1. CAPM – Expected Rate of Return.

If the risk free rate of interest (RF) is 10% and expected return on market portfollo (Rm) is 15%
ascertain expected return of the portfolio if portfolio betas are _ (a)0.20 (b)0.50

2. Return and Risk Free Rate of Return _RIP.

Your client is holding the following securities:

Particulars Of Securities. Cost Dividends/Interest Market Beta

Price
Equity Shares:
Gold Ltd., 10,000 1,725 9,800 0.6
Silver Ltd., 15,000 1,000 16,200 0.8
Bronze Ltd., 14,000 700 20,000 0.6
GOL Bonds 36,000 3,600 34,500 1.0
Average return of the portfolio is 15.7%, calculate:

(a) Expected rate of return in each, using the Capital Asset Pricing Model (CAPM).
(b) Risk free rate of return.

3. Expected Return _ CAPM _ M03

Your client is holding the following securities:

Particulars Of Securities. Cost Rs. Dividends Rs. Market Beta

Price Rs.
Equity Shares:
Co. X 8,000 800 8,200 0.8
Co. Y 10,000 800 10,500 0.7
Co. Z 16,000 800 22,000 0.5
PSV Bonds 34,000 3,400 32,300 1.0
Assuming a Risk_ free rate of 15% Calculate_

(a) Expected rate of return in each, using the Capital Asset Pricing Model(CAPM)

(b) Average return of the portfolio.

 5. Portfolio Beta and Return_ Effect of Change in Portfolio.

Security A B C D
Amount invested Rs. 1,25,000 Rs. 1,50,000 Rs. 80,000 Rs. 1,45,000
Beta 0.60 1.50 0.90 0.90
If RBI Bonds carries an interest rate of 5% and NIFTY ylelds 12% what is the expected return on
Portfolio? If Investment in Security C is replaced in RBI Bonds, what is the corresponding change
in Portfolio Beta and expected return?

13. Risk and Return of the Portfolio _ RTP

A portfolio consists of three Securities P,Q and R with the following parameters.

P Q R
Expected return(%) 28 24 22
Standard deviation(%) 30 26 24

Correlation Co-efficient = PQ=0.50 QR+0.40 PR+0.60

If the securities are equally weighted, how much is the risk and return of the portfolio of these
three securities.

14. . Return and Risk of the Portfolio, Proportion of Investment_ RIP

Europium Ltd., has been specially formed to undertake two investment opportunities. The risk
and return characteristics of the two projects are shown below:

A B
Expected return 12% 20%
Risk 3% 7%
Europium plans to invest 80% of its available funds in project A and 20% in B. The directors
believe that the correlation co- efficient between the returns of the projects is + 1.0.

Required-

(a) Calculate the returns from the proposed portfolio of projects A and B.

(b) Calculate the risk of the portfolio.

(c) Suppose the correlation coefficient between A and B was-1, How should the company invest
its funds in order to obtain zero risk portfolio.
 16. . Risk of Portfolio _ Three Securities.
From the following information, ascertain the risk of the portfolio_

Securities. Standard of Deviation Proportion in portfolio

P 5% 0.30
Q 12% 0.60
R 6% 0.10
Correlation Co-efficient = PQ=0.50 QR= -0.40 PR= +0.75

18. Expected Return and Risk of Portfolio_ RTP

Laxman is interested to construct a port-follo of securities X and Y. He has collected the
following information about the proposed investment.

X Y
Expected return 15% 20%
12% 16%
Co-efficient of Co-retention, r, between X and Y is 14.

Laxman wants to constitute only five port folios of X and Y as follows.

(1) All funds invested in X.

(2) 50% of funds in each X and Y.

(3) 75% of funds in X and 25% in Y.

(4) 25% of funds in X and 75% in y.

(5) All funds invested in y.

You are required to calculate_

(1) Expected return under different portfolios.

(2) Risk factor associated with these portfolios.

(3) which portfolio is best from the point of view of Risk.

(4) which portfolio is best from the point of view of Return.

 20. Capital Market Line (CML) _ Market Price of Risk.
From the following information, ascertain the Market Price (ʎ) of Risk of the following
information_

Market Return (Rm) Standards Deviation Return on Standards Deviation

on Market Return Government Bonds of the Portfolio (oP)
(oM) (RF)
18% 6% 6% 8%
20% 8% 7% 6%
22% 9% 8% 10%
Also, Determine the expected return for each of the above cases.

22. Covariance and Correlation Co-efficient _ M07

The historical rates of return of two securities over the past ten years are given.

