BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Portfolio management
Q1

PRAVINN
MAHAJAN
CA CLASESS

Year
05
06
07
08
09
10

(X-𝑋 )
-3
3
-21
5
7
9

X
12
18
-6
20
22
24

(X-𝑋)2
9
9
441
25
49
81
__________

614 𝑋
=

Ʃ𝑋 𝑁

=

90
6

(𝑋;𝑋)2 𝑁

σ = 𝜎

2 =

614
6

= 15%
614

=

6

=

10.11%

= 102.33

Q2
No.

Return (X)

Prob.

(X-𝑋)

P(X-𝑋)2

1
2
3
4
5
6
7

12
15
18
20
24
26
30

0.05
0.10
0.24
0.26
0.18
0.12
0.05

-8.56
-5.56
-2.56
-0.56
3.44
5.44
9.44

3.66
3.09
1.57
0.082
2.13
3.55
4.46
18.542

Expected return = 𝑃𝑋

= 12 x 0.05 + 15 x 0.10 + 18 x 0.24 + 20 x 0.26 + 24 x 0.18 +
26 x 0.12 + 30 x 0.05 = 20.56
σ = 𝑃

(𝑋 − 𝑋)2

1

=

18.542

= 4.31%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Year
1
2
3
4
5
6
7

Q3

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Return(X)
-24
-10
0
12
18
22
30

Prob.
0.05
0.15
0.15
0.20
0.20
0.15
0.10

Expected return =

PRAVINN
MAHAJAN
CA CLASESS

Year

Return =

1
2
3
4
5

-33.33
50
33.33
25
20 𝑃

1−𝑃0 𝑃
0

P(X-𝑋)2
56.448
57.624
13.824
1.152
14.112
23.064
41.616
207.84

(X-𝑋)
-33.6
-19.6
-9.6
2.4
8.4
22.4
20.4

9.6

σ = Ʃ𝑃(𝑋 − 𝑋)2 =

Q4

PX
-1.2
-1.5
0
2.4
3.6
3.3
3.0
9.6

207.84 = 14.417 %

=X

Prob.

PX

(X-𝑋)

P(X-𝑋)2

0.10
0.20
0.40
0.20
0.10

-3.33
10.00
13.33
5
2

-60.33
23
6.33
-2
-7
27

363.97
105.8
16.027
0.8
4.9
491.497

Expected Return = 27
σ = 𝑃(𝑋 − 𝑋)2 = 491.497 = 22.169 %

Q5
Year

Return = 𝑑

1 :(𝑃1−𝑃0 ) 𝑃
0

=X

1.8:(38;38)
= 4.73
38
2.0:(45;38)
= 23.68
38
2.5:(53;45)
= 23.33
45
2.0:(50;53)
= -1.886
53
2.6:(61;50)
= 27.2
50
3.0:(68;61)
= 16.393
61

04-05
05-06
06-07
07-08
08-09
09-10

(X-𝑋)

(X-𝑋)2

-10.845

117.614

8.105

65.691

7.755

60.140

17.461

304.886

11.625

135.140

0.818

0.669

93.447

684.14

Expected Return = 93.447 6 = 15.575%
σ =

(𝑋;𝑋)2 𝑁

=

684.14
6

= 10.67%

2

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q6
Year

Return =

PRAVINN
MAHAJAN
CA CLASESS 𝑑

1 :(𝑃1−𝑃0 ) 𝑃

0
1.53:(20.75;31.25)
31.25

96

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

97

1.53:(30.88;20.75)
20.75

98

2:(67;30.88)
30.88

99

2:(100;67)
67

00

3:(154;100)
=
100

(X-𝑋)

(X-𝑋)2

= - 28.7

-80.732

6517.65

= 56.19

4.158

17.288

71.408

5099.102

0.198

0.0392

4.968

24.681

=X

= 123.44

= 52.23
57
260.16

Expected return
σ =

(𝑋;𝑋)2 𝑁

=

260.16
5

=
11,658.76
5

11658.76
= 52.032

= 48.28%

Q7
Market
Condition
Good
Normal
Bad

probability

Dividend

0.25
0.50
0.25

9
5
3

Return of security =

Expected
Dividend
9 x 0.25 = 2.25
5 x 0.5 = 2.5
3 x 0.25 = 0.75
5.5 𝑑

1 :(𝑃1−𝑃0) 𝑃
0

=

Market
price
115
107
97

5.5:(106.5;100∗∗ )
=
100

Expected
Mkt. price
115 x 0.25 = 28.75
107 x 0.5 = 53.5
97 x 0.25 = 24.25
106.5

12%

**

The current market price of the share is Rs 106 cum bonus 10% debenture of Rs 6 each,
company had offered buyback of debentures at face value, so Rs 6 will be returned , thus net
investment in share is Rs 100
Risk of security
Probability(P)
0.25
0.50
0.25

Capital gain
115 – 100 = 15
107 – 100 = 7
97 – 100 = -3

Dividend
9
5
3

Return(X)
15 + 9 = 24
7 + 5 = 12
0

P(X)
6
6
0
12

P(X-𝑋)2
0.25(24 – 12)2 = 36
0.50(12-12)2 = 0
0.25(0 – 12)2 = 36
72

σ = 𝑃(𝑋 − 𝑋)2 = 72
= 8.485%
Company has offered buyback of debenture at face value. Rate of interest of debenture is 10%
whereas expected market rate of return is 12%, so investor should accept the offer of buyback.

3

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q8

PRAVINN
MAHAJAN
CA CLASESS

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Security X
X
30
20
10
5
-10

Security Y

P
0.10
0.20
0.40
0.20
0.10

PX
3
4
4
1
-1

2

(X-𝑋)
19
9
-1
-6
-22

Return =

11 𝑃𝑋
= 11%

σ = 𝑃(𝑋

− 𝑋)2

P(X-𝑋)
36.1
16.2
0.40
7.20
44.10

Y
-20
10
20
30
40

P
0.05
0.25
0.30
0.30
0.10

104
Return = 𝜎 𝑋

= 𝑅𝑖𝑠𝑘 𝑅𝑒𝑡𝑢𝑟𝑛

P(Y-𝑌)2
82.0125
27.5625
0.75
27.075
38.025

(Y-𝑌)
-40.5
-10.5
0.5
9.5
19.5

20.5 𝑃𝑌
= 20.5%

174.75

σ = 𝑃(𝑌 − 𝑌)2 = 174.75 = 13.21%

= 104 = 10.19%

Coefficient of variation =

PX
-1
2.5
6.0
9.0
4

=

10.19
11

Coefficient of variation = 𝜎 𝑌

= 𝑅𝑖𝑠𝑘 𝑅𝑒𝑡𝑢𝑟𝑛

=

13.21
20.5

= 0.644

= 0.926

In case of security X for 1% of return there is risk of 0.926%, and in security Y for 1%
return risk is 0.644%. since for 1% of return , risk is lower in case of Y, so Y is better.
Q9

Security X
X
-10
10
15
20
40

P
0.10
0.2
0.4
0.2
0.10

Security Y

PX
-1
2
6
4
4

Return =

15 𝑃𝑋
= 15%

σ = 𝑃(𝑋

− 𝑋)2

(X-𝑋)
-25
-5
0
5
25

P(X-𝑋)2
62.5
5.0
0
5.0
62.5

X
2
7
12
15
16

P
0.2
0.2
0.3
0.2
0.1

135
Return = 𝜎 𝑋 𝑅𝑖𝑠𝑘

(Y-𝑌)
-8
-3
2
5
6

10 𝑃𝑌
= 10%

P(Y-𝑌)2
12.8
1.8
1.2
5.0
3.6
24.4

σ = 𝑃(𝑌 − 𝑌)2 = 24.4 = 4.93%

= 135 = 11.618%

Coefficient of variation =

PX
0.4
1.4
3.6
3.0
1.6

= 𝑅𝑒𝑡𝑢𝑟𝑛 =

11.618
15

Coefficient of variation = 𝜎 𝑌

= 0.774 𝑅𝑖𝑠𝑘

= 𝑅𝑒𝑡𝑢𝑟𝑛 =

4.93
10

= 0.493

In case of security X for 1% of return there is risk of 0.774%, and in security Y for 1%
return risk is 0.493%. since for 1% of return , risk is lower in case of Y, so Y is better.
Q10
1
2
3
4
5

Portfolio
29.5
-3.8
26.8
24.6
7.2

AAA bonds
13.4
12.8
10.5
8.9
9.2

Risk premium
16.1
-16.6
16.3
15.7
-2.0
29.5

4

Average risk premium =

29.5
5

= 5.9%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Risk premium is excess of return on risky securities over risk free securities. Risk premium on
risky securities can be negative in short term due to negative movement or reduction in price but
over a long term risk premium cannot be negative

Q11
PRAVINN
MAHAJAN
CA CLASESS

Market return

28.5
-5.0
17.9

Treasury
Bill

Prob.

9.7
9.5
9.2

0.20
0.30
0.50

Expected
Expected T.B
market return Return
5.7
-1.5
8.95
13.15

1.94
2.85
4.6
9.39

Risk
Expected
Premium Risk premium
18.8
-14.5
8.7

3.76
-4.35
4.35
3.76

Q12
portfolio return is weighted average of return of individual securities in portfolio
RP

=
=

WXRX + WYRY
12 x 0.40 + 15 x 0.60

=

13.8

Risk of Portfolio is NOT weighted average of risk of individual securities in portfolio.
 Portfolio risk if r=+1
σP

= 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

= (0.402 ). (152 ) + (0.602 ). (202 ) + (2). (1). (0.40). (15). (0.60). (20)
=

σP

36 + 144 + 144

=

324

=

18%

Portfolio risk if r=0
= 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

= (0.402 ). (152 ) + (0.602 ). (202 ) + (2). (0). (0.40). (15). (0.60). (20)
=

σP

36 + 144

=

180 =

13.41%

Portfolio risk if r= -1
= 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

= (0.402 ). (152 ) + (0.602 ). (202 ) + (2). (−1). (0.40). (15). (0.60). (20)
=

36 + 144 − 144

5

=

36 =

6%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q13
Weight of stock A and stock B is same.
i.
Expected Return of Portfolio – It is weighted average of return of each security in
portfolio.
RP
=
WARA + WBRB
=
15 x 0.50 + 25 x 0.50
=
20%
ii.

PRAVINN
MAHAJAN
CA CLASESS

Risk of Portfolio is NOT weighted average of risk of individual securities in portfolio.

σP

Portfolio risk if r=+1 𝑊𝐴
2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵

=

= (0.502 ). (202 ) + (0.502 ). (502 ) + (2). (1). (0.50). (20). (0.50). (50)
= 100 + 625 + 500

σP

1225

=

=

35%

Portfolio risk if r=0 𝑊𝐴
2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵

=

= (0.502 ). (202 ) + (0.502 ). (502 ) + (2). (0). (0.50). (20). (0.50). (50)
= 100 + 625 =

σP

725

= 26.92%

Portfolio risk if r=-1 𝑊𝐴
2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵

=

= (0.502 ). (202 ) + (0.502 ). (502 ) + (2). (−1). (0.50). (20). (0.50). (50)
= 100 + 625 − 500

=

225

=

15%

Q14
Year
1
2
3

Return (X)
9
12
18
39

Expected Return =

σ =

(𝑋;𝑋)2 𝑁

(X-𝑋)
-4
-1
5 𝑋 𝑁

=

Covariance =

=

39
3
42
3

2 𝑌 𝑁

= 13%
=

(X;𝑋) (Y;𝑌) 𝑁

=

(Y-𝑌)2

Return (Y) (Y-𝑌)
6
-12
30
12
18
0
54

(X-𝑋)
16
1
25
42

=

54
3

144
144
0
288

(𝑌;𝑌)2 𝑁

288
3

σ =

36
3

Co-eff of correlation (r)
r=
12

48
-12
0
36

= 18%

3.74 %

= 12

(X-𝑋) (Y-𝑌) 𝐶𝑂𝑉𝑋𝑌 𝜎𝑋𝜎𝑌

=

= 9.79%

12
3.74 𝑋 9.79

= 36.615 = 0.3277

6

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q15
Return of portfolio is weighted average of return of each security in the portfolio. Risk of
portfolio is not the weighted average of risk of each security in the portfolio.
Return of portfolio
RP
=
W B RB + W D RD
σP

Risk of portfolio

i.

100% investment in B

RP

PRAVINN
MAHAJAN
CA CLASESS 𝑊𝐵

2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

=

σP

=
=

W B R B + W D RD
12 X 1

=

12% 𝑊𝐵

2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

=

(1.002 ). (102 ) + (0.002 ). (182 ) + (2). (0.15). (1.00). (10). (0.00). (18)
100

=
ii.

=

10%

50% of fund invested in B and D both

RP

=
=
=

σP

=

W B R B + W D RD
0.50 X 12 + 0.50 X 20
16% 𝑊𝐵
2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

(0.502 ). (102 ) + (0.502 ). (182 ) + (2). (0.15). (0.50). (10). (0.50). (18)
=

0.25 𝑋 100 + 0.25 𝑋 324 + 13.5

=

25 + 81 + 13.5

=
iii.

119.5

=

10.93%

75% of fund invested in B and rest 25% in D

RP

=
=
=

σP

=

W B R B + W D RD
0.75 X 12 + 0.25 X 20
14% 𝑊𝐵
2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

(0.752 ). (102 ) + (0.252 ). (182 ) + (2). (0.15). (0.75). (10). (0.25). (18)
56.25 + 20.25 + 10.125
9.30%

=
=

=

86.625

Contd:

7

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

iv.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Contd:
25% of the fund invested in B and rest 75% in D
RP
=
W B R B + W D RD
=
0.25 X 12 + 0.75 X 20
=
18%
σP 𝑊𝐵

2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

=

(0.252 ). (102 ) + (0.752 ). (182 ) + (2). (0.15). (0.25). (10). (0.75). (18)

PRAVINN
MAHAJAN
CA CLASESS

6.25 + 182.25 + 10.125
14.093%

=
=

v.

