MBA 4th Semester

INVESTMENT MANAGEMENT
Unit IV
PROBLEMS ON PORTFOLIO THEORY

1. What is the expected return of a portfolio comprising of the following securities.

Security Expected Return % of Funds Invested
X 10 % 25 %
Y 15 % 25 %
Z 20 % 50 %

2. Two Corporations Z and Q have the following :

Z Q
Return 14 % 19 %
Risk 18 % 30 %
Correlation coefficient between Z and Q is 0.28. Weights of Z = 25 % and Q = 75 %.
Determine the risk and return of portfolio. Also when weights are 50 % and 50 %.
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3. Calculate the portfolio risk and portfolio return from the following information :
An investor wants to construct a portfolio with stock A and stock B, by investing 75 % of
his funds in A and the balance in B. The expected returns on A and B are 6 % and 9
% respectively. The standard deviation of returns on A and B are 4 % and 12 %
respectively. The correlation coefficient between the returns on A and B is + 0.50.

4. Determine the risk and return for an equally weighted portfolio of assets A, B and C with
the following data :
A B C
Expected Return 16 % 18 % 21 %
Standard Deviation 19 % 21 % 26 %
Correlation of returns :
A and B = 0.5
B and C = 0.2
A and C = 0.5

5. A portfolio consists of the following three securities P, Q and R with the following
parameters :
P Q R
Expected Return ( % ) 25 22 20
Standard Deviation ( % ) 30 26 24
Correlation Coefficient
PQ = -0.5
QR = +0.4
PR = +0.6

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

6. The annual rates of return for the Master Equity Plan of UTI and the returns prevailing in
the market are :
Year Return on UTI ( % ) Return on Market ( % )
2010 4 3
2011 14 12
2012 10 12
2013 12 14
2014 17 20
Calculate the beta coefficient for the Master Equity Plan of UTI.

7. The following are the returns of Java Ltd., and the Market.
Year Java Ltd ( % ) Market ( % )
1 -5 -6
2 14 16
3 10 12
4 12 14
5 17 20
Calculate Beta coefficient of Java Ltd.

8. The following are the returns of UTI and BSE Index

Year UTI ( % ) BSE ( % )
1 -2.2 -4.1
2 18 17.2
3 11 14
4 3.2 5.9
5 -9.7 -6.9
6 4.3 5.6
7 25.2 21.3
8 3.3 5
Determine the beta coefficient of UTI.

9. Risk Free Rate is 8 %, market return is 14 %, beta is 1.25 for stock Z. What is the
expected return for stock Z. Find also when Rm = 16 % and beta = 0.75.

10. From the following data, compute beta of security j.

SD j = 12 % SD m = 9 % and Cor jm = +0.72.

11. Assume that Rf = 10 %, E (rm) = 16 % and the return on stock C = 20 %.

(a) Determine the implicit beta for stock C.
(b) What is the stock C’s return if its beta is 0.75.

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12. ABC Ltd., has a beta of 1.45. The risk free rate is 10 % and the expected return on the
market portfolio is 16 %. The Company presently pays a dividend of Rs. 2. The dividend
is expected to grow at 10 %.
(a) What is the required rate of return on the stock under CAPM.
(b) What is the market value of the share.

13. Given the following information :

Expected return for the market = 12 %.
SD of market return = 20 %.
Risk Free Rate = 8 %.
Correlation coefficient between :
Stock A and the market = 0.8.
Stock B and the market = 0.6.
SD for stock A = 25 %
SD for stock B = 30 %.
(a) Calculate the beta for Stock A and Stock B.
(b) Calculate the expected return for each stock.

14. Following are the returns on Rj and Rm :

Rj ( % ) : 8 10 15 12
Rm ( % ) : 12 15 18 25
If Rf = 10 %, determine the CAPM Return.

15. Following are the returns on the market and security.

Rm ( % ) : 6 8 12 14 20
Rj ( % ) : 18 22 28 30 32
If the risk free return is 10 %, what is the CAPM return.

16. From the following information, calculate the expected rate of return of a portfolio.
Risk free rate of interest = 8 %.
Expected return on market portfolio = 18 %.
SD of an asset = 2.8 %.
Market SD = 2.3 %.
Correlation coefficient of portfolio with market = 0.8.

17. XYZ is a financial consultancy managing a fund consisting of five stocks. The risk free rate
is 8 % and the expected market return is 15 %. Using the information in the following
table, you are required to find the portfolio expected return.
Stock Market Value Beta
TR 1,65,000 0.68
AL 4,80,000 1.41
VC 3,25,000 1.12
KN 2,10,000 1.18
CH 5,00,000 1.26
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18. The ABC financial consultant measures the portfolio, which consists of 5 stocks with the
following market values and beta :
Stock Market Value Beta Weight
Zee Films 1,00,000 1.10 0.20
Maruti Udyog 50,000 1.20 0.10
Dabur Ltd. 75,000 0.75 0.15
SiyaRam’s 1,25,000 0.80 0.25
Reliance 1,50,000 1.40 0.30
5,00,000 1.00
If the risk free rate is Rf = 7 %, Market return Rm = 14 %, what is the portfolio
expected return.

19. Assume Rf = 9 %, Rm = 15 %. The expected returns and beta’s are given below for
three stocks.
Stock Expected Return Expected Beta
H 14 % 1.20
I 15 % 0.75
J 20 % 1.50
Which stocks are under-valued and over-valued.

20. Given Rf as 9 % and Rm as 15 %, calculate the return on the securities and compare
them with the expected returns to find over-valued and under-valued securities.
Security E(R) Beta
1 14 % 1.70
2 15 % 0.55
3 20 % 1.60

21. Estimated returns and betas of 4 securities are given below. The risk free rate is 8 %
and the return on the market is 14 %. Find,
(a) the expected return on each security.
(b) Which of the securities are over-priced.
Securities : A B C D
Estimated Return : 25 17 32 12
Beta : 1.5 1.2 0.8 0.9

22. Consider two stocks P and Q :

Expected Return ( % ) SD ( % )
Stock P 16 25
Stock Q 18 30
The returns on the two stocks are perfectly negatively correlated. What is the expected
return of a portfolio constructed to derive the SD of portfolio return to zero.

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23. From the following information, compute expected return based on CAPM and APT
models.
Return on Market Portfolio is 15 %, equity beta is 1.2 and the risk free return is 15 %.

Factors Market Price of Risk Sensitivity Indexes

Inflation 6% 1.1
Industrial Production 2% 0.8
Risk Premium 3% 1.0
Unanticipated Changes 4% -0.9

24. Arvind stock has a beta of 0.5, Lasya stock has a beta of 1.2 and Reshma stock has a
beta of 1.25. If the expected market return is 22 % and the risk free rate is 13 %,
(i) What would be the expected return on Arvind ?
(ii) What would be the average and expected return on portfolio, if the portfolio consists
of 30 % of Arvind stock, 40 % of Lasya Stock and 30 % of Reshma Stock.
(iii) Compute expected return using part (i).