Birla Institute of Technology & Science, Pilani

Pilani Campus – Rajasthan

Comprehensive Exam (Open Book)

FIN F 414 – Financial Risk Analytics & Management
Session - 2023-24

Maximum Marks: 75 Dated: 09/Dec./2023

Instructions: Time Duration: 90 Minutes
• All questions are compulsory. Start each question from a new page.
• In the case of numerical, write all the steps necessary to arrive at the final answer with
interpretation.
• Marks would be deducted in case of No Valid Interpretation.
• Make sure that you have correctly mentioned your Name, ID, Course, and other details on
your answer sheet.

Short Type Questions (Each question 7 marks)

Q1:
A.

1
B.

C.

2
 D.

Particulars Scheme P Scheme Q Scheme R

Dividend Distributed Rs.1.75 - Rs.1.30
Add: Capital Appreciation Rs.2.97 Rs.3.53 Rs.1.99
Total Return [A] Rs.4.72 Rs.3.53 Rs.3.29
Opening NAV [B] Rs.32.00 Rs.27.15 Rs.23.50
Actual Return [A] ÷ [B] = [C] 14.75% 13.00% 14.00%
[4.72 ÷32.00] [3.53 ÷ 27.15] [3.29 ÷ 23.50]
Beta [D] 1.46 1.10 1.40
Expected Return under CAPM [E(RP)] [E] 14.56% 12.66% 14.25%
RF + βP X (RM – RF) = 6.84 + [D] × (12.13 - 6.84) [6.84 + 1.46 × [6.84 + 1.10 × [6.84 + 1.40 ×
(12.13 – 6.84] 12.13 – 6.84] (12.13 – 6.84]
Jensen’s Alpha (σp) [C] – [E] 0.19% 0.34% (0.25%)
(14.75-14.56) (13.00-12.66) (14.00-14.25)
Ranking 2 1 3
Evaluation: Schemes P and Q have outperformed the Market Portfolio (NIFTY), whereas
Scheme R has underperformed compared to the NIFTY.
E.

Reasons for Difference between Sharpe and Treynor’s method: (a) Sharpe Index considers
only the Standard Deviation and leaves the market Standard Deviation and the Correlation,
whereas Treynor considers market Standard Deviation and Correlation. (b) Greater correlation
results in a greater value of Beta. This would reduce the points in Treynor. (c) Portfolio R,
which is ranked ‘2’ in Sharpe, is pushed a position back in Treynor owing to the correlation
effect. Also evident in Portfolio P and Q.

3
 Long Type Questions
Q2: [20 Marks]
You are the portfolio manager of XYZ Ltd. You are constructing a portfolio of four securities
(A, B, C & D). You have Rs.10000 of wealth to be distributed among four securities as: 4000,
3000, 1000, and 2000 respectively. Using, historical price information you calculated the
variance-covariances among all the four securities. You want to determine the portfolio Value-
at-Risk and Expected Shortfall at 99% and 95% confidence level. Show all the steps clearly
with proper reasoning. [ z-value at 1% is 2.33 and z-value at 5% is 1.65]
The variance-covariance matrix is given as follows:
A B C D
-
A 0.0001227 0.0000768 0.0000767 0.0000095
B 0.0000768 0.0002010 0.0001817 0.0000394
C 0.0000767 0.0001817 0.0001950 0.0000407
D -0.0000095 0.0000394 0.0000407 0.0001909

Ans:
alpha's 4000 3000 1000 2000 alpha's
A B C D
Variance-
Covariance A 0.0001227 0.0000768 0.0000767 -0.0000095 4000
B 0.0000768 0.0002010 0.0001817 0.0000394 3000
C 0.0000767 0.0001817 0.0001950 0.0000407 1000
D -0.0000095 0.0000394 0.0000407 0.0001909 2000

Portfolio Variance 8761.832891

Portfolio SD 93.60466277

2.33

One-Day 99% VaR 218.0988642

One-Day 99% ES 247.3642263

Portfolio Variance 8761.832891

Portfolio SD 93.60466277

1.65

One-Day 95% VaR 154.4476936

One-Day 95% ES 193.2473777

Interpret the finding with proper reasoning.