=

198.625

100% investment in D

RP

=
=

σP

W B R B + W D RD
20 X 1

=

20% 𝑊𝐵

2 . 𝜎𝐵2 + 𝑊𝐷2 . 𝜎𝐷2 + 2. r. 𝑊𝐵 . 𝜎𝐵 . 𝑊𝐷 . 𝜎𝐷

=

(0.002 ). (102 ) + (1.002 ). (182 ) + (2). (0.15). (0.00). (10). (1.00). (18)
324

=

=

18%

Q16

Year
1
2
3
4
5
6
7
8
9
10

X
12
8
7
14
16
15
18
20
16
22
148

ReturnSEC1 =
σSEC1 =

(X-𝑋)2
7.84
46.24
60.84
0.64
1.44
0.04
10.24
27.04
1.44
51.84
207.6

(X-𝑋)
-2.8
-6.8
-7.8
-0.8
1.2
0.2
3.2
5.2
1.2
7.2

148
10

(𝑋;𝑋)2 𝑁

Y
20
22
24
18
15
20
24
25
22
20
210

= 14.8%
=

207.6
10

(Y-𝑌)
-1
1
3
-3
-6
-1
3
4
1
-1

ReturnSEC2 =
= 4.55%

8

σSEC2 =

210
10

(𝑌;𝑌)2 𝑁

(Y-𝑌)2
1
1
9
9
36
1
9
16
1
1
84

(X-𝑋) (Y-𝑌)
2.8
-6.8
-23.4
+2.4
-7.2
-0.2
9.6
20.8
1.2
-7.2
-8

= 21%
=

84
10

= 2.89%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

COVSEC 1&2

=

Correlation (r) =

Q17

(𝑋;𝑋).(𝑌;𝑌) 𝑁

Risk of portfolio (σP)

;8
10

=

COVSEC 1&2 𝜎𝑋
.𝜎𝑌

a. Return of portfolio
RP

PRAVINN
MAHAJAN
CA CLASESS

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

;0.8

=

=
=
=

= -0.8

4.55 𝑋 2.89

WXRX + WYRY
0.50 X 24 + 0.50 X 19
12 + 9.5
=

=

-0.0608

21.5 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

(0.502 ). (282 ) + (0.502 ). (232 ) + (2). (0.6). (0.50). (28). (0.50). (23)

196 + 132.25 + 193.2
22.83%

=
=

=

521.45

Correlation if investor wants to reduce portfolio risk to 15
(σP)

= 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

15

=

(0.502 ). (282 ) + (0.502 ). (232 ) + (2). (𝑿). (0.50). (28). (0.50). (23)

15

=

196 + 132.25 + 322𝑋

Squaring both sides
225
=
196 + 132.25 + 322X
X

=

;103.25
322

X

=

-0.32

b.
GM
GE
i.

Portfolio Return

Weight
0.40
0.60
RP

Risk
15
14
=
=
=

9

Return
15
9

WGMRGM + WGERGE
0.40 X 15 + 0.60 X 9
6 + 5.4 =
11.4

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

ii.

iii.

(σP)

(0.402 ). (152 ) + (0.602 ). (142 ) + (2). (0.5). (0.40). (15). (0.60). (14)

=

36 + 70.56 + 50.4

RP
13
13
4

156.96

=

12.52%

=
WGMRGM + WGERGE
=
x.15 + (1-x). 9
=
15x + 9 – 9x
=
6x
X = 0.667, (1-x) = 0.333

Risk of portfolio according to above weight is 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

=

(0.6672 ). (152 ) + (0.332 ). (142 ) + (2). (0.5). (0.667). (15). (0.33). (14)

=

100 + 21.78 + 46.67

Return
14
18

Devta (X)
Shree (Y)

RP

(σP)

=

Let the weight of GM be X and weight of GE be (1-x)

(σP)

Q18 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

=

PRAVINN
MAHAJAN
CA CLASESS

iv.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

=

Risk
25
35
=
=
=

168.45

weight
0.20
0.80

= 12.97%

r = 0.42

WXRX + WYRY
0.20 x 14 + 0.80 x 18
17.2% 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

= (0.202 ). (252 ) + (0.802 ). (352 ) + (2). (0.42). (0.20). (25). (0.80). (35)
25 + 784 + 117.6 = 926.6 = 30.44%

=

If 10% is invested in Devta and 90% in shree
RP
=
WXRX + WYRY
=
0.10 x 14 + 0.90 x 18
=
1.4 x 16.2
= 17.6%
(σP) 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

(0.102 ). (252 ) + (0.902 ). (352 ) + (2). (0.42). (0.10). (25). (0.90). (35)

=

6.25 + 992.25 + 66.15 = 1064.65 = 32.628%

10

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q19

i.

Year
1
2

X
11
17
28

ReturnP
PRAVINN
MAHAJAN
CA CLASESS

σP =

ii.

Security P
(X-𝑋) (X-𝑋)2
-3
9
3
9
18
=

(𝑋;𝑋)2 𝑁

COVPQ

=

=

28
2

18
2

= 3%

=

σP =

(𝑋;𝑋)2 𝑁

=

=

;36
2

= -18

=

;18
18

ReturnQ = 𝐶𝑂𝑉𝑃𝑄

=

(X-𝑋) (Y-𝑌)
-18
-18
-36 𝑋 𝑁

= 14%

(𝑋;𝑋).(𝑌;𝑌) 𝑁

=

Correlation (r)
iii. 𝑋 𝑁

security Q
Y (Y-𝑌) (Y-𝑌)2
20 6
36
8 -6
36
28
72 𝜎𝑃

.𝜎𝑄

28
2

= 14%

72
2

= 6%

= -1

If P and Q are invested in the ratio of 2:1
(σPORTFOlio) 𝑊𝑃

2 . 𝜎𝑃2 + 𝑊𝑄2 . 𝜎𝑄2 + 2. r. 𝑊𝑃 . 𝜎𝑃 . 𝑊𝑄 . 𝜎𝑄

=

(0.672 ). (32 ) + (0.332 ). (62 ) + (2). (−1). (0.667). (3). (0.33). (6)

=

=
4.04 + 3.92 − 7.924 = 0.04 = 0.2%
(since r = -1, so portfolio risk is equivalent to 0)

iv.

If P and Q are invested in the ratio of 1:1
(σPORTFOlio) 𝑊𝑃

2 . 𝜎𝑃2 + 𝑊𝑄2 . 𝜎𝑄2 + 2. r. 𝑊𝑃 . 𝜎𝑃 . 𝑊𝑄 . 𝜎𝑄

=

= (0.502 ). (32 ) + (0.502 ). (62 ) + (2). (−1). (0.50). (3). (0.50). (6)
= 2.25 + 9 − 9 = 1.5%
Since the correlation between two securities is -1, so portfolio risk can be 0. But for portfolio
risk to be 0 weight of securities in portfolio should be in the ratio of 2:1. Since weight of each
security in portfolio is changed and weight of low risk security P is reduced and high risk
security is increased so portfolio risk is higher

Q20

i.

Investment in A to attain a minimum risk portfolio
WA =

2 𝜎𝐵

;𝑟𝜎𝐴 𝜎𝐵
2
2 ;2𝑟𝜎 𝜎 𝜎𝐴
:𝜎𝐵 𝐴
𝐵

=

302 ; 0.10 . 20 . 30
202 :302 ;2 . 0.10 . 20 . 30

840

= 1180 = 0.711

WB = 1 – WA = 1 – 0.711 = 0.289
For minimum risk portfolio investor will invest 71.1% i.e (5,00,000 X 0.711)
3,55,500 in A and 28.9% (5,00,000 X 0.289) 1,44,500 in B

11

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

ii.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Return of portfolio
RP

PRAVINN
MAHAJAN
CA CLASESS

=
iii.

WARA + WBRB
0.711 x 17 + 0.289 x 16
16.711 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵

Risk of portfolio (σP) =

=

=
=
=

(0.7112 ). (202 ) + (0.2892 ). (302 ) + (2). (0.10). (0.711). (20). (0.289). (30)

202.2 + 75.15 + 24.657

= 302 = 17.38%

If r = -1, weight of A and B is

WA =

2 𝜎𝐵

;𝑟𝜎𝐴 𝜎𝐵
2
2 ;2𝑟𝜎 𝜎 𝜎𝐴
:𝜎𝐵 𝐴
𝐵

302 ;(;1) . 20 . 30

=

202 :302 ; 2

. (;1) . 20 . 30

=

1500
2500

= 0.60

WB = 1 – WA = 1 – 0.60 = 0.40
For minimum risk portfolio investor will invest 60% i.e (5,00,000 X 0.60)
3,00,000 in A and 40 % (5,00,000 X 0.40) 2,00,000 in B

X
20%
10%

Q21

Risk (σ)
Return

Y
25%
15%

r = + 0.5

Weight of each security for minimum risk portfolio
WX =
WY = 𝜎𝑌

2 ;𝑟𝜎𝑋 𝜎𝑌

2 :𝜎 2 ;2𝑟𝜎 𝜎 𝜎𝑋 𝑋

𝑌 𝑌

252 ;(𝑜.5) . 20 . 25

=

202 :252 ; 2

1 - WX
1 – 0.71 = 0.29
Return =
RP

Risk = (σP)

=

. (0.5) . 20 .

375

=
= 0.71
25 525

WXRX + WYRY
0.71 x 10 + 0.29 x 15 = 11.45 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

(0.712 ). (202 ) + (0.292 ). (252 ) + (2). (0.5). (0.71). (20). (0.29). (25)

357.1525 = 18.89%
Q22

Risk
Return

L
M
15%
18%
r = -1
20%
22%
Weight of each security for minimum risk portfolio
WL =

2 𝜎𝑀

;𝑟𝜎𝐿 𝜎𝑀

2 ;2𝑟𝜎 𝜎 𝜎𝐿
2 :𝜎𝑀 𝐿
𝑀

=

182 ;(;1) . 15 . 18
152 :182 ; 2

. (;1) . 15 .

594

=
= 0.55
18 1089

WM = 1 – WL = 1 – 0.55 = 0.45
Contd.
12

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Contd.
Return at the above weight
RP
PRAVINN
MAHAJAN
CA CLASESS

Risk = (σP)

=
=

2 𝑊𝐿
2 . 𝜎𝑀

=

WLRM + WLRM
0.55 x 20 + 0.45 x 22

+

2 𝑊𝐿
2 . 𝜎𝑀

= 20.9

+ 2. r. 𝑊𝐿 . 𝜎𝐿 . 𝑊𝑀 . 𝜎𝑀

(55). (152 ) + (0.452 ). (182 ) + (2). (−1). (0.55). (15). (0.45). (18)
0.0225 = 0.15%

Q23

Risk of portfolio can be zero only if r = -1, weight of P and Q so that portfolio risk is Zero :WP = 𝜎 𝜎𝑄

30 𝑃

:𝜎𝑄

= 25:30 = 0.55

WQ = 1- WP = 1 – 0.55 = 0.45
RP

RP

=
=
=

Q24

Risk of portfolio (σP) =

=
=
ii.

WA =

=

WLRM + WLRM
.54 x 16 + 0.45 x 18 = 16.82 %

WARA + WBRB
0.80 x 12 + 0.20 x 20
9.6 + 4 = 13.6 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵
(0.802 ). (32 ) + (0.202 ). (72 ) + (2). (1). (0.80). (3). (0.20). (7)

5.76 + 1.96 + 6.72

2 𝜎𝐵

;𝑟𝜎𝐴 𝜎𝐵
2
2 ;2𝑟𝜎 𝜎 𝜎𝐴
:𝜎𝐵 𝐴
𝐵

=

= 14.44 = 3.8%

72 ; (;1) . 3 . 7

70

32 :72 ; 2 . (;1) . 3 . 7

= 100 = 0.70

WB = 1 – 0.70 = 0.30
Q25

W
σ

1
0.3
6

2
0.5
9

3
0.2
10 𝑟

1.2 = 0 .4 𝑟

1.3 = 0.6 𝑟

2.3 = 0.7

(σP)= 𝑊12 . 𝜎12 + 𝑊22 . 𝜎22 + 𝑊32 . 𝜎32 + 2. 𝑟1.2 . 𝑊1 . 𝜎1 . 𝑊2 . 𝜎2 + 2. 𝑟1.3 . 𝑊1 . 𝜎1 . 𝑊3 . 𝜎3 + 2. 𝑟2.3 . 𝑊2 . 𝜎2 . 𝑊3 . 𝜎3
= (0.302 ). (62 ) + (0.502 ). (92 ) + (0. 20)2 (102 ) + 2. (0.4). (0.30). (6). (0.50). (9)
+2. (0.6). (0.30). (6). (0.20). (10) + 2. (0.7). (0.50). (9). (0.20). (10)

= 3.24 + 20.25 + 4 + 6.48 + 4.32 + 12.6 =

13

50.89 = 7.13 %

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q26

X1

x2

x3

x4

W

0.20

0.30

0.40

0.10

σ

4

8

20

10

rx1.x2 = 0.3
rx1.x4 = 0.2
rx2.x4 = 0.8

rx1.x3 = 0.5
rx2.x3 = 0.6
rx3.x4 = 0.4

2
2
2
2
2
2
2
2
(σP)= 𝑊𝑥1
. 𝜎𝑥1
+ 𝑊𝑥2
. 𝜎𝑥2
+ 𝑊𝑥3
. 𝜎𝑥3
+ 𝑊𝑥4
. 𝜎𝑥4
+ 2. 𝑟𝑥1.𝑥2 . 𝑊𝑥1 . 𝜎𝑥1 . 𝑊𝑥2 . 𝜎𝑥2 +

PRAVINN
MAHAJAN
CA CLASESS

2. 𝑟𝑥1.𝑥3 . 𝑊𝑥1 . 𝜎𝑥1 . 𝑊𝑥3 . 𝜎𝑥3 + 2. 𝑟𝑥1.𝑥4. 𝑊𝑥1 . 𝜎𝑥1 . 𝑊𝑥4 . 𝜎𝑥4 +
2. 𝑟𝑥2.𝑥3 . 𝑊𝑥2 . 𝜎𝑥2 . 𝑊𝑥3 . 𝜎𝑥3 + 2. 𝑟𝑥2.𝑥4 . 𝑊𝑥2 . 𝜎𝑥2 . 𝑊𝑥4 . 𝜎𝑥4 +

2. 𝑟𝑥3.𝑥4 . 𝑊𝑥3 . 𝜎𝑥3 . 𝑊𝑥4 . 𝜎𝑥4
= (0.202 ). (42 ) + (0.302 ). (82 ) + (0. 40)2 (202 ) + (0. 10)2 (102 ) + 2. (0.3). (0.20). (4). (0.30). (8)
+2. (0.5). (0.20). (4). (0.40). (20) + 2. (0.2). (0.20). (4). (0.10). (10)
+2. (0.6). (0.30). (8). (0.40). (20) + 2. (0.8). (0.30). (8). (0.10). (10)
+2. (0.4). (0.40). (20). (0.10). (10)

= 0.64 + 5.76 + 64 + 1 + 1.152 + 6.4 + 0.32 + 23.04 + 3.84 + 6.4

= 112.552 = 10.61%

Q27

Risk of portfolio (σP) = 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵
(0.702 ). (202 ) + (0.302 ). (102 ) + (2). (0.1). (0.70). (20). (0.30). (10)
196 + 9 + 8.4 =

213.4 = 14.60%

Weighted average risk of portfolio

= WAσA + WBσB
= 0.70 x 20 + 0.30 x 10 = 17%
Gain on portfolio is excess of weighted average risk over portfolio risk
Weighted average σ – Portfolio σ
17 – 14.60
= 2.40 %
%age of gain = Weighted average σ – Portfolio σ
= 17- 4.60 x 100 = 14.91 %
Weighted average σ
17
Contd.

