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Math Assignment (1)

The document outlines various financial calculations related to optimal risky portfolios, asset pricing models, and portfolio evaluation. It includes requirements for calculating expected returns, risks, covariances, and correlations for different stocks and funds, as well as evaluating the performance of portfolios using metrics like alpha, beta, Sharpe ratio, and Treynor ratio. Additionally, it discusses the implications of risk-free rates and market returns on investment decisions.

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Anvir Polton BBA General
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20 views

Math Assignment (1)

The document outlines various financial calculations related to optimal risky portfolios, asset pricing models, and portfolio evaluation. It includes requirements for calculating expected returns, risks, covariances, and correlations for different stocks and funds, as well as evaluating the performance of portfolios using metrics like alpha, beta, Sharpe ratio, and Treynor ratio. Additionally, it discusses the implications of risk-free rates and market returns on investment decisions.

Uploaded by

Anvir Polton BBA General
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Optimal Risky Portfolio

1. Consider the following data:

Probability Return from Stock A (%) Return from Stock B (%)


0.25 6.3 -3.7
0.55 10.5 6.4
0.20 15.6 25.3

Requirements:
i. Calculate expected return, risk on each stock, and interpret your investment
decision.
ii. Calculate the covariance and correlation coefficient between returns from stock A
and stock B.
iii. Calculate the portfolio return and portfolio risk if 35 percent investment made in
stock B.

2. An investor is considering investing in a small-cap stock fund and a general bond


fund. Their returns and standard deviations are given next and the correlation between the
two fund returns is 0.10:
Investment Expected Return (%) Standard Deviation of Return (%)
Small-cap fund, (S) 19 33
Bond fund, (B) 8 13

Requirements:
i. If the investor requires a portfolio of return of 12 percent, what should the
proportion in each fund be?
ii. What is the standard deviation of the portfolio constructed in part (i)
iii. Now, the investor assumes that the correlation coefficient between the above
mentioned investment is perfectly negative. The calculate the return and risk of the
perfectly hedged portfolio.
iv. Suppose the rate of return from T-bill is 5 percent, then calculate the portfolio
return and portfolio risk and reward to variability ratio of the optimal risky
portfolio.
v. Considering the risk free rate is 5 percent calculate the portfolio return and
portfolio risk and reward to variability ratio of the optimal complete portfolio
(assuming the risk aversion coefficient of the investor is 3.5.
Asset Pricing Models

1. Suppose the risk-free rate is 3 percent, the expected return on the market portfolio is 13
percent, and its standard deviation is 23 percent. An Indian company, Bajaj Auto, has a
standard deviation of 50 percent but is uncorrelated with the market. Calculate Bajaj
Auto’s beta and expected return.
2. Suppose you observe the following situation:
Security Beta Expected Return (%)
A 1.15 18
B 0.80 15
Assume these securities are correctly priced. Based on the CAPM, what is the expected
return on the market? What is the risk free rate?
3. Suppose the risk-free rate is 3 percent, the expected return on the market portfolio is 13
percent, and its standard deviation is 23 percent. A German Company, Mueller Metals,
has a standard deviation of 50 percent and a correlation of 0.65 with the market.
Calculate Mueller Metals’s beta and expected return.
4. You invest 30 percent of your fund in market portfolio, 25 percent in the 91-day
Treasury bills, and the remaining in Prime Finance stock, a DSE stock that has a beta of
1.5. Given that the risk free rate is 6.5 percent and the market return is 16.5 percent, what
are the portfolio’s beta and expected return?
5. The following data are available to you as portfolio manager:
Security Estimated Return (%) Beta Standard Deviation (%)
A 30 2.0 50
B 25 1.5 40
C 20 1.0 30
D 11.5 0.8 25
E 10 0.5 20
Market Index 15 1.0 18
Govt. 7 0 0
Security
Requirement:
i. In terms of security market line (SML), which of the securities listed above are
underpriced?
ii. Assuming that a portfolio is constructed using equal proportions of the five
securities listed above, calculate the expected return and the risk of such a
portfolio.

Portfolio Evaluation
1. The DBH Fund, T-bills, and the DSEX have had the following returns over the past 6
years:

Tim DBH Fund’s Returns T-bills DSEX Returns


e (%) Returns (%) (%)
2012 -5 9 -4
2013 13 7 10
2014 11 6 9
2015 15 6 12
2016 17 7 13
2017 18 7 15
Determine DBH Fund’s alpha and beta coefficient for the 6-year period. Give your
opinion based on your findings.

Given the following information:


Portfolios
A B C D
Beta 1.10 0.8 1.8 1.4
Return (%) 14.5 11.2 19.75 18.5
5
Standard Deviation (%) 20 17.5 26.3 24.5
Risk free rate of return= 6 percent
Market return=12 percent
Calculate:
i. Sharpe ratio
ii. Treynor ratio

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