Calculate the Covariance and Correlation Co-efficient of the two Securities:

Years 1 2 3 4 5 6 7 8 9 10
Security1:(Return%) 12 8 7 14 16 15 18 20 16 22
Security2:(Return%) 20 22 24 18 15 20 24 25 22 20
 21. Average Return _ N06
X co. Ltd, invested on 1.4.2005 in certain equlty shares as below:

Name of Co. No. of shares Cost (Rs)

M Ltd., 1,000 (Rs.100 each) 2,00,000
N Ltd., 500 (Rs.10 each) 1,50 000
In September, 2005, 10% dividend was paid out by M Ltd., and in October, 2005, 30% dividend
paid out by N Ltd. On 31.03.2006 market quotations showed a value of Rs.220 and Rs.290 per
share for M Ltd., and N Ltd. respectively.

On 1.4.2006, investment advisors indicate (a) that the dividends from M Ltd. and N Lts. For the
year ending 31.3.2007 are likely 20% and 35% respectively and (b) that the probabilities of
market quotations on 31.3.2007 are as below:

Probablity Factor Price/ share of M Ltd, Price/ share of N Ltd.

0.2 220 290
0.5 250 310
0.3 280 330
You are required to _

(a) Calculate the average return from the portfolio for the year ended 31.3.2006:

(b) Calculate the expected average return from the portfolio for the year 2006-07; and

(c) Advise X Co.., Ltd., of the comparative risk in the two investment by calculating the standard
deviation in each case.

28. Beta Co- efficient_ N04

Given below is information of market rates of Return and Data from two Companies A and B:

Year 2002 Year 2003 Year 2004

Market (%) 12.0 11.0 9.0
Company A (%) 13.0 11.5 9.8
Company B (%) 11.0 10.5 9.5
Determine the beta coefficients of the Shares of Company A and Company B.
 29. Covariance, Correlation, Characteristic Line of Security _ N03
The rates of return on the Security of Company S and Market portfolio for 10 periods are given
below:

Period. Return of security S (%) Return of Market portfolio (%)

1 20 22
2 22 20
3 25 18
4 21 16
5 18 20
6 -5 8
7 17 -6
8 19 5
9 -7 6
10 20 11
(a) What is the beta of Security S?

32. Beta Factor and Expected Rate of Return _ M98

An investor is seeking the price to pay for a security, whose standard deviation is 3.00%. The
correlation co-effcient for the security with the market is 0.80 and the market standard
deviation is 2.20%. The return from Government securities is 5.20% and from the market
portfolio is 9.80%.

The investor knows that by calculating the required return , he can then determine the price to
pay for the security. What is the required on security?

34. Expected Rate of Return on Portfolio _ RTP.

From the following information, calculate the expected rate of return of a Portfolio:

Risk free rate of interest. 12%

Expected return of market Portfolio. 18%
Standard deviation of an asset. 2.8%
Market standard deviation. 2.3%
Correlation co-efficient of portfolio with market. 0.8
 38. Systematic and Unsystematic Risk _ RTP
The following are the returns of share S and the market (M) for the last six years_

Return (%)
Year S M
2001 18 18
2002 9 7
2003 20 16
2004 -10 -13
2005 5 4
2006 12 7
(a) Calculate the covariance and correlation coefficient of returns.

(b) Determine the beta coefficient for S.

(c) What is S’s total risk?

(d) How much is systematic risk?

39. CAPM _ Evaluation of security _ Expected Rate of Return _ M97

The Beta Co-efficient of Target Ltd is 1.40. The Company has been maintaining 8% rate of
growth in dividends and earnings. The last dividend paid was Rs.4 per share. Return on
Government Securities is 10% Return on Market Portfolio is 15%. The Current Market Price of
one share of Target Ltd is Rs.36.00.

Required-

1. What will be the equilibrium price as per share of Target Ltd?

2. Would you advise purchasing the share?

40. Equilibrium Price Per share _ RTP

The Beta Coefficient of Target Ltd. is 1.4. The company has been maintaining 8% rate of growth
in dividends and earnings. The last dividend paid was Rs.4 per share. Return on Government
securities is 10% Return on market portfolio is 15%. The current market price of one share of
Target Ltd.is Rs.36.

(a) What will be the equilibrium price per share of Target Ltd.?

(b) Would you advise purchasing the share?

 41. Equilibrium Price per Share _ RTP
The current market price of equity shares of Best Ltd., is 60. The Company paid Rs.4 per share
as dividend recently and has been maintaining a 4% growth rate in individends. Its beta
coefficient is 1.2.

