Page 95 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 18. T.S. Shekhar has a portfolio of five securities. The expected rate and amount of investment
in each security is as follows:

Security A B C D E
Expected Return .14 .08 .15 .09 .12
Amount invested ( ) 20,000 10,000 30,000 25,000 15,000
Compute the expected return on Shekhar's portfolio.

19. T.S. Kumar holds a two-stock portfolio. Stock ABC has a standard deviation of returns of
.6 and stock XYZ has a standard deviation of .4. The correlation coefficient of the two
stocks returns is 0.25. Kumar holds equal amounts of each stock. Compute the portfolio
standard deviation for the two-stock portfolio.
20. Ravi Shankar has prepared the following information regarding two investments under
consideration. Which investment should be accepted?

Security ABC Security XYZ
Probability Return (%) Probability Return (%)
0.30 27 0.21 15
0.50 18 0.30 6
0.30 -2 0.40 10
- - 0.10 4

21. Ammy, a Korean-based auto manufacturer, is evaluating two overseas locations for
proposed expansion of production facilities, one site in Neeroland and another on
Forexland. The likely future return from investment in cash site depends to a great extent
on future economic conditions. These scenarios are postulated, and the internal rate of
return from cash investment is computed under each scenario. The results with their
estimated probabilities are shown below:

Internal Rate of Return (%)
Probability
Neeroland Forexland
0.3 20 10
0.3 10 30
0.4 15 20
Calculate the expected value of the IRR and the standard deviation of the return of
investments in each location. What would be the expected return and the standard deviation
of the following split investment strategies:
(a) Committing 50% of the available funds to the site in Neeroland and 50% to Forexland?
(b) Committing 75% of the available funds to the site in Neeroland and 25% to Forexland
site? (Assume zero correlation between the returns form the two sites.)

22. You have invested 50,000, 30% of which is invested in Company A, which has an expected
rate of return of 15%, and 70% of which is invested in Company B, with an expected return
of 12%. What is the return on your portfolio? What is the expected percentage rate of
return?
23. Suppose you invest in four securities. Company ABC has on expected return of 20%,
Company BCD has an expected return of 10%, Company CDE has an expected return of
12%, and Company DEF has an expected return of 9%. You have invested 40,000. What is
the expected rate of return on your portfolio?

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