14

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Contd.
If r = -1
Risk of portfolio (σP) = 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵
(0.702 ). (202 ) + (0.302 ). (102 ) + (2). (−1). (0.70). (20). (0.30). (10)

PRAVINN
MAHAJAN
CA CLASESS

196 + 9 − 84 =

121 = 11%

Weighted average risk of portfolio

= WAσA + WBσB
= 0.70 x 20 + 0.30 x 10 = 17%
Gain on portfolio is excess of weighted average risk over portfolio risk
Weighted average σ – Portfolio σ
17 – 11
= 6%
%age of gain = Weighted average σ – Portfolio σ
= 17- 11 x 100 = 35.29 %
Weighted average σ
17

Q28

σ
W

A
0.06
0.40

Risk of portfolio (σP) =

B
0.09
0.60

ra.b

= 0.06 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐵2 . 𝜎𝐵2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐵 . 𝜎𝐵
(0.402 ). (62 ) + (0.602 ). (92 ) + (2). (0.06). (0.40). (6). (0.60). (9)
5.76 + 29.16 + 1.5552 =

36.4752 = 6.04%

Weighted average risk of portfolio

= WAσA + WBσB
= 0.40 x 6 + 0.60 x 9 = 7.8%
Gain on portfolio is excess of weighted average risk over portfolio risk
Weighted average σ – Portfolio σ
7.8 – 6.04
= 1.76 %
%age of gain = Weighted average σ – Portfolio σ
= 7.8- 6.04 x 100 = 2.26 %
Weighted average σ
7.8

15

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q29

Rm = 10% , σM= 14% , RF = 6%

PRAVINN
MAHAJAN
CA CLASESS

(i)

If 100% is invested in risk free asset
Return = 6%
Risk = 0

(ii)

If 100% is invested in market portfolio
Return = 10%
Risk = 14
If investment in Risk free and market portfolio is in the ratio of 1:2
RP
=
WRfRRf + WMPRMP
=
(0.333) (6) + (0.667) (10)
=
8.67%
Risk of portfolio is weighted average risk
=
WMPσMP
=
(0.667) (14) = 9.33%

(iii)

(iv)

Risk of portfolio is weighted average risk
=
WMPσMP
=
(1.333) (14)
Return of portfolio =

=

Q30 𝑅

;𝑅
RF + ( 𝑀 𝐹 ) σP 𝜎𝑀

10;6
6+(
) 18.67
14

=

18.67%

=

11.33%

Ram buys 30,000 of stock X
And sells short 10,000 of stock Y and buys more of stock X
Return =

(1.333) (15) + (-0.333) (10)

Risk

(σP)

=
=

=

=

16.667 % 𝑊𝑋

2 . 𝜎𝑋2 + 𝑊𝑌2 . 𝜎𝑌2 + 2. r. 𝑊𝑋 . 𝜎𝑋 . 𝑊𝑌 . 𝜎𝑌

=

(1.3332 ). (102 ) + (−0.3332 ). (122 ) + (2). (0.45). (1.333). (10). (−0.333). (12)

12.07%

16

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q31

RF = 7%, RM = 15%, σM = 20%
(i)

PRAVINN
MAHAJAN
CA CLASESS

Risk level of portfolio constructed by A. Expected rate of return of A is 18% 𝑅𝑀
;𝑅𝐹
) σP 𝜎𝑀

15;7
(
) σP
20

Return of portfolio

=

RF + (

18

=

7+

0.4 σP
σP

=
=

18 – 7
27.5

σP
27.5

=
=

WRfσRf + WMPσMP
WRF.0 + WMP. (20)

WMP

=

27.5
20

Risk of portfolio

=

=

1.375

WRf
=
1 – 1.375
=
-0.375
A will shortsell 37.5% of risk free securities and invest 137.5% in Market portfolio
for return of 18% and risk at this level is 27.5%.
(ii)

Q32

Expected level of return or portfolio constructed by B having a risk of 15.81%
Risk of portfolio
=
σP
=
WRfσRf + WMPσMP
15.81 =
0
+ WMP. 20
WMP

=

15.81
20

WRF

=
=
=

0.7905
1 - WMP
1 – 0.7905

=

0.2095

Rm = 16% , σM= 10% , RF = 8%
(i)

If 100% is invested in market portfolio
Return = 16%
Risk = 10%

(ii)

If 100% is invested in risk free asset
Return = 8%
Risk = 0
If investment in Risk free and market portfolio is in the ratio of 40% : 60%
RP
=
WRfRRf + WMPRMP
=
(0.40) (8) + (0.60) (16)
=
12.8 %
Risk of portfolio is weighted average risk
=
WMPσMP
=
(0.60) (10) = 6%
Contd.

(iii)

17

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
(iv)

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Risk of portfolio is weighted average risk
=
WMPσMP
=
(1.20) (10)
Return of portfolio =
=

Contd. 𝑅

;𝑅
RF + ( 𝑀 𝐹 ) σP 𝜎𝑀

16;8
8 + ( 10 ) 12

=

12%

=

17.6%

Q33

Rf = 10%, RM = 18% , σM = 5%
PRAVINN
MAHAJAN
CA CLASESS 𝑅𝑀

;𝑅𝐹
) σP 𝜎𝑀

18;10
( 5 )σP

Return of portfolio

=

RF + (

16

=

10 +

6

=

1.6 σP

σP

=

6
1.6

=

3.75

Risk of portfolio is weighted average risk
σP
=
WRfσRf + WMPσMP
3.75 =
WRf. 0 + WMP.5
WMP

=

3.75
5

WRF

=

1 – WMP = 1 – 0.75 = 0.25

=

0.75

If expected return is 20% 𝑅𝑀
;𝑅𝐹
) σP 𝜎𝑀

18;10
( 5 ) σP

Return of portfolio

=

RF + (

20

=

10 +

σP
6.25

σP
=
=

=
6.25
WRfσRf + WMPσMP
WRf(0) + WMP. (5)

WMP

=

6.25
5

WMP
WRF

=
=

1.25
1 - WMP = 1- 1.25

18

=

1.25
=

-0.25

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q34

PRAVINN
MAHAJAN
CA CLASESS

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Between A and B – A dominates B, B is cancelled
Between A and C – there is no domination
Between And D – A dominates D, D is cancelled
Between A and E – There is no domination
Between A and F – there is no domination
Between C and E – there is no domination
Between E and F – E dominated F, F is cancelled
So A, C and E are efficient securities
Securities in ascending order of risk
A
E
C
ii. a)
75% in A and 25% in C
RP
=
W A RA + W C RC
ER
= 0.75 x 8 + 0.25 x 12 = 6 + 3 = 9
Risk

=

(σP)

=

Risk
4
5
12

Return
8
9
12 𝑊𝐴

2 . 𝜎𝐴2 + 𝑊𝐶2 . 𝜎𝐶2 + 2. r. 𝑊𝐴 . 𝜎𝐴 . 𝑊𝐶 . 𝜎𝐶

(0.752 ). (42 ) + (0.252 ). (122 ) + (2). (1). (0.75). (4). (0.25). (12)

b)

100% in E

=

=
6%
Expected return 9 and risk = 5%

Investment in E gives return of 9% with risk of 5% whereas investment in portfolio of A and
C gives return of 9 with risk of 6%. So investment in E is better.

Q35

Between U and V = U dominates V , V is cancelled
Between U and W = No domination
Between U and X = U dominates and X is cancelled
Between U and Y = No Dominance
Between U and Z = U dominates and Z is cancelled
Between W and Y = No domination
U, Y and W are efficient securities
Securities in Increasing order of Risk
Risk
U
5
Y
6
W
13
ii)
80% in U and 20% in W
RP
=
WURU + WWRW =
0.80 x 10 + 0.20 x 15 = 11%
Risk

=

(σP)

Return
10
11
15

2 𝑊𝑈
2 . 𝜎𝑈2 + 𝑊𝑊2 . 𝜎𝑊
+ 2. r. 𝑊𝑈 . 𝜎𝑈 . 𝑊𝑊 . 𝜎𝑊

=

(0.802 ). (52 ) + (0.202 ). (132 ) + (2). (1). (0.80). (5). (0.20). (13) = 6.6%

100% investment in Y ER = 11% and Risk 6%
Investment in Y gives return of 11% with risk of 6.6% whereas investment in portfolio of A and C
gives return of 11% with risk of 6%. So investment in Y is better.

19

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q36

Dividend
Cl. Price
Op. Price

M
10
220

N
3
290 𝟐

,𝟎𝟎,𝟎𝟎𝟎
= 𝟏
,𝟎𝟎𝟎

200

Return of security =

PRAVINN
MAHAJAN
CA CLASESS

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854 𝟏

,𝟓𝟎,𝟎𝟎𝟎
= 𝟓𝟎𝟎 𝒅𝟏

:(𝑷𝟏−𝑷𝟎 ) 𝑷𝟎 𝟏𝟎

:(𝟐𝟐𝟎;𝟐𝟎𝟎⬚ )
= 15% 𝟐𝟎𝟎 𝟑

:(𝟐𝟗𝟎;𝟑𝟎𝟎⬚ )
= - 2.3% 𝟑𝟎𝟎

M

=

N

=

Portfolio return(31.03.09) =

ii.
Dividend
Expected MP

Opening Price
Return of security =

RP

=

= 𝟐

,𝟎𝟎,𝟎𝟎𝟎
x 𝟑
,𝟓𝟎,𝟎𝟎𝟎

M
20
220 x 0.2 +
250 x 0.5 +
280 x 0.3
= 253
220

WMRM + WNRN 𝟏
,𝟓𝟎,𝟎𝟎𝟎

15 + 𝟑,𝟓𝟎,𝟎𝟎𝟎 x (-2.3) = 7.63%

N
3.5
290 x 0.2 + 310 x 0.5
+ 330 x 0.3 = 312

290 𝒅𝟏

:(𝑷𝟏−𝑷𝟎 ) 𝑷𝟎 𝟐𝟎

:(𝟐𝟓𝟑;𝟐𝟐𝟎⬚ )
= 24.09% 𝟐𝟐𝟎

⬚ 𝟑
.𝟓:(𝟑𝟏𝟐;𝟐𝟗𝟎 )
= 8.79% 𝟑𝟎𝟎

M

=

N

=

Portfolio return(31.03.09) =
iii.

300

RP

=

= 𝟏𝟎𝟎𝟎

𝑿 𝟐𝟐𝟎
x 𝟑
,𝟔𝟓,𝟎𝟎𝟎

Standard deviation of M
Probability
CG
0.2
220 – 220= 0
0.5
250-220 = 30
0.3
280-220 = 60
Risk =
Standard deviation of M
Probability
CG
0.2
290 – 290= 0
0.5
310-290 = 20
0.3
330-290 = 40

Div
20
20
20

WMRM + WNRN
24.09 +

Return(X)
20
50
80 𝟓𝟎𝟎

𝑿 𝟐𝟗𝟎
x 𝟑
,𝟔𝟓,𝟎𝟎𝟎

PX
4
25
24

8.79 =

17.97%

P(X-𝑋)2
217.8
4.5
218.7
441

441 = 21%
Div
3.5
3.5
3.5

Return(X)
3.5
23.5
43.5

PX
P(X-𝑋)2
0.7
96.8
11.75 2
13.05 97.2
196

Risk = 196 = 14%
20

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q37

RP

=
=
(σP)=

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

WPRp + WQRQ + WRRR
0.33 x 25 + 22 x 0.33 + 20 x 0.33

=

22.326% 𝑾𝟐𝑷

. 𝝈𝟐𝑷 + 𝑾𝟐𝑸 . 𝝈𝟐𝑸 + 𝑾𝟐𝑹 . 𝝈𝟐𝑹 + 𝟐. 𝒓𝑷.𝑸 . 𝑾𝑷 . 𝝈𝑷 . 𝑾𝑸 . 𝝈𝑸 + 𝟐. 𝒓𝑷.𝑹 . 𝑾𝑷 . 𝝈𝑷 . 𝑾𝑸 . 𝝈𝑸 + 𝟐. 𝒓𝑸.𝑹 . 𝑾𝑸 . 𝝈𝑸 . 𝑾𝑹 . 𝝈𝑹

PRAVINN
MAHAJAN
CA CLASESS

= (𝟎. 𝟑𝟑𝟐 ). (𝟑𝟎𝟐 ) + (𝟎. 𝟑𝟑𝟐 ). (𝟐𝟔𝟐 ) + (𝟎. 𝟑𝟑)𝟐 (𝟐𝟒𝟐 ) + 𝟐. (−𝟎. 𝟓). (𝟎. 𝟑𝟑). (𝟑𝟎). (𝟎. 𝟑𝟑). (𝟐𝟔)
+𝟐. (𝟎. 𝟔). (𝟎. 𝟑𝟑). (𝟑𝟎). (𝟎. 𝟑𝟑). (𝟐𝟒) + 𝟐. (𝟎. 𝟒). (𝟎. 𝟑𝟑). (𝟐𝟔). (𝟎. 𝟑𝟑). (𝟐𝟒)

= 𝟗𝟖. 𝟎𝟏 + 𝟕𝟑. 𝟔𝟐 + 𝟔𝟐. 𝟕𝟑 − 𝟖𝟒. 𝟗𝟒𝟐 + 𝟗𝟒. 𝟎𝟗 + 𝟓𝟒. 𝟑𝟔
= 𝟐𝟗𝟕. 𝟖𝟔𝟖 = 17.2588%
Q38

Portfolio P and Q
RP
=
=
Risk

=

WPRp + WQRQ
0.5 x 11 + 0.5 x 20
(σP)

= 15.5% 𝑊𝑃

2 . 𝜎𝑃2 + 𝑊𝑄2 . 𝜎𝑄2 + 2. r. 𝑊𝑃 . 𝜎𝑃 . 𝑊𝑄 . 𝜎𝑄

=

(𝟎. 𝟓𝟎𝟐 ). (𝟏𝟕𝟐 ) + (𝟎. 𝟐𝟗𝟐 ). (𝟎. 𝟓𝟎𝟐 ) + (𝟐). (𝟎). (𝟎. 𝟓𝟎). (𝟏𝟕). (𝟎. 𝟓𝟎). (𝟐𝟗) = 16.80%

Portfolio Q and R
RP
=
=
Risk

=

WQRQ + WRRR
0.5 x 20 + 0.5 x 14
(σP)

= 17% 𝑾𝟐𝑸

. 𝝈𝟐𝑸 + 𝑾𝟐𝑹 . 𝝈𝟐𝑹 + 𝟐. 𝐫. 𝑾𝑸 . 𝝈𝑸 . 𝑾𝑹 . 𝝈𝑹

=

(𝟎. 𝟓𝟎𝟐 ). (𝟐𝟗𝟐 ) + (𝟐𝟏𝟐 ). (𝟎. 𝟓𝟎𝟐 ) + (𝟐). (𝟎. 𝟒). (𝟎. 𝟓𝟎). (𝟐𝟗). (𝟎. 𝟓𝟎). (𝟐𝟏) = 21.03%