4
Q3: [10 Marks}
A Mutual Fund having 200 units has shown in NAV of Rs.8.75 and Rs.9.45 at the beginning
and at the end of the year, respectively. The Mutual Fund has given two options:
(a) Pay Rs.0.75 per unit as a dividend and Rs.0.60 per unit as a capital gain, or
(b) These distributions are to be reinvested at an average NAV of Rs.8.65 per unit.
What difference would it make in terms of return available, and which option is
preferable?
Ans:
Basic Data for Computation
Particulars Value (Rs.)
Opening NAV 8.75
Closing NAV 9.45
Dividend 0.75
Capital Gain Appreciation [Closing NAV - Opening NAV] 0.70
Capital Gain Distribution 0.60
Price Paid at the year beginning [200 units X Rs.8.75] 1,750

Option 1: Returns are distributed to Mutual Fund Holders

(a) Preparation of Fund Balance Sheet
Liabilities Rs. Assets Rs.
NAV on Closing Date 1,890 Fund Assets 2,160
Dividend Payable 150
Capital Gain Distribution 120
Total 2,160 Total 2,160

• NAV on Closing Date = [9.45 × 200]

• Dividend Payable = [0.75 × 200]
• Capital Gain Distribution = [0.60 × 200]

(b) Returns = (Closing Fund Assets – Opening Asset Value)/ Opening Asset Value
= (2,160- 1,750) /1,750
Option 2: The Distributions are reinvested at an average NAV of Rs.8.65 per unit
(a) Distributions Reinvested
Particulars Rs.
Capital Gain [0.60x200] 120
Dividend [0.75x200] 150
Total Distributions 270
No. of Units [Total Distributions ÷ Average NAV p.u. = 270 ÷ 8.65] 31.21 units

(b)
Preparation of Fund Balance Sheet after Reinvestment
Liabilities Rs. Assets Rs.
NAV on Closing Date 2,160 Fund Assets 2,160
Total 2,160 Total 2,160

• NAV on Closing Date = [9.45 × 200] + [8.65 × 31.21] = Rs. 2,160

5
Returns = (Closing Fund Assets – Opening Asset Value)/ Opening Asset Value
= (2,160 - 1,750) /1,750
= 23.43%
Conclusion:
Holding period return is the same from the Investor’s viewpoint, irrespective of whether the return is
reinvested or distributed in the form of Capital Gains or Dividends. Explain in details.

Q4: Critically analyse the need of BASEL-III in India and explain in detail. [10 Marks]
Reason # 1: Mounting pile of stressed assets
The banking sector in India is facing challenging times due to low credit growth,
deterioration in asset quality and low profitability. India’s banks have a stressed asset pile of
almost Rs 10 trillion, which hampers their ability to give out fresh loans. Of this, gross non-
performing assets account for Rs 7.7 trillion, the remaining comprising restructured loans. In
order to protect their margins under the new Basel III norms, banks need to adopt a granular
approach and a dynamic risk mitigation strategy.
Reason # 2: Economic and policy changes
The banking sector is facing headwinds due to some recent policy and economic regulations
such as demonetization, GST rollout and the Real Estate (Regulation and Development) Act
(RERA). This could slow the process for implementation of global risk norms under Basel
III. For example, despite significant interest rate cuts and sops for affordable housing, growth
in home loans fell to 10.5% in the 12 months ended July 2017, from 17.2% in in the same
period last year. The banks are slowly recovering from the after-effects of these changes, and
this may slow the process of adapting to BASEL III norms.
Reason # 3: Capital requirements of public sector banks
The public sector banks (PSBs) in India are falling short of the stipulated capital requirements under
Basel III. Media reports suggest that the Indian PSBs need Rs 2.4 lakh crore capital by 2019 to meet
the norms. This will be a humongous task for the banks, more so because of the large amount of bad
loans on their books -- the total bad loans on the 40 listed banks in India amount to Rs 3 lakh crore.
According to According to estimates, the PSBs will need to raise tier 1 capital of Rs 1,72,000-
2,10,000 crore during FY17-FY19 to meet the higher regulatory minimum capital requirements as
well as fund growth. Strengthened organizational structure, stricter risk management and improved
credit delivery discipline will be critical to a turnaround in PSB performance. The proposed capital
infusion by the government is expected to provide a fillip though detail of the capitalization of
individual banks are not clear as yet. A proper risk culture has to be developed across all levels at
banks, with stringent checks and controls.
Reason # 4: A race for survival and operational efficiency
To meet the new regulations, Indian banks will need to raise high quality capital while preserving the
core capital and using it more efficiently. This may have a transformational impact on the banking
landscape in India, leading to crowding out of weaker banks as it will get more difficult for them to
raise the additional funding and capital. We may, therefore, see more consolidation in the sector, with
the most with the most efficient, competitive and agile banks emerging as the winners.
Reason # 5: Meeting investor and customer expectations
As with all new regulations, Basel III norms have various costs and benefits associated with them.
Banks will now face the challenge of meeting stakeholder and customer expectations, all the while
complying with the stringent new regulatory requirements. In this scenario, banks will need to fully
embrace disruptive technologies such as Big Data and Artificial Intelligence to meet the increasing
demands of their customers.