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Birla Institute of Technology & Science, Pilani

Hyderabad Campus
Semester-II 2020-21
Maximum Marks- 40
Mid-semester examination
Course Name: SAPM Course Code: ECON F412/ FIN F313
Date: 22/05/2021 Time: 10:00a.m.-12:00p.m.

 All questions are compulsory.


 There are total 8 questions
 Marks is mentioned against each question.
 Upload a single pdf with the solutions.

1. The characteristics if two securities are given below:


Security 1: Beta=0.8, Return =10%, SD=20%
Security 2: Beta=1.2, Return=15%, SD=25%
If the market risk is 20%, find the return, total risk, market risk and portfolio specific of
a portfolio consisting of 30% of security 1 and 70% of security 2. [5]

2. Consider following two securities:


Security 1: Return =10%, SD=18%
Security 2: Return=15%, SD=25%
If the risk-free rate is 5%, correlation 0.8, find the optimal risky portfolio and the
minimum variance portfolio if short selling is allowed. Write down the objective
function along with the constraints. [5]

3. Suppose that the SML relation is given by E(r)=7%+beta*20%. If there is a fund that has
a beta of 1.5 and an expected return of 20%, what will be your investment strategy and
why? Show all the steps involved to arrive at the answer. [5]

4. Consider a three factor model given as: E(r)=risk-free rate+b1 RP of F1+b2 RP of


F2+b3 RP of F3. Consider that F1=12%, F2=10%, F3=15% and risk-free rate is 5%.
There is a fund with an expected return of 35% and b1=1, b2=0.7 and b3=1.2. What can
we say regarding the pricing of this fund? What is the arbitrage strategy and profit?
Show all the steps involved to arrive at the answer. [5]
5. Evaluate the relative performance of the two funds using the M-squared measure and the
Treynor ratio:
Portfolio 1: Return: 23%; Risk=38%, beta=1.1
Portfolio 2: Return: 18%; Risk=25%, beta=1.35
The Market return is 25% and SD of market return is 30% and T-bill rate is 6%. [5]

6. Consider a fund investing in three sectors- Utilities, Bank and Technology. Given the
portfolio weights, returns as well as benchmark returns and weights find the difference
in return of the fund that can be attributed to security selection and the return that can be
attributed to sectoral allocation. [5]

Portfolio weights Benchmark Portfolio Benchmark


weights return return
Utilities 0.5 0.4 0.2 0.15
Banks 0.3 0.5 0.22 0.2
Technology 0.2 0.1 0.35 0.3

7. Suppose Company A has an obligation to pay $1 million in 10 years. The company


wants to immunize its portfolio by investing in any two bonds out of the three available
bonds:
Coupon rate Time to maturity (in Duration
years)
Bond 1 6% 30 11.44
Bond 2 11% 10 6.54
Bond 3 9% 20 9.61

The yield is 9% and par value is $100 for all the 3 bonds. Find the weights of each bond
in the immunized portfolio for all the available investment strategies (there can be more
than 1 possibility). [5]

8. You are an analyst working with Morgan Stanley valuing securities of small and
medium firms in India. Consider a small-cap company ABC Ltd. that has paid a
dividend of Rs.4 in the current year. Assuming a higher growth for next 3 years at 15%
and a stable growth of 4% thereafter, calculate the value using a two-stage dividend
discount model if the market capitalization rate is 10%. [5]

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