Portfolio P and R
RP
=
=
Risk

=

WPRp + WRRR
0.5 x 11 + 0.5 x 14
(σP)

= 12.5% 𝑾𝟐𝑷

. 𝝈𝟐𝑷 + 𝑾𝟐𝑹 . 𝝈𝟐𝑹 + 𝟐. 𝐫. 𝑾𝑷 . 𝝈𝑷 . 𝑾𝑹 . 𝝈𝑹

=

(𝟎. 𝟓𝟎𝟐 ). (𝟏𝟕𝟐 ) + (𝟎. 𝟓𝟎𝟐 ). (𝟐𝟏𝟐 ) + (𝟐). (𝟎. 𝟔). (𝟎. 𝟓𝟎). (𝟏𝟕). (𝟎. 𝟓𝟎). (𝟐𝟏) = 𝟐𝟖𝟗

. 𝟔 = 17.017
Portfolio
Risk
Return coeff. of varition
PQ
16.8 15.5
1.083
QR
21.03 17
1.237
PR
17.017 12.5
1.36

21

Portfolio PQ is most efficient
as it has least co.eff. of variation

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q39

Probability
Stock A
.25
14
.75
12
Expected return

PA
3.5
9.0
12.5

Stock B
15
3

PB
3.75
2.25
6.0

Expected return of equally weighted portfolio =
RP
=
WARA + WBRB + WCRC
=
0.33 x 12.5 +0.33 x 6 + 0.33 x 3.75
ii.
Standard deviation of A, B and C
probability P(A-𝐴)2
P(B-𝐵)2 P(C-𝐶)2
0.25
0.5625
20.25
213.891
0.75
0.1875
6.75
71.297
0.75
27
285.188 𝟒

.𝟓

rA.B = 𝟎.𝟖𝟔𝟔 𝑿 𝟓.𝟏𝟗𝟔 = 1 𝟖𝟕

.𝟕𝟓

=

P(A-𝐴)(B-𝐵)
3.375
1.125
4.5

σA = 𝟎. 𝟕𝟓 = 0.866% σB = 𝟐𝟕 = 5.196%
rB.C = 𝟓.𝟏𝟗𝟔 𝑿 𝟏𝟔.𝟖𝟖 = 1

Stock C
33
-6

P(C-𝐶)(B-𝐵)
65.8125
21.9375
87.75

PC
8.25
-4.5
3.75

7.84%

P(A-𝐴)(C-𝐶)
10.969
3.656
14.625

σC = 𝟐𝟖𝟓. 𝟏𝟖𝟖 = 16.88% 𝟏𝟒
.𝟔𝟐𝟓

rC.A = 𝟏𝟔.𝟖𝟖 𝑿 𝟎.𝟖𝟔𝟔 =1

(σP)= 𝑾𝟐𝑨
. 𝝈𝟐𝑨 + 𝑾𝟐𝑩 . 𝝈𝟐𝑩 + 𝑾𝟐𝑪 . 𝝈𝟐𝑪 + 𝟐. 𝒓𝑨.𝑩 . 𝑾𝑨 . 𝝈𝑨 . 𝑾𝑩 . 𝝈𝑩 + 𝟐. 𝒓𝑩.𝑪 . 𝑾𝑩 . 𝝈𝑩 . 𝑾𝑪 . 𝝈𝑪 + 𝟐. 𝒓𝑨.𝑪 . 𝑾𝑨 . 𝝈𝑨 . 𝑾𝑪 . 𝝈𝑪

=
(𝟎. 𝟏𝟓𝟐 ). (𝟎. 𝟖𝟔𝟔𝟐 )

+ (𝟎. 𝟏𝟓𝟐 ). (𝟓. 𝟏𝟗𝟔𝟐 ) + (𝟎. 𝟕)𝟐 (𝟏𝟔. 𝟖𝟖𝟐 ) + 𝟐. (𝟏). (𝟎. 𝟏𝟓). (. 𝟖𝟔𝟔). (𝟎. 𝟏𝟓). (𝟓. 𝟏𝟗𝟔)

+𝟐. (𝟏). (𝟎. 𝟏𝟓). (𝟓. 𝟏𝟗𝟔). (𝟎. 𝟕𝟎). (𝟏𝟔. 𝟖𝟖) + 𝟐. (𝟏). (𝟎. 𝟏𝟓). (𝟎. 𝟖𝟔𝟔). (𝟎. 𝟕𝟎). (𝟏𝟔. 𝟖𝟖)

= 𝟎. 𝟎𝟏𝟔𝟖𝟕 + 𝟎. 𝟔𝟎𝟕𝟒𝟔 + 𝟏𝟑𝟗. 𝟔𝟏𝟕𝟗 + 𝟎. 𝟐𝟎𝟐𝟒𝟖𝟖 + 𝟏𝟖. 𝟒𝟏𝟖𝟕𝟖 + 𝟑. 𝟎𝟔𝟗𝟖𝟎
= 𝟏𝟔𝟏. 𝟗𝟑𝟑𝟐𝟗 = 12.725%
Variance = σ2 = 161.933

22

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q40

X 5,000
Y 3,000

A
1500
600
2100

B
2000
1500
3500

C
1500
900
2400

Weight of each stock 𝟐𝟏𝟎𝟎 𝟖𝟎𝟎𝟎 𝟑𝟓𝟎𝟎 𝟖𝟎𝟎𝟎 𝟐𝟒𝟎𝟎 𝟖𝟎𝟎𝟎

ii.

= 26%

= 44%

= 30%

Minimum variance of 3 security portfolio is computed by Critical line method
Critical line =

WB = a + b.WA

Portfolio X
Portfolio Y

0.4 = a + b. (0.30)
0.50=a + b (0.20)

….1
…..2

Solving 1 and 2 b = -1 and = 0.70
So critical line is
WB = 0.70 – 1(WA)
Out of 8000, Rs 4,000 is invested in A, So weight of A = 0.50
WB = 0.70 – 1(0.50)
=
0.20
WC = 1 – WA - WB
=
1 – 0.50 – 0.20 = 0.30

Investment in A = 4,000
B = 1600
C= 2400

23

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q41

X 2,000
Y 1,000

A
480
(360)
120

B
1040
720
1760

C
480
640
1120

Weight of each stock 𝟏𝟐𝟎 𝟑𝟎𝟎𝟎 𝟏𝟕𝟔𝟎 𝟑𝟎𝟎𝟎 𝟏𝟏𝟐𝟎 𝟑𝟎𝟎𝟎

ii.

PRAVINN
MAHAJAN
CA CLASESS

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

= 4%

= 58.67%

= 37.33%

Minimum variance of 3 security portfolio is computed by Critical line method
Critical line =

WB = a + b.WA

Portfolio X
Portfolio Y

0.52 = a + b. (0.24)
0.72=a + b (-0.36)

….1
…..2

Solving 1 and 2 b = -0.333 and = 0.0.44
So critical line is
WB = 0.44 – 0.33(WA)
Out of 3000, Rs 1,500 is invested in A, So weight of A = 0.50
WB = 0.44 – 0.33(0.50) =
0.275
WC = 1 – WA - WB
=
1 – 0.50 – 0.275 = 0.225
Investment in A = 1,500
B = 825
C= 675

Q42

i. 𝜎𝑆 𝜎𝑀

22
X 12

β = rM.S
0.7

= 1.283

Systematic risk
β2 X 𝝈𝟐𝑴 = (1.283)2 X (12)2 =237.036 or
r2 X 𝝈𝟐𝑺 = (0.7)2 X (22)2 = 237.16
Unsystematic risk of security = 𝜎𝑆2 - systematic risk
= (22)2 – 237.16
= 246.84

24

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q43

Year
1
2
3
4
5
6

PRAVINN
MAHAJAN
CA CLASESS

ERS =
σS =

ii.

(S-𝑆)2
4
81
324
64
64
49
586

S
14
21
-6
4
20
19
72 𝟕𝟐 𝟔

= 12% 𝟓𝟖𝟔 𝟔

= 9.88%

βS.M = rM.S

(M-𝑀)2
9
1
121
9
25
49
214

M
6
8
-2
12
14
16
54 𝝈𝑺 𝝈𝑴

ERM = 𝟓𝟒 𝟔

σM = 𝟐𝟏𝟒 𝟔

or

Q44

Probability
0.30
0.20
0.30

S
30
20
0

SP
9
8
0
17

ERS = 17

ERM = 14

(S-𝑆) (M-𝑀)
-6
-9
198
-24
40
49
248

= 9%
= 5.97 𝑪𝑶𝑽𝑺

.𝑴 𝝈𝟐𝑴 𝟒𝟏

.𝟑𝟑
= (𝟓.𝟗𝟕)𝟐

COVS.M = 𝟐𝟒𝟖 𝟔

= 41.33

= 1.15

P(S-𝑆)2
50.7
3.6
86.7
141

M
-10
20
30

MP
-3
8
9
14

P(M-𝑀)2
172.8
14.4
76.8
264

P(S-𝑆)(M-𝑀)
-93.6
7.2
-81.6
168

COVS.M = 168

σS = 𝟏𝟒𝟏 = 11.87% σM = 𝟐𝟔𝟒 = 16.24%
ΒS = 𝑪𝑶𝑽𝑺

.𝑴 𝝈𝟐𝑴 𝟏𝟔𝟖

= 𝟐𝟔𝟒 = 0.636

25

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q45

Year
2002
2003
2004
PRAVINN
MAHAJAN
CA CLASESS

A
13
11.50
9.80
34.3 𝑴

= 𝟑𝟐 𝟑 = 10.67 𝟒
.𝟔𝟔𝟔𝟕
= 1.247 𝟑 𝟒

.𝟖𝟑𝟑
COVM.A = 𝟑 = 1.611

Year
1
2
3 𝑪𝑶𝑽𝑨

.𝑴 𝝈𝟐𝑴

B
11
10.5
9.50
31

(B - 𝐵)2
0.4489
.0289
.6889
1.1667 𝟏

.𝟔𝟏𝟏

M
9
12
18

βB = 𝑪𝑶𝑽𝑩

.𝑴 𝝈𝟐𝑴

P(M-𝑀)2
5.33
0.33
8.33
13.99

PM
3
4
6
13

(M-𝑀)(A-𝐴)
2.084
0.022
2.727
4.833

(M-𝑀)(B-𝐵)
0.8911
0.056
1.3861
2.3332 𝑩

= 𝟑𝟏 𝟑 = 10.33 𝟓

.𝟏𝟐𝟓
= 1.30% 𝟑 𝟐

.𝟑𝟑𝟑𝟐
COVM.B = 𝟑 = 0.777

σA =

= 𝟏.𝟓𝟓𝟓 = 1.036

Probability
1/3
1/3
1/3 𝑴

= 13

(A-𝐴)2
2.455
0.004
2.666
5.125 𝑨

= 𝟑𝟒. 𝟑 𝟑 = 11.433

σM =

ΒA =

Q46

(M-𝑀)2
1.7689
0.1089
2.7889
4.6667

M
12
11
9
32

σB = 𝟏

.𝟏𝟔𝟔𝟕
= 𝟑

0.624% 𝟎

.𝟕𝟕𝟕

= 𝟏.𝟓𝟓𝟓 = 0.50

I
6
30
18

PI
2
10
6
18

P(I-𝐼)2
48
48
0
96

P(M-𝑀)(I-𝐼)
16
-4
0
12 𝑰

= 18

σM = 𝟏𝟑. 𝟗𝟗 = 3.740% σI = 𝟗𝟔= 9.798%
COVM.I = 12
ΒI =
b. 𝑪𝑶𝑽𝑰

.𝑴 𝝈𝟐𝑴

βX.M = rM.X 𝟏𝟐

= 𝟏𝟑.𝟗𝟗 = 0.8578 𝝈𝑿 𝝈𝑴

= 0.72 X 𝟏𝟐 𝟗

=

0.96

Q47

Vriability of returns of EML = σEML = 3.82% 𝝈𝑬𝑴𝑳 𝝈𝑴

=

=

1.2 x 𝟑

.𝟖𝟐 𝟕
.𝟔

=

0.603

ΒEML.M = rM.EML

26

rM.EML = 1.2

σM = 7.6

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q48

Β of Portfolio is value weighted β of security constituting the portfolio
Weight
10,000
20,000
16,000
14,000
60,000

β
0.8
1.2
1.4
1.75

βP

Q49

W Xβ
8000
24,000
22,400
24,500
78,900 𝟕𝟖
,𝟗𝟎𝟎 𝟔𝟎
,𝟎𝟎𝟎

=

βP (5 securities) = 1.2

= 1.315

Required β = 0.90

β
W
Securities
1.2
W1
RF
0
W2
β of Portfolio is value weighted β of security constituting the portfolio

PRAVINN
MAHAJAN
CA CLASESS

0.90
W1 =

= 1.2 W1 + 0. W2
0.9
1.2

= 0.75

W2 = 1 – W1

= 1 – 0.25
= 0.75
75% of funds are to be invested in 5 securities and 25% in risk free investments.

Q50

Weight
Stock A
Stock B

β 𝟏

,𝟒𝟎,𝟎𝟎𝟎
= 𝟓
,𝟎𝟎,𝟎𝟎𝟎 𝟏
,𝟔𝟎,𝟎𝟎𝟎
= 𝟓
,𝟎𝟎,𝟎𝟎𝟎

0.28

0.9

0.32

1.2

Stock C
RF

?
1.6
?
0
β of market is always equal to 1. Portfolio β should be equal to market β, so required
portfolio β = 1.
β of Portfolio is value weighted β of security constituting the portfolio
1 = 0.9 X 0.28 + 1.2 x 0.32 + 1.6 X WC + 0 X ( 1- 0.28 – 0.32 – WC)
1 = 0.252 + 0.384 + 1.6 WC
WC = 0.2275

WRF = 1 – 0.28 – 0.32 – 0.2275 = 0.1725

Investment in risk free investments is 17.25% of 5,00,000 = Rs 86,250

27

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q51

Stock X
Stock Y
RF Security

Return
28%
16%
7%

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Risk (β)
1.6
1.2
0

Required return of portfolio = 12.5%
PRAVINN
MAHAJAN
CA CLASESS

Required β of portfolio = 80% of market portfolio
i.e 80% of 1 = 0.8
Return of portfolio is weighted average of returns of Individual securities in the portfolio
12.5 = 28. WX + 16. WY + 7. WRF
12.5 = 28WX + 16WY + 7(1 – WX – WY)
21WX + 9WY = 5.5

…………………………..(1)

β of Portfolio is value weighted β of security constituting the portfolio
0.8 = 1.6WX + 1.2WY + 0WRF
0.8 = 1.6WX + 1.2WY …………………………………………(2)
Solving 1 and 2
WX = - 0.0555

WY = 0.740

WRF

= 1 – WX – WY
= 1 + 0.0555 – 0.740
= 0.3155
Available funds of Rs 1,00,000 and funds acquired by short selling X i.e Rs 5,550 are
invested in Y and risk free security.
0.740 x 1,00,000 = Rs 74,000 in Y and 0.3155 X 1,00,000 = Rs 31,550 In Risk free security.

Q52

Market
Recession
Normal
Irrational

Prob.
0.20
0.60
0.20

S1
9
42
26

PS1
1.8
25.2
5.2
32.2

P(S1 -𝑆1)2
107.648
57.624
7.688
172.96

S2
-30
12
44

PS2
-6
7.2
8.8
10

P(S2-𝑆2)2
320
2.4
231.2
553.6

σS1 = 𝑷(𝑺𝟏 − 𝑺𝟏)𝟐 = 𝟏𝟕𝟐. 𝟗𝟔

= 13.15%

σS2 = 𝑷(𝑺𝟐 − 𝑺𝟐)𝟐 = 𝟓𝟓𝟑. 𝟔

= 23.52% Stock 2 is more riskier
contd.

28

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Contd.
Expected return = RF + β (RM – RF)
Stock1
32.2 = 4 + β (10)
β = 2.82
Stock2
10 = 4 + β (10)
β = 0.6
since β of stock 1 is higher and β is index of systematic risk so systematic risk of stock 1 is higher
Since β of stock 2 is lower and β is index of systematic risk, so systematic risk of stock 2 is lower
and unsystematic risk is higher
Since σ of stock 2 is higher so stock 2 is more riskier

Q53

Return of security = 𝑑

1 :(𝑃1−𝑃0)

Returns from market index 𝑃

0

% of index appreciation
2001
2002
2003
Year
2001
2002
2003

σM =
βS = 𝟐𝟓

:(𝟐𝟕𝟗 ; 𝟐𝟒𝟐)
X 100
= 25.62% 𝟐𝟒𝟐 𝟑𝟎

: ( 𝟑𝟎𝟓 ; 𝟐𝟕𝟗 )
X 100 = 20.07% 𝟐𝟕𝟗 𝟑𝟓

: ( 𝟑𝟐𝟐 ; 𝟑𝟎𝟓 )
X 100 = 17.05% 𝟑𝟎𝟓

S
25.62
20.07
17.05
62.74

(S-𝑆)2
22.1841
0.7056
14.8996
37.7893 𝟏𝟑𝟔

.𝟐𝟏𝟑𝟑
= 𝟑 𝑪𝑶𝑽𝑺

.𝑴 𝝈𝟐𝑴

=

6.738% 𝟔

.𝟖𝟐𝟑 𝟒𝟓
.𝟒𝟎𝟎𝟔

M
12.62
21.79
5.32
39.73
COVS.M = 𝟏𝟗𝟓𝟎

; 𝟏𝟖𝟏𝟐
X 𝟏𝟖𝟏𝟐 𝟐𝟐𝟓𝟖

; 𝟏𝟗𝟓𝟎
X 𝟏𝟗𝟓𝟎 𝟐𝟐𝟐𝟎

; 𝟐𝟐𝟓𝟖
X 𝟐𝟐𝟓𝟖

(M-𝑀)2
0.3844
73.1025
62.7264
136.2133 𝟐𝟎

.𝟒𝟔𝟗 𝟑

Div yield

Total

100 = 7.62%

5%

12.62%

100 = 15.79%

6%

21.79%

100= (1.68%)

7%

5.32%

(S-𝑆)(M-𝑀)
- 2.9202
- 7.182
30.5712
20.469

6.823

= 0.15

This is a low β stock

29

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q54
2
Systematic Risk = 𝛽𝑆2 x 𝜎𝑀
X
=
(0.71)2 x 2.25
Y
=
(0.27)2 x 2.25

=
=

1.134225
0.164025

Unsystematic Risk = 𝜎𝑆2 - Systematic risk of security
X
=
6.30 - 1.134
=
Y
=
5.86 - 0.164
=
PRAVINN
MAHAJAN
CA CLASESS

5.166
5.696

β of Portfolio is value weighted β of security constituting the portfolio
βP

= WX. βX + WY. βY
= (0.50 X 0.71) + (0.50 X 0.27) = 0.49

Portfolio Variance = Systematic Risk of Portfolio + Unsystematic Risk of Portfolio
2 𝛽𝑃
2 . 𝜎𝑀
+ Weighted average unsystematic Risk of each security in
the portfolio
2
=(0.49) . (2.25) + (0.50)2 X 5.166 + (0.50)2 X 5.696
=0.5402 + 1.2915 + 1.424
=3.2557
Q55

i. 𝝈

βS = rS.M x 𝝈 𝑺 𝑴 𝟐𝟎

A = 0.60 x 𝟏𝟓 = 0.80 𝟏𝟖

B = 0.95 x 𝟏𝟓 = 1.14 𝟏𝟐

C = 0.75 x 𝟏𝟓 = 0.60
ii.

Covariance of 2 securities
2
= βSECURITY 1 X β(SECURITY 2) X 𝜎𝑀
COVA.B = 0.80 X 1.14 x (15)2 = 205.20
COVB.C = 1.14 X 0.60 X (15)2 = 153.90
COVC.A = 0.60 X 0.80 X (15)2 = 108

(NEW CONCEPT)(CHECK DERIVATION)

iii.
(σP)= 𝑾𝟐𝑨

. 𝝈𝟐𝑨 + 𝑾𝟐𝑩 . 𝝈𝟐𝑩 + 𝑾𝟐𝑪 . 𝝈𝟐𝑪 + 𝟐. 𝑪𝑶𝑽𝑨.𝑩 . 𝑾𝑨 . 𝑾𝑩 . + 𝟐. 𝑪𝑶𝑽𝑩.𝑪 . 𝑾𝑩 . 𝑾𝑪 + 𝟐. 𝑪𝑶𝑽𝑨.𝑪 . 𝑾𝑨 . 𝑾𝑪 . 𝟏 𝟏 𝟏

= (𝟑)𝟐 . (𝟐𝟎𝟐 ) + (𝟑)𝟐 . (𝟏𝟖𝟐 ) + (𝟑)𝟐 (𝟏𝟐𝟐 ) + 𝟐. 𝟏 𝟑

. 𝟏

+𝟐.

= 𝟏𝟖𝟎𝟐

.𝟐𝟎 𝟗

=

. (𝟐𝟎𝟓. 𝟐𝟎) + 𝟐. 𝟑 𝟏 𝟑

. 𝟏 𝟑 𝟏 𝟑

. 𝟏 𝟑

. (𝟏𝟓𝟑. 𝟗𝟎)

. (𝟏𝟎𝟖) 𝟐𝟎𝟎

. 𝟐𝟒 = 14.151

Portfolio Variance = 200.244

30

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

iv.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

β of Portfolio is value weighted β of security constituting the portfolio
βP = WAβA + WBβB + WCβC
1

1

1

= 3 x 0.80 + 3 x 1.14 + 3 x 0.60
PRAVINN
MAHAJAN
CA CLASESS

Q56

v.

= 0.847

2
Portfolio Systematic Risk = 𝛽𝑃2 X 𝜎𝑀
= (0.847)2 X (15)2
= 161.417
Unsystematic Risk = Variance of portfolio – systematic Risk of Portfolio
= 200.244 - 161.417
= 38.827 𝜎𝑆 𝜎𝑀

Required Return = RF + r.

(RM – RF)
3

= 5.2 + 0.8 X 2.2 ( 9.8 – 5.2)
= 10.21%

Q57

βS.M = rM.S 𝝈𝑺 𝝈𝑴

= 0.8 X 𝟑 𝟐

.𝟐

= 1.364

Required Return = RF + β (RM – RF)
= 5.2 + 1.364( 9.8 – 5.2)
= 11.474%

Q58

βS.M = rM.S 𝝈𝑺 𝝈𝑴

= 0.8 X 𝟐

.𝟓 𝟐

= 1

Required Return = RF + β (RM – RF)
= 13 + 1( 15 – 13)
= 15%
b.
Required Return = RF + β (RM – RF)
= 10 + 0.5 (15 – 10)
= 12.5

31

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q59

Expected Return = 16.14% , RF = 4.95% , (RM – RF) = 8.88%
i.
Expected Return = RF + β(RM - RF)
16.14 = 4.95 + β (8.88)
β
= 1.260
PRAVINN
MAHAJAN
CA CLASESS

ii.

iii.

Iv

Q60

Risk premium of stock

= Return of security – Risk free return
= 16.14 - 4.95
= 11.19
Expected return of Market portfolio (RM) =
RM – RF = 8.88
RM – 4.95 = 8.88
RM = 13.83%
Expected return of stock if RM = 8%
Expected Return = RF + β(RM - RF)
= 4.95 + 1.26 (8 - 4.95) = 8.793%
Required Return = RF + β(RM - RF)
If Expected return > Required Return = Security is under priced
If Expected return < Required Return = Security is over priced
If Expected return = Required Return = Security is correctly priced
Required return of X = 7 + 1.8(15.3 - 7) = 21.94%
Expected Return of X = 22.00%
ER > RR = Security X is Under priced

Required return of Y = 7 + 1.6(15.3 - 7) = 20.28%
Expected Return of Y = 20.40%
ER > RR = Security Y is Under priced
RF if securities are correctly Priced
If Security Is correctly Priced ER = RR
If RR of X is 22%
22 = RF + 1.8 (15.3 – RF)
RF = 6.925%
If RR of Y is 20.40%
20.40 = RF + 1.6 (15.3 – RF)
RF = 6.89%

32

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q61

(P)
0.05
0.25
0.35
0.20
0.15
PRAVINN
MAHAJAN
CA CLASESS

Market(M)
(20)
10
15
20
25

i.

ERM = 14.5
ERS = 16.25

ii.

βM = 1
βS = 𝐶𝑂𝑉𝑆

.𝑀
2 𝜎𝑀

P(M)
(1)
2.5
5.25
4
3.75
14.5

=

124.374
87.25

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

P(M-𝑀)2
59.5125
5.0625
0.0875
6.05
16.5375
87.25

Project(S)
(30)
5
20
25
30

P(S)
(1.5)
1.25
7
5
4.5
16.25

P(S-𝑆)2 P(M-𝑀)(S-𝑆)
106.953
79.781
31.641
12.656
4.922
0.656
15.313
9.625
28.359
21.656
187.188
124.374

= 1.425

iii.

Required Return

= RF + β(RM - RF)
= 8 +1.425 (14.5 – 8) = 17.2625

iv.

Since Required return is more than expected return so project should not be expected
Systematic Risk =

2
β2. 𝜎𝑀
(1.425)2. (87.25) = 177.172

Unsystematic risk = 𝜎𝑆

2 - Systematic Risk of Security
187.188 – 177.172 =
10.016

Q62

Security
A
B
C
D

Required Return = RF + β(RM - RF)
Expected Return
Required return
13
8 + 0.8(14 – 8) = 12.8 ER > RR
14
8 + 1.05 (14 – 8)= 14.3 ER < RR
17
8 + 1.25 (14 – 8) = 15.5 ER > RR
13
8 + 0.90 (14 – 8) = 13.4 ER < RR

33

under priced
Over Priced
under priced
over priced

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q63

Security
A
B
C

Required Return = RF + β(RM - RF)
Expected Return
Required return
18
9 + 1.7(14 – 9) = 17.5
11
9 + 0.6 (14 – 9)= 12
15
9 + 1.2 (14 – 9) = 15

Q64

Expected Return
Standard deviation
β
PRAVINN
MAHAJAN
CA CLASESS

i.

A ltd
22
40
0.86

Coefficient of variation =

Risk
Return
40
22

38

= 1.82

B Ltd. = 24 = 1.583

70 % in A and 30% in B
RP =
WARA + WBR
=
0.7 x 22 + 0.3 x 24

Risk

=

under priced
Over Priced
correctly priced

B Ltd.
24
38
1.24 rA.B = 0.72

Altd
ii.

ER > RR
ER < RR
ER = RR

(σP)

= 22.6 % 𝑾𝟐𝑨

. 𝝈𝟐𝑨 + 𝑾𝟐𝑩 . 𝝈𝟐𝑩 + 𝟐. 𝐫. 𝑾𝑨 . 𝝈𝑨 . 𝑾𝑩 . 𝝈𝑩

=

(𝟎. 𝟕𝟎𝟐 ). (𝟒𝟎𝟐 ) + (𝟎. 𝟑𝟎𝟐 ). (𝟑𝟖𝟐 ) + (𝟐). (𝟎. 𝟕𝟐). (𝟎. 𝟕𝟎). (𝟒𝟎). (𝟎. 𝟑𝟎). (𝟑𝟖)
= 𝟏𝟑𝟕𝟑

. 𝟔𝟎𝟖 = 37.0622
iii.

Expected Return = RF + β(RM - RF)
A
22 = RF + 0.86 (RM – RF)
22 = 0.14RF + 0.86RM
B

24 = RF + 1.24 (RM – RF )
24 = - 0.24RF + 1.24RM

Solving 1 and 2
vi.

RM = 22.736

……………….(1)

…………………(2)
RF = 17.469%

β of Portfolio is value weighted β of security constituting the portfolio
βP = WAβA + WBβB
0.70 X 0.86 + 0.30 X 1.24 = 0.974

34

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q65

Security
A
B

Q66

PRAVINN
MAHAJAN
CA CLASESS

(P)
0.2
0.4
0.4

Required Return = RF + β(RM - RF)
Expected Return
Required return
22
10 + 1.5(18 – 10) = 22 ER = RR
17
10 + 0.7 (18 – 10)= 15.6 ER > RR

Market(M)
10
16
24

P(M)
2.0
6.4
9.6
18

(C)
15
14
26

P(C)
3
5.6
10.4
19

P(C-𝐶)2 P(M-𝑀)(C-𝐶)
3.2
6.4
10.0
4.0
19.6
16.8
32.8
27.2

ERM = 18
ERC = 19
βM = 1
βC = 𝑪𝑶𝑽𝑪

.𝑴 𝝈𝟐𝑴 𝟐𝟕

.𝟐

= 𝟐𝟖.𝟖 = 0.944

Required Return

Q67

P(M-𝑀)2
12.8
1.6
14.4
28.8

correctly priced
under Priced

= RF + β(RM - RF)
= 9 +0.944 (18 – 9) = 17.496

Systematic Risk =

β2. 𝝈𝟐𝑴
(0.944)2. (28.8) = 25.665

Unsystematic risk = 𝝈𝟐𝑺

- Systematic Risk of Security
32.8 – 25.665 =
7.135

If Investor Is Aggressive RF = 4.6%
Required Return = RF + β(RM - RF)
15.5 =
4.6 + β (12 - 4.45)
=
β
= 1.444
If Investor is conservative RF = 4.3%
Required Return
= RF + β(RM - RF)
15.5 = 4.3 + β (12 – 4.3)
β=
1.455
If Investor is moderate Risk free return =
Required Return
15.5
β = 1.464

35 𝟒

.𝟑𝟎 : 𝟒.𝟔𝟎 𝟐

=

4.45

= RF + β(RM - RF)
= 4.45 + β (12 – 4.45)

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q68

RM = 12% , β = 2 , RR = 18%, g = 5% , P0 = Rs 30
i.