(a) Assuming a risk free rate of 6% and Return on Market portfolio of 10%, calculate the
equilibrium price per share.

(b) State whether the shares of Best Ltd., can be purchased at Rs.60.

43. Intrinsic Value per Share _ RTP

The risk free return is 10% and the risk premium is 5% with beta of a company is 1.6. The
company has declared the latest dividend @ Rs.3 (2007) whereas if had declared a dividend of
Rs.2.115 in the year 2001. The company’s earnings and the dividend experienced constant
growth. Find out intrinsic value of the shares.

45. CAPM _ Overvaluation vs. Undervaluation.

Ram expected a risk free return of 5%, a market return of 15% and the return for stocks A and B
as follows-

 Stock A _ βA=1.25; Ram,s Estimated Return=16%

 Stock B _ βB=0.80; Ram,s Estimated Return=14%

State whether Stock A and B are undervalued or overvalued if Ram uses CAPM for investment
decisions. Also recommend the course of action for Ram.

46. Overvaluation vs. Undervaluation.

AB expects a risk free rate of 7%. The return on market portfolio is 18%. It is evaluating its
position with respect to shares of Company A, whose Beta is 1.3. Current market price of the
share is Rs.108. It is expected that the market price after 12 Months will be Rs.125. A dividend
of Rs.10 will also be paid out in the next year. What should AB do?
 47. CAPM _ Overvaluation vs. Undervaluation.
Jeev is contemplating buying/Selling the shares of Companies A,B and C. He already holds some
shares in each of these Companies. He has the following data in his hand to aid him in his
decision_

 Return on NIFTY 16%

 Rs.500 Treasury Bonds, whose returns are considered risk free earns its owners a return
of Rs.35
 Company A has a Beta Factor of 0.9 and investment therein yleds a return of 14%
 Company B which is traded at Rs.1200 per shares, earns its investors a sum of Rs.246.It
has a beta factor of 1.5.
 Company C price of which is Rs.450 has a beta factor of 0.5. Historical data shows the
that annual share price increase of the company is around 8%. Last dividend declared
was Rs.10 per share. Dividend payout is expected to double in the next year.

Jeev seeks your guidance on the course of action.

48. Change in Composition _ RTP

Better luck Ltd., has been enjoying a substantial net cash inflow, and until the surplus funds are
needed to meet tax and dividend payments, and to finance further capital expenditure in
several months time, they have been invested in a small portfolio of short term equity
investments.

Details of the portfolio which consists of shares in four UK listed companies are as follows.

Company Number of Beta equity Market price Latest Expected return

shares held co-efficient per share (Rs) Dividend on equity in the
yield (%) next year %
D Ltd., 60000 1.16 4.29 6.10 19.50
E Ltd., 80000 2.28 2.92 3.40 24.00
F Ltd., 100000 0.90 2.17 5.70 17.50
G Ltd., 125000 1.25 3.14 3.3. 23.00
The current market return is 19% a year and the risk free rate is 11% a year…………Required:

1. On the basis of the data given calculate the risk of Better luck ltd’s short term investmeny
portfolio relative to that of the market.

2. Recommend, with reasons, whether Better Luck Lts, should change the composition of its
portfolio.
 50. Expected Return under CAPM _ Computation of Alpha
Shares of Veeru Limit has a beta factor of 1.8. The NIFTY has yielded a return of 17%. 6.75%
Rs.100 Treasury Bills are traded at Rs.108. Asertain_

(a) Expected Return on Shares of Veeru Ltd under CAPM.

(b) Alpha Factor of Shares of veeru Ltd if the past 5 years actual returns on shares of veeru Ltd
are _ 22.50%; 26.30%; 25.70%; 23.40%; and 27.60%.

51. Return under CAPM _ Different Portfolios _ Adjustment for Alpha

Returns on two portfolios, A and B for the past 4 years are-

Year 1 2 3 4
Portfolio A 12.50% 13.50% 12.20% 14.00%
Portfolio B 14.35% 11.75% 13.60% 12.90%
Beta factor of the two portfolios are 1.3 and 1.2 respectivelly. If the market portfolio fetches
12% return and RBI Bonds, which are considered risk free yield which of the above two
portfolio will an investor prefer?

57. Evaluation of Stocks under CAPM

Stock A has a Beta of 1.50 and a market expectation of 16% return. For Stock B it is 0.80 and
12% respectively. If the risk free rate is 6% and the market risk premium is 17%. Evaluate
whether these two stocks are priced correctly? If these two stocks to be regarded as correctly
priced, what should the risk free rate and market risk premium be ?