year Stock DH welding ’s Returns (R A) Stock BHEL’s Returns (R B)

2003 10.00% 3.00%
2004 18.50 21.29
2005 38.67 44.25
2006 14.33 3.67
2007 33.00 28.30

(a) Calculate the average rate of return for each stock during the period 2000 through
2004. Assume that someone held a portfolio consisting of 50% of stock DH Welding
and 50% of Stock BHEL. What would have been the realized rate of return on the
portfolio in each year from 2003 through 2007? What would have been the average
return on the portfolio during this period?
(b) Now calculate the standard deviation of returns for each stock and for the portfolio.

(c) Looking at the annual returns data on the two stocks, would you guess that the
correlation coefficient between returns on the two stocks is closer to 0.9 or to – 0.9?
(d) If you added more stocks at random to the portfolio, which of the following is the
most accurate statement of what would happen to ?
P
(i) would remain constant.
P
(ii) would decline to somewhere in the vicinity of 21%.
P
(iii) Would decline to zero if enough stocks were included.
P
8. Examine the Single Index Model.
9. What are the steps you would take when selecting the best portfolio?
10. Do you think that optimal portfolio is important in investment decisions? Why/Why not?

11. Analyse the significance of the Markowitz Model of Risk Return Optimisation.
12. What do you see as the significance of Beta in the portfolio?

Answers: Self Assessment

1. Multi-factor 2. Small Minus Big
3. Market cap (“size”), book/market ratio (“value”)

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