P0

=
30 = 𝑑
1 =

PRAVINN
MAHAJAN
CA CLASESS
ii. 𝑑

1 𝐾𝑒
;𝑔 𝑑
1
.18; .05

3.9

d1 = d0 ( 1 + g )
3.9 = d0 (1 + .05 )
D0 = 3.71

combined effect on price of share
Required Return
= RF + β(RM - RF)
18
= RF + 2 (12 – RF)
RF = 6%
If inflation increases by 2%, RF = 2% , So new RF = 8% ,
Existing Risk Premium = 12 – 6 = 6%
1
3

New Risk Premium = 6 –( X 6) = 4%
New growth rate = 4% and β = 1.8
Required Return

= RF + β(RM - RF)
= 8 + 1.8 (4)
= 15.2%

P0 𝒅𝟏 𝑲𝒆

;𝒈

=
=

3.71(1.04)
.152 – 0.04

Rs 34.45

Q69

RM = 9% , β = 1.2 , RM = 13%, g = 7% , d0 = Rs 2
i.

Required Return

P0

ii.

= 𝒅𝟏 𝑲𝒆

;𝒈 𝟐
( 𝟏.𝟎𝟕) 𝟎
.𝟏𝟑; 𝟎.𝟎𝟕

= RF + β(RM - RF)
= 9 + 1.2 (1- 9)

= 13.8%

= 31.47

If inflation premium increases by 21%, RF and RM shall increase by 2%
Risk premium shall remain same.
Required Return
= RF + β(RM - RF)
= 11 1.2 (15 – 11) = 15.8% 𝟐
(𝟏.𝟎𝟕)

P0 = 𝟎.𝟏𝟓𝟖; .𝟎𝟕 = 24.31 %
Contd.

36

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

ii.

increases by 3%
RR
= 13.8
P0

PRAVINN
MAHAJAN
CA CLASESS

iii.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854 𝒅𝟏 𝒆

;𝒈

=𝑲

Required Return
P0 𝟐

(𝟏.𝟏)

= 𝟎.𝟏𝟑𝟖 ; 𝟎.𝟏𝟎 = 57.89
= RF + β(RM - RF)
= 9 + 1.3 (13 – 9) = 14.2
=
= 𝒅𝟏 𝑲𝒆

;𝒈 𝟐
.𝟏𝟒 𝟎
.𝟏𝟒𝟐; .𝟎𝟕

= 29.72

Q70

RF = 10% , β = 1.4 , RM = 15%, g = 8% , P1 = Rs 36 d0 = 4
Required Return

P0

=
= 𝒅𝟏 𝑲𝒆

;𝒈 𝟒
(𝟏.𝟎𝟖) 𝟎
.𝟏𝟕;𝟎.𝟎𝟖

= RF + β(RM - RF)
= 10 + 1.4 (15 – 10) = 17%

= Rs 48

Equilibrium Price is Rs 8 whereas share is currently traded at Rs 36. So share must be purchased

Q71

Required Return
RM =

= RF + β(RM - RF) 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅

:(𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆;𝒐𝒑𝒆𝒏𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆) 𝒐𝒑𝒆𝒏𝒊𝒏𝒈
𝒑𝒓𝒊𝒄𝒆 𝟓𝟖𝟎𝟎
:(𝟕𝟑,𝟎𝟎𝟎;𝟔𝟖,𝟎𝟎𝟎)
=
= 0.158 or 15.8% 𝟔𝟖
,𝟎𝟎𝟎

Expected Rate
X

=

Required Return

= RF + β(RM - RF)
= 15 + 0. (15.8 – 15) = 15.64%

Y

=

Required Return

= RF + β(RM - RF)
= 15 + 0.7 (15.8 – 15) = 15.56%

Z

=

Required Return

Bonds =

Required Return

= RF + β(RM - RF)
= 15 + 0.5 (15.8 – 15) = 15.4%
= RF + β(RM - RF)
= 15 + 1 (15.8 – 15) = 15.8%

Average Return = 𝟏𝟓

.𝟔𝟒:𝟏𝟓.𝟖:𝟏𝟓.𝟓𝟔:𝟏𝟓.𝟒 𝟒

37

= 15.6%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q72

RM =

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅

:(𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆;𝒐𝒑𝒆𝒏𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆) 𝒐𝒑𝒆𝒏𝒊𝒏𝒈
𝒑𝒓𝒊𝒄𝒆 𝟕𝟎𝟐𝟓
:(𝟖𝟎,𝟓𝟎𝟎;𝟕𝟓,𝟎𝟎𝟎)
=
= 0.167 or 16.7% 𝟕𝟓
,𝟎𝟎𝟎

Average Return
0.157 = 𝐑𝐅

: 𝟎.𝟔(𝟎.𝟏𝟔𝟕 ; 𝐑𝐅):𝐑𝐅: 𝟎.𝟖(𝟎.𝟏𝟔𝟕 ; 𝐑𝐅):𝐑𝐅 : 𝟎.𝟔(𝟎.𝟏𝟔𝟕 ; 𝐑𝐅):𝐑𝐅 : 𝟏(𝟎.𝟏𝟔𝟕 ; 𝐑𝐅) 𝟒

RF = 12.7%
PRAVINN
MAHAJAN
CA CLASESS

Required Return

= RF + β(RM - RF)

Gold

= 12.7 + .6 ( 16.7 -12.7) = 15.1

Silver

= 12.7 + .8 ( 16.7 -12.7) = 15.9

Bronze = 12.7 + .6 ( 16.7 -12.7) = 15.1
GOI

Q73

RM =

= 12.7 + 1 ( 16.7 -12.7) = 16.7 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅

:(𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆;𝒐𝒑𝒆𝒏𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆) 𝒐𝒑𝒆𝒏𝒊𝒏𝒈
𝒑𝒓𝒊𝒄𝒆 𝟏𝟐𝟓𝟎
:𝟏𝟒𝟔;𝟏𝟏𝟎𝟓
= 26.33% 𝟏𝟏𝟎𝟓

Required Return

= RF + β(RM - RF)

Cement Ltd.
Steel Ltd.
Liquor Ltd
GOI Bonds

= 14 +0.8 (26.33 – 14) = 23.864%
= 14 + 0.7 (26.33 – 14) = 22.631%
= 14 + 0.5 (26.33 -14) = 20.165%
= 14 + 0.99 (26.33 – 14) = 26.207%

Average Return = 𝟐𝟑

.𝟖𝟔𝟒:𝟐𝟐.𝟔𝟑𝟏:𝟐𝟎.𝟏𝟔𝟓:𝟐𝟔.𝟐𝟎𝟕 𝟒

38

= 23.217%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q74

β of Portfolio is value weighted β of security constituting the
portfolio
Investment
I
II
IiI
IV

β
1.6
2.28
0.90
1.50

ΒP =

Value weight
2,57,400
2,3,600
2,17,000
3,92,500
11,00,500

16,15,242
11,00,500

Required Return

PRAVINN
MAHAJAN
CA CLASESS

= 1.467

= RF + β(RM - RF)

I

= 11 + 1.16 (19 -11)

= 20.28%

II

= 11 + 2.28 (8)

= 29.24%

Iii

= 11 + 0.90 (8)

= 18.2%

IV

=11 + 1.5 (8)

= 23%

I
II
Iii
IV
Q75

β X Weight
2,98,584
5,32,608
1,95,300
5,88,750
16,15,242

Change in the composition of portfolio
ER
RR
Value
Action
19.50
20.28 overvalued
Sale
24
29.24 overvalued
Sale
17.50
18.2 overvalued
Sale
26
23
undervalued Hold

D0 = 2 P0 = 25
Required Return
P0 𝒅𝟏 𝒆

;𝒈 𝟐
(𝟏.𝟎𝟓) 𝟎
.𝟐𝟎𝟒;𝟎.𝟓

= RF + β(RM - RF)
= 12 + 1.4 (6) = 20.4%

=𝑲
=

= R 13.63

Existing price is more than equilibrium price, so currently share is overvalued
Revised RR
Required Return
= RF + β(RM - RF)
= 10 + 1.25(4) = 15%
P0 𝒅𝟏 𝒆

;𝒈

=𝑲 𝟐

(𝟏.𝟎𝟗)

= (𝟎.𝟏𝟓; .𝟎𝟗) = 36.33

Existing price is less than revised equilibrium price, so currently share is undervalued,
Investor should hold the share.

39

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q76

WP = 0.75

WQ = 0.25

β = 1.40

(RM – RF)= 10%

Portfolio risk premium is return of portfolio over risk free rate which is market risk premium
times β.
Portfolio risk premium = (RM – RF) β
= 10 X 1.4 = 14%

Q77

RM = 0.095, σM = 0.035, RF = 0.025

Market Return- Risk trade off =
βS.M = rM.S 𝝈𝑺 𝝈𝑴

= 0.75 X

Required Return 𝟕 𝟑

.𝟓 𝑹𝑴

;𝑹𝑭 𝝈𝑴

= 𝟗

.𝟓 ; 𝟐.𝟓 𝟑
.𝟓

=

1.5

= 𝟕 𝟑

.𝟓

= 𝟕 𝟒

= 2

PRAVINN
MAHAJAN
CA CLASESS

= RF + β(RM - RF)
= 8 + 1.5 (6)
= 17%

Q78

RM = 10 %, σM = 4%, RF = 3%

Market Return- Risk trade off =
βS.M = rM.S 𝝈𝑺 𝝈𝑴 𝟖

= 0.85 X 𝟒

Required Return 𝑹𝑴

;𝑹𝑭 𝝈𝑴

= 𝟏𝟎

; 𝟑 𝟒

=

1.70

= 1.75

= RF + β(RM - RF)
= 9 + 1.7 (7)
= 20.9%

40

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q80

Period
1
2
3
4
5
6
7
8
9
10

ERS =
βS =

Security(s)
20
22
25
21
18
-5
17
19
-7
20
150 𝟏𝟓𝟎 𝟏𝟎

= 15 𝑪𝑶𝑽𝑺

.𝑴 𝝈𝟐𝑴

(S-𝑆)2
25
49
100
36
9
400
4
16
484
25

ERM = 𝟑𝟓
.𝟕

= (𝟖.𝟒𝟎)𝟐

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854
Market(M)
22
20
18
16
20
8
-6
5
6
11
120 𝟏𝟐𝟎 𝟏𝟎

= 12

(M - 𝑀)2
100
64
36
16
64
16
324
49
36
1
706 𝟑𝟓𝟕 𝟏𝟎

COVS.M =

= 35.7

(S-𝑆)(M-𝑀)
50
56
60
24
24
80
-36
-28
132
-5
357
σM = 𝟕𝟎𝟔 𝟏𝟎

= 8.40%

= 0.5059

characteristic line =
RS = α + β (RM)
When market return is 12%, security return is 15%
15 = α + 0.5059 (12)
α = 8.929
Characteristic Line is
RS = 8.929 +0.5059 (RM)

Q80

Period
1
2
3
4
5
6

ERA =
βS = 𝟑𝟖 𝟔

Security(A)
12
15
11
2
10
-12
38
= 6.33% 𝑪𝑶𝑽𝑺

.𝑴 𝝈𝟐𝑴

= 𝟒𝟖

.𝟐𝟓
(𝟔.𝟑𝟑𝟔)𝟐

(A-𝐴)2
32.1489
75.1689
21.8089
18.7489
13.4689
335.9889
497.3334
ERM = 𝟑𝟒

.𝟓 𝟔

Market(M)
8
12
11
-4
9.5
-2
34.5
= 5.75%

(M - 𝑀)2
5.0625
39.0625
27.5625
95.0625
14.0625
60.0625
240.875
COVS.M = 𝟐𝟖𝟗

.𝟓 𝟔

(A-𝐴)(M-𝑀)
12.7575
54.1875
24.5175
42.2175
13.7625
142.0575
289.5
= 48.25 σM = 𝟐𝟒𝟎

.𝟖𝟕𝟓 𝟔

= 6.336%

= 1.20

characteristic line =
RS = α + β (RM)
When market return is 5.75%, security return is 6.33%
6.33 = α + 1.20 (5.75)
S
ystematic Risk
α = - 0.57
Characteristic Line is RS = -0.57 +1.20 (RM)
41

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

Systematic Risk =

β2. 𝝈𝟐𝑴
(1.20)2. (40.145) = 57.8088

Unsystematic risk = 𝝈𝟐𝑺

- Systematic Risk of Security

=
.

Q81

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

=
=

(𝑨; 𝑨)𝟐
– β2. 𝝈𝟐𝑴 = 𝑵 𝟒𝟗𝟕

.𝟑𝟑𝟑𝟒
- 57.8088 𝟔

82.8889 - 57.8088
25.0801

β of Portfolio is value weighted β of security constituting the portfolio
i.
A
B
C

ii.

W
0.20
0.50
0.30

β
0.40
0.50
1.10


0.08
0.25
0.33
0.66

Residual variance or Unsystematic Risk
Total Variance
Systematic Risk
0.015 X 100 X 100 = 150
0.402 X 102 = 16
0.025 X 100 X 100 = 250
0.502 X 102 = 25
0.1 X 100 X 100 = 1000
1.102 X 102 = 121

A
B
C

2
Unsystematic Risk (𝜎𝑒𝑖
)
134
225
879

iii.

Portfolio Variance =
β2𝝈𝟐𝑴 + 𝑾𝟐𝑨 USRA + 𝑾𝟐𝑩 USRB + 𝑾𝟐𝑪 USRC
(.66)2.(10)2 + (0.20)2. (134) + (0.50)2. (225) + (0.30)2.(879) = 184.28

iv.

Expected Return of Portfolio
RP = WARA + WBRB + WCRC
(0.20)(14) + (0.50)(15) + (0.30)(21)

=

16.6%

v.(σP)= 𝑾𝟐𝑨
. 𝝈𝟐𝑨 + 𝑾𝟐𝑩 . 𝝈𝟐𝑩 + 𝑾𝟐𝑪 . 𝝈𝟐𝑪 + 𝟐. 𝑪𝑶𝑽𝑨.𝑩 . 𝑾𝑨 . 𝑾𝑩 . + 𝟐. 𝑪𝑶𝑽𝑩.𝑪 . 𝑾𝑩 . 𝑾𝑪 + 𝟐. 𝑪𝑶𝑽𝑨.𝑪 . 𝑾𝑨 . 𝑾𝑪 .

= (. 𝟐𝟎)𝟐 . (𝟏𝟓𝟎) + (. 𝟓𝟎)𝟐 . (𝟐𝟓𝟎) + (. 𝟑𝟎)𝟐 (𝟏𝟎𝟎𝟎) + 𝟐. (𝟑𝟎𝟎). (. 𝟐𝟎). (. 𝟓𝟎) + 𝟐. (𝟐𝟎𝟎). (. 𝟐𝟎). (. 𝟑𝟎)
+𝟐. (𝟒𝟎𝟎). (. 𝟓𝟎). (. 𝟑𝟎)

=

19.039433

Portfolio variance = 𝝈𝟐𝑷 = (19.039433)2 = 362.5

42

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q82

RM = 15%

A
B
C
D

VarianceM = 320

σM = 17.88%

ER of Portfolio =

α + β (RM)

W
.25
0.15
.35
.25

β
1.65
0.55
0.75
1.40

α
2.10
3.60
1.55
0.70

W.α
0.525
0.54
.54
0.175
1.78

W.β
0.4125
0.0825
0.2625
0.35
1.1075

ER

=
1.78 + 1.1075 (15)
=
18.395%
Portfolio variance according to Sharpe Model
β2𝝈𝟐𝑴 + 𝑾𝟐𝑨 USRA + 𝑾𝟐𝑩 USRB + 𝑾𝟐𝑪 USRC + 𝑾𝟐𝑫 USRD
=
(1.10)2(320) + (.25)2(380) + (.15)2(140) + (.35)2(310) + (.25)2(385)
=
476.1375
Q83

W.β
0.225
0.325
0.35
0.525
1.425
=
α + β (RM)
=
1.75 + 1.425 (10)
=
16%
Portfolio variance according to Sharpe Model
β2𝝈𝟐𝑴 + 𝑾𝟐𝑨 USRA + 𝑾𝟐𝑩 USRB + 𝑾𝟐𝑪 USRC + 𝑾𝟐𝑫 USRD
=
(1.425)2(27) + (.25)2(45) + (.25)2(130) + (.25)2(199) + (.25)2(53)
=
81.5075
A
B
C
D

W
.25
.25
.25
.25

α
0.50
2.50
1.50
2.50

W.α
0.125
0.625
0.375
0.625
1.78
ER of Portfolio
ER

β
0.90
1.30
1.40
2.10

43

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q84

Systematic RiskSECUITY

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854 𝜷𝟐𝑺

𝝈𝟐𝑴

= 𝜷𝑺

= 𝐒𝐲𝐬𝐭𝐞𝐦𝐚𝐭𝐢𝐜

𝐑𝐢𝐬𝐤 𝐒𝐄𝐂𝐔𝐑𝐈𝐓𝐘 𝝈𝟐𝑴

A

= 𝟓

.𝟏𝟎 𝟓

=

1.01

B

= 𝟐

.𝟐𝟎 𝟓

=

0.663

C

= 𝟑

.𝟑𝟎 𝟓

=

0.8124

D

= 𝟑

.𝟐𝟎 𝟓

=

0.80

W
.25
.25
.25
.25

α
-0.08
0.11
0.02
-0.15

W.α β
W.β
A
-0.02 1.01 0.2525
B
0.0275 0.663 0.16575
C
0.005 0.8124 0.2031
D
-0.0375 0.80 0.20
-0.025
0.82135
ER of Portfolio =
α + β (RM)
ER
=
-0.025 + 0.82135 (10)
=
8.18875%
Portfolio variance according to Sharpe Model
β2𝝈𝟐𝑴 + 𝑾𝟐𝑨 USRA + 𝑾𝟐𝑩 USRB + 𝑾𝟐𝑪 USRC + 𝑾𝟐𝑫 USRD
=
(0.82135)2(5) + (.25)2(3) + (.25)2(5.5) + (.25)2(1.10) + (.25)2(2.30)
=
3.3731 + 0.74375
=
4.11685
Q85

Market Price of risk

= 𝑅𝑀

;𝑅𝐹 𝜎𝑀

=

16.5;4
5

Or slope of CMl

Q86

=

2.5

Rf = 8% RM = 18%, σM = 6%
Required Return 𝑹𝑴

;𝑹𝑭
) 𝝈𝑷 𝝈𝑴 𝟏𝟖

;𝟖
+( 𝟔 ) σP

= RF + (

15

=8

σP

= 4.2
σP = WMP σMP + WRFσRF
4.2 = WMP (6)

Risk of Portfolio

WMP = 𝟒

.𝟐 𝟔

= 0.7

Market portfolio 70%, Rf = 30%

44

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q87

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Between A and B
Between B and C
Between B and d
Between B and E
Between B and F
Between B and G
Between B and H
Between C and D
Between C and E
Between C and F
Between C and G
Between C and H
Between D and E

ii.

Iii

=
B dominates , A is cancelled
=
No Dominance
=
No Dominance
=
No Dominance
=
No Dominance
=
No Dominance
=
no Dominance
=
No Dominance
=
no Dominance
=
No Dominance
=
C Dominates and G is cancelled
=
No Dominance
=
E Dominates and D is cancelled
Efficient Portfolios in increasing order of Risk
Risk
Return
21
12.5
25
15.0
29
17.0
32
18.0
45
20.0
out of efficient portfolios best portfolio is that in which risk premium per unit of risk is
highest
Risk
Return
Risk Premium
Risk Premium per unit
If RF is 12%
of Risk
B
21
12.5
0.5
0.023
C
25
15
3
0.120
E
29
17
5
0.172
F
32
18
6
0.187
H
45
20
8
0.177
Since Risk Premium per unit of Risk of F is highest. So it is the Best Portfolio if Lending and
Borrowing is allowed at 12%.
If Lending and Borrowing is not allowed then σ of 25% is at portfolio C which gives return
of 15%. So maximum return at risk of 25% is 15%.

Required Return

= RF + ( 𝑅𝑀

;𝑅𝐹
) 𝜎𝑆 𝜎𝑀

If borrowing and lending is allowed 12% then F is best portfolio, so market portfolio is F
12 +

18 ; 12
32

X 25

=

16.68%
Risk of Portfolio
σP = WMP σMP + WRFσRF
25 = WMP (32) + WRF(0)
WMP = 0.78125 WRF = 0.21875
If borrowing and lending is allowed then optimal strategy is to invest 78.125% in F and
21.875% in Risk free and return at optimal strategy is 16.68%

45

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q88

Given the level of σ of security the Expected Rate of Return Prediction by CML is
Required Return

= RF + (

17 ; 10
) 40
12
1000 ;875
x 100
875

10 + (
Actual return of security is 𝑅𝑀

;𝑅𝐹
) 𝜎𝑆 𝜎𝑀

=

33%

= 14%

Actual return of security of 14% is well below 33%. Thus this venture does not constitute an
efficient portfolio. It bears some risk that does not contribute to the expected rate of return
Sharpe ratio is used as performance measure. Closer the sharpe ratio to CML, better is the
performance of fund in terms of return against risk.
17 ; 10
) = 0.583
12
14 ; 10
= 0.1
40

Slope of CML = (
Sharpe ratio =

Sharpe ratio of security is less than slope of CML, so it is not an efficient portfolio.

Q89

If securities are correctly priced ER = RR
Required Return

B 𝑹𝑹

;𝑹𝑭 𝑴
; 𝑹𝑭 𝟐𝟎
; 𝟖 𝟏𝟒
; 𝟖 𝟐𝟔
; 𝟖 𝟏𝟒
; 𝟖

βS

=𝑹

βA

=

βB

=

Security variance
A

= RF + β(RM - RF)

=

2

=

3

= Systematic Risk + Unsystematic Risk
=
β2𝝈𝟐𝑴
+
USR
2
2
=
2 . (.40 ) + 0.0475
=
4.2075
=

Standard deviation of A = 𝟒. 𝟐𝟎𝟕𝟓 = 2.0512

=
=

32. (.402) + 0.0650
1.505

=

Standard deviation of B = 𝟏. 𝟓𝟎𝟓 = 1.227

46

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Required Return

Q90

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

= RF + β(RM - RF)

In case of security 1
.24
.24

= RF + 2.50 (RM - RF)
= 2.50 RM – 1.50 RF

………………….(i)

In case of security 2
.18
.18

= RF + 1 (RM - RF)
= RM

From (i)….. RF = .14

Security variance

= Systematic Risk + Unsystematic Risk
=
β2𝝈𝟐𝑴
+
USR

From security 2
(0.302) = (0.5)2 𝝈𝟐𝑴 + 0.06 𝝈𝟐𝑴

= 0.12
For Security 1 𝝈𝟐𝑺𝑬𝑪𝑼𝑹𝑰𝑻𝒀
𝟏 = 2.52(0.12) + 0.10
= 0.85
Standard deviation of Security 1 = . 𝟖𝟓 = 0.922 𝝈𝟐𝑺𝑬𝑪𝑼𝑹𝑰𝑻𝒀
𝟑 = 12(0.12) + 0.17
= .29

For Security 3

Standard deviation of Security 3 = . 𝟐𝟗 = 0.5385

Q91

(A-𝐴)2
324
324
648

A
4
40
44

M
7
25
32 𝟖𝟏 𝟐

= 40.5 𝑪𝑶𝑽𝑨𝑴 𝝈𝟐𝑴

σM = 𝟏𝟔𝟐 𝟖𝟏

=2

ERD =𝟐𝟕 𝟐 = 13.5

(A-𝐴)(M -𝑀) (D-𝐷)(M -𝑀)
162
40.5
162
40.5
324
81
COVAM = 𝟑𝟐𝟒 𝟐

= 162

=9

βD = 𝑪𝑶𝑽𝑫𝑴 𝝈𝟐𝑴

βA =

ii.
iii.

ERA = 0.5 X 4 + 0.5 X 40 = 22
ERD = 0.5 X 9 + 0.5 X 18 = 13.5
RM = 7 X 0.5 + 25 X 0.5 = 16
(RM – RF) = (16 - 9) = 9
SMl = RF + (RM – RF)β
7 + 9β
Alpha of stock = Expected Return - Required Return
A
=
22
7 + 2(16 – 7)
=
-3 overpriced
D
=
13.5 7+ .5(16 – 7)
=
2 underpriced

47

= 𝟒𝟎

.𝟓 𝟖𝟏

i.

iv.

= 𝟏𝟔𝟐 𝟐

(D-𝐷)2
20.25
20.25
40.50

D
9
18
27

ERM =𝟑𝟐 𝟐 = 16

ERA = 𝟒𝟒 𝟐 = 22
COVDM =

(M-𝑀)2
81
81
162

= 0.5

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q92

i.

ii.
PRAVINN
MAHAJAN
CA CLASESS

SMl
= RF + (RM – RF)β
RM = 0.30 X 12 + 0.40 X 8 + 0.30 X(-4)
SML = 8 + (5.6 – 8)β
= 8 - 2.4 β

= 5.6

Market price at risk is co-efficient of SML. In this case, market price at risk is negative
which provides that if risk decreases, return will increase which does not happen
normally

III.
Prob.
0.30
0.40
0.30

S
18
9
-8

ERs = 6.6

ERM = 5.6

P. S
5.4
3.6
-2.4
6.6

P(S-𝑆)2
38.988
2.304
63.948

σM =

M
12
8
-4

PM
3.6
3.2
-1.2
5.6

P(M − 𝑀)2

P(M -𝑀)2
12.288
2.304
27.648
42.24

P(S - 𝑠)(M - 𝑀)
21.888
2.304
42.048
66.24

COVSM = 6.4

42.24 = 6.49%
βSEC =
iv. 𝐶𝑂𝑉𝑆𝑀

2 𝜎𝑀

=

66.24
42.12

= 1.573

Alpha of stock = Expected Return - Required Return
6.6
[8 – 2.4(1.573)] = 2.3752 underpriced

48

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q93 𝝈𝟐𝒆𝒊 𝑹

;𝑹𝑭 𝜷

A 15 1.5

40

B 12 2.0 𝜷𝟐 𝑼𝑺𝑹 𝑹

;𝑹 𝑹

;𝑹 𝑹

−𝑹𝑭
)𝛃 𝑼𝑺𝑹 𝟐 𝜷 𝟏

: 𝝈𝟐𝑴 Ʃ(
) 𝑼𝑺𝑹 𝝈𝟐𝑴

Ʃ(

( 𝑼𝑺𝑹𝑭)β

5.333 1

A

0.30

0.05625 0.30

20

2.5

3

F

0.35

0.075

0.65

0.13125

C 10 2.5

30

1.2

5

B

0.50

0.20

1.15

0.33125

D 9

1

10

2

4

D

0.20

0.10

1.35

0.43125

E 8

1.2

20

0.833 6

C

0.25

0.208

0.45

0.63925 𝟏𝟎

𝑿 𝟎.𝟒𝟓
=0.61 𝟏
:𝟏𝟎 𝑿 𝟎.𝟔𝟑𝟗𝟐𝟓

F 14 1.5

30

4.67

E

0.06

0.072

0.51

0.71125 𝟏𝟎

𝑿 𝟎.𝟓𝟏
=0.63 𝟏
:𝟏𝟎 𝑿 𝟎.𝟕𝟏𝟏𝟐𝟓

β

Rank

2

Ʃ( 𝑼𝑺𝑹𝑭)β 𝜷𝟐

S

S R

Ʃ(𝑼𝑺𝑹)

0.05625

C= 𝟏𝟎

𝑿 𝟎.𝟑𝟎
= 𝟏
:𝟏𝟎 𝑿 𝟎.𝟎𝟓𝟔𝟐𝟓

1.92 𝟏𝟎

𝑿 𝟎.𝟔𝟓
= 𝟏
:𝟏𝟎𝑿𝟎.𝟏𝟑𝟏𝟐𝟓

2.81 𝟏𝟎

𝑿 𝟏.𝟏𝟓 𝟏
:𝟏𝟎 𝑿 𝟎.𝟑𝟑𝟏𝟐𝟓

= 2.67 𝟏𝟎

𝑿 𝟏.𝟑𝟓
= 𝟏
:𝟏𝟎 𝑿 𝟎.𝟒𝟑𝟏𝟐𝟓

Highest of all cut off rates is cut-off rate of portfolio i.e 2.81. so securities A & F are selected
Z

= 𝜷 𝑼𝑺𝑹

A

= 𝟏

.𝟓
X 𝟒𝟎

[5.33 – 2.81 ] = 0.0945

B

= 𝟏

.𝟓
X 𝟑𝟎

[ 4.66 – 2.81 ] = 0.0925

X[ 𝑹

; 𝑹𝑭 𝜷

- C]

0.187
Proportion of each security
A

=

B

= 𝟎

.𝟎𝟗𝟒𝟓 𝟎
.𝟏𝟖𝟕 𝟎
.𝟎𝟗𝟐𝟓 𝟎
.𝟏𝟖𝟕

= 0.51
= 0.49

49

fb-id PRAVINN MAHAJAN CA CLASSES

2.54

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q94 𝑹
−𝑹𝑭
)𝛃 𝑼𝑺𝑹 𝟐 𝜷 𝟏

: 𝝈𝟐𝑴 Ʃ(
) 𝑼𝑺𝑹

β 𝝈𝟐𝒆𝒊 𝑹

;𝑹𝑭 𝜷

Rank

S

( 𝑼𝑺𝑹𝑭)β 𝜷𝟐 𝑼𝑺𝑹

1 19

1

20

14

1

1

1.7

0.05

0.7

0.05 𝟏𝟎

𝑿 𝟎.𝟕
= 𝟏
:𝟏𝟎 𝑿 𝟎.𝟎𝟓

4.67

2 23 1.5

30

12

2

2

0.9

0.075

1.6

0.125 𝟏𝟎

𝑿 𝟏.𝟔
= 𝟏
:𝟏𝟎 𝑿 𝟎.𝟏𝟐𝟓

7.11

3 11 0.5

10

12

3

3

0.3

0.025

1.9

0.15 𝟏𝟎

𝑿 𝟏.𝟗
= 𝟏
:𝟏𝟎 𝑿𝟎 .𝟏𝟓

7.6

4 25 2.0

40

10

4

4

1.0

0.10

2.9

0.25 𝟏𝟎

𝑿 𝟐.𝟗
= 𝟏
:𝟏𝟎 𝑿𝟎 .𝟐𝟓

8.28

5 13 1.0

20

8

5

5

0.4

0.05

3.3

0.30 𝟏𝟎

𝑿 𝟑.𝟑
= 𝟏
:𝟏𝟎 𝑿𝟎 .𝟑𝟎

8.25

6 9

0.5

50

8

6

6

0.04

0.005

3.34

0.305 𝟏𝟎

𝑿 𝟑.𝟑𝟒
= 𝟏
:𝟏𝟎 𝑿𝟎 .𝟑𝟎𝟓

8.24

7 14

1.5

30

6

7

7

0.45

0.075

3.79

0.38 𝟏𝟎

𝑿 𝟑.𝟕𝟗
= 𝟏
:𝟏𝟎 𝑿𝟎 .𝟑𝟖

7.90 𝑹

;𝑹 𝑹

;𝑹

Ʃ( 𝑼𝑺𝑹𝑭)β 𝜷𝟐 𝝈𝟐𝑴

Ʃ(

S R

Ʃ(𝑼𝑺𝑹)

C=

Highest of all cut off rates is cut-off rate of portfolio i.e 8.82. so securities 1 to 4 are selected
Z

= 𝜷 𝑼𝑺𝑹

1

= 𝟏 𝟐𝟎

2

= 𝟏

.𝟓
X 𝟑𝟎

(12 – 8.28) =

0.186

3

= 𝟎

.𝟓
X 𝟏𝟎

(12 – 8.28)=

0.186

4

= 𝟐 𝟒𝟎

X (10 – 8.28) =

0.086

X[ 𝑹

; 𝑹𝑭 𝜷

- C]

X (14 – 8.28) =

0.286

0.744
Proportion of each security in optimum portfolio
1

=

2

=

3

=

4

= 𝟎

.𝟐𝟖𝟔 𝟎
.𝟕𝟒𝟒 𝟎
.𝟏𝟖𝟔 𝟎
.𝟕𝟒𝟒 𝟎
.𝟏𝟖𝟔 𝟎
.𝟕𝟒𝟒 𝟎
.𝟎𝟖𝟔 𝟎
.𝟕𝟒𝟒

= 0.38

= 0.25
= 0.25
= 0.12

50

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q95

i.

Risk Premium on each of 3 stocks
Β1 x Market Risk Premium
For β1
Security A =
1.75 X 4 + 0.25 x 8
Security B =
-1 x 4 + 2 x 8
Security C =
2 x 4 + 1 x 8

ii. 𝟐

,𝟎𝟎,𝟎𝟎𝟎 𝟐
,𝟎𝟎,𝟎𝟎𝟎:𝟓𝟎,𝟎𝟎𝟎;𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟓𝟎
,𝟎𝟎𝟎 𝟐
,𝟎𝟎,𝟎𝟎𝟎:𝟓𝟎,𝟎𝟎𝟎;𝟏,𝟓𝟎,𝟎𝟎𝟎
; 𝟏,𝟓𝟎,𝟎𝟎𝟎 𝟐
,𝟎𝟎,𝟎𝟎𝟎:𝟓𝟎,𝟎𝟎𝟎;𝟏,𝟓𝟎,𝟎𝟎𝟎

WA

=

WB

=

WC

=

β1 =
β2 =

1.75 x2 + (-1) (0.5) + (-1.5) (2)
0.25 x 2 + 2 x 0.5 + (- 1.5) (1)

+

β2 x

Market Risk
Premium for β2

= 9%
= 12%
= 16%

=

2

=

0.5

=

- 1.5
= 0
= 0

Risk Premium is 0
Portfolio β1 and β2 is 0. This implies that by selecting the given Proportion of the
portfolio of the Portfolio, investor has designed 0 risk portfolio
So, risk premium of Portfolio will be 0 & return of Portfolio will be equal to Risk free
rate of Return.
Q96

If overall portfolio is insensitive to changes in factor 2 , β2 of Portfolio = 0
Portfolio β2
0
0
WA
WB

ii.

= WA X β2 of A +
WB X β2 of B
=
WA X 0.80 + (1 - WA) x 1.40
=
- 0.6 WA + 1.40
=
2.33
=
( 1 – WA)
=
1 – 2.33
=
-1.33

Portfolio β1
=
Portfolio β2
=
Portfolio β1
1

1
0
= WA X β1 of A +
WB X β1 of B
+
WRF X β1 of RF
=
WA (0.50) + WB (1.50) + 0……………….(i)

Portfolio β2
0

= WA X β2 of A +
WB X β2 of B
+
WRF X β2 of RF
=
WA (0.80) + WB (1.40) + 0……………….(ii)

Solving (i) and (ii)

WA = - 2.8
WB = 1.6
WRF = ( 1 – (-2.8) – 1.6) =

51

2.2

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q97

i.

WA = 𝟏

,𝟓𝟎,𝟎𝟎𝟎 𝟏
,𝟓𝟎,𝟎𝟎𝟎;𝟓𝟎,𝟎𝟎𝟎

=

1.5

=

; 𝟓𝟎,𝟎𝟎𝟎 𝟏
,𝟓𝟎,𝟎𝟎𝟎;𝟓𝟎,𝟎𝟎𝟎

=

- 0.5

β1

β2

A
B

0.80
1.50

0.60
1.20

β1
0.80
1.50

Wβ1
1.2
-0.75
0.45

WB

W
1.5
- 0.5

β1 = 0.46
ii.

a.

b.

β2
0.60
1.20

Wβ2
0.9
-0.6
0.3

β2 = 0.3

Fund other than funds from short selling of B =
Funds from Short selling of B
=
( 50% of funds other than from short selling of B)
Funds other than B
owned funds =
Short selling RF =

1,00,000
1,00,000

2,00,000

Short selling of B = 50% of funds other than from B
0.50 x 2,00,000
=
Investment in A
3,00,000
Investment in B
1,00,000
Short selling of RF
1,00,000

β1
β2

1,00,000
50,000

1,00,000

WA

= 𝟑

,𝟎𝟎,𝟎𝟎𝟎 𝟑
,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎

=

3

WB

=

; 𝟏,𝟎𝟎,𝟎𝟎𝟎 𝟑
,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎

=

-1

WRF

=

; 𝟏,𝟎𝟎,𝟎𝟎𝟎 𝟑
,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎;𝟏,𝟎𝟎,𝟎𝟎𝟎

=

-1

=
=

3 X 0.80 + (-1)(1.5) + (-1)(0)
3 X 0.60 + (-1) (1.20) + (-1)(0)

52

=
=

0.9
0.60

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

ER
15
15
19

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

= RF + β1 (RM1 – RF ) + β2 (RM2 – RF )
=
10 + 0.80 (RM1 – 10) + 0.6 (RM2 – 10)
=
-4 + 0.80 RM1 + 0.6 RM2
=
0.80 RM1 + 0.60 RM2
……………………………………………..(i)

ER
= RF + β1 (RM1 – RF ) + β2 (RM2 – RF )
20
= 10 + 1.5 (RM1 – 10) + 1.20 (RM2 – 10)
20
= - 17 + 1.5 RM1 + 1.20 RM2
37
= 1.5 RM1 + 1.20 RM2
…………………………………………(ii)
From (i) and (ii)
RM1
=
10
RM2
=
18.33
Risk Premium of Factor 2 = RM2 – RF
= 18.33 – 10 = 8.33%

Q98

ER
= RF + β1 (RM1 – RF ) + β2 (RM2 – RF )
Security A
14
=
RF + 0.8 RP1 +0.8 RP2
Security B
10.8 =
RF + 0.6 RP1 +0.4 RP2
Security C
11.2 =
RF + 0.4 RP1 +0.6 RP2

Solving (i) and (ii)
Solving (ii) ad (iii)

………..(i)
…………(ii)
…………(iii)

RF + 0.4 RP1
= 7.60 ……..(iv)
0.5 RF + 0.5 RP1 = 5
……..(v)

Solving (iv) and (v)
RP1 = 4
RF = 6
Substituting values in (i)
RP2 = 6
ER

= RF + β1 (RP1) + β2 (RP2 )
=
RF + 4β1 + 6β2

Required Return of Portfolio D =
RF + 4β1 + 6β2
=
6 + 4(0.5) + 0.7 (6)
=
12.2%
Expected return of D
=
14%
Since ER > RR, so Portfolio D is underpriced
Investor will short sell securities yielding 12.2% and buy portfolio D
If investor invests Rs 1,00,00 in portfolio D
Return from D 14% of 1,00,000
= 14,000
Amount payable or return lost
= 12,200
Gain
1,800

53

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Required Return of Portfolio E =
=

RF + 4β1 + 6β2
6 + 4(0.8) + 6(1)

=

15.2%

=

11.40%

Expected Return of Portfolio F =
15.2%
Since ER = RR, so Portfolio E is correctly Priced. No Arbitrage.
Required Return of Portfolio F =
=

RF + 4β1 + 6β2
6 + 4(0.6) + 6(0.5)

Expected Return of Portfolio F =
9%
Since ER < RR, So Portfolio F is Overpriced
Investor will short sell Portfolio F and invest in securities yielding 11.40%
If investor short sell Rs 1,00,00 of portfolio D
Return from securities =
11.4% of 1,00,000
= 11,400
Loss of Return from Portfolio F
= 9,000
Loss
2,400
Q99

ER

= RF + β1 (RM1 – RF ) + β2 (RM2 – RF ) + β3(RM3 – RF)
=
RF + RP1 β1 + RP2 β2 + RP3 β3

Small Cap value =
Small Cap growth=
Large Cap value =
Large Cap Growth =

4.5 + (0.90 x 6.85) + (0.75 x – 3.5) + (1.25 x 0.65) = 8.857
4.5 + (0.80 x 6.85) + (1.39 x -3.5) + (1.35 x 0.65) = 5.9925
4.5 + (0.85 x 6.85) + (2.05 x -3.5) + 6.75 x 0.65) = 7.535
4.5 + 91.165 x 6.85) + (2.75 x -3.5) + (8.65 x 0.65) = 8.48

Average Expected Return
= 8.857 x 0.10 + 5.9925 x 0.25 + 7.535 x 0.15 + 8.48 x 0.50
Required Return
Small Cap value
Small Cap growth
Large cap value

= 7.754

= RF + β. (Risk Premium)
= 4.5 + (0.90 x 6.85)
= 10.665
= 4.5 + (0.80 x 6.85)
= 9.98
= 4.5 + (1.165 x 6.85) = 12.48

Average return = (10.665 x 0.10) + (9.98 x 0.25) + (10.3225 x 0.15) + (12.48 x 0.50)
= 11.35%

54

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q100

RF = 7% RM = 11% βEQUITY = 1.3
Since its an all equity firm so β of equity is β of Asset.
ΒASSET = 1.3
RRPRIOJECT

=
=

Q101

RF + β(RM – RF)
7 + (11 – 7)1.3 = 12.2% 𝑷

P.E Ratio = 𝑬 = 5 𝟏 𝟏

Ke = 𝑷𝑬 = 𝟓 = 0.20

RF = 10%

Before Buy Back βEQUITY = 0.6, Since No Debt βASSET = 0.6
After Buy Back βASSET will be same 𝑬 𝑫

ΒASSET = βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫
0.6 =

βEQUITY x 𝟎

.𝟓
+ 𝟏

ΒEQUITY (after Buy
ii. 𝟎

.𝟓 𝟏 𝟎

.𝟔
back) = 𝟎.𝟓 = 1.2

0x

Before Buy Back βE = .06
Before Buy –Back PE ratio = 5 𝟏

Ke = 𝟓 = 20%
ii.

Risk Premium on Equity before Buy Back
KE
= RF + β (RM – RF )
20
= 10 + Security Premium
Security Premium = 10%
β (RM – RF) = 10
0.6 (RM – 10) = 10
RM = 26.67%

iii.

After Buy Back
RR = RF + β (RM – RF)
= 10 + 1.2 ( 26.67 – 10) = 30%
Security Risk Premium = RR - RF
= 30 – 10
=
20%

iv.

Return on Debt = Risk Free rate == 10%

55

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

v.

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Before Buy back PE ratio = 5
Assume MP = 100 𝑴𝑷

PE = 𝑬𝑷𝑺
5= 𝟏𝟎𝟎 𝑬𝑷𝑺

EPS = 20

After Buy back KE = 30% 𝟏 𝟏

PE ratio = 𝑲 = .𝟑𝟎 = 3.33 𝑬 𝑴𝑷

PE ratio = 𝑬𝑷𝑺 𝟏𝟎𝟎

3.33 = 𝑬𝑷𝒔

EPS = 30

Increase in EPS =
vi. 𝟑𝟎

;𝟐𝟎
= 𝟐𝟎

50%

New PE ratio = 3.33

Q102

Weight
β

i.

II.
ii.

A
0.5
1.3

B
0.3
1.0

C
0.2
0.8

RF = 8%

RM = 12%

Expected return of each project
RF + (RM – RF)β
A = 8 + (12 – 8) 1.3
= 13.2%
B = 8 + (12-8) 1
= 12%
C = 8 + (12 – 8) 0.8
= 11.2%
Return OF Company = 0.5 x 13.2 + 0.3 x 12 + 11.2 x 0.2 = 12.44%
Cost of capital i.e KE = 12.44%

56

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q103

Market value of East , West and Central Division is in the ratio of 1:2:1,I.e there weights are
@25% , 50% and 25%
Let Risk of Division West is X, Risk of East is 1.5X and risk of central is 0.75X
i.

Since it is an all equity company, So βASSET = βEQUITY = 1.24
ΒASSET is Weighted average of β of Individual assets in the portfolio
ΒASSET = WEAST βEAST + WWEST βWEST + WCENTRAL βCeNtRAL
PRAVINN
1.24 = 0.25 x (1.5X) + 0.50 x (X) + 0.25 x (0.75X)
MAHAJAN CA
X = 1.167
CLASSES
Thus βEAST = 1.167 x 1.5 =
1.7505
9871255244
ΒWEST = 1.167 x 1
=
1.167
ΒCENTRAL = 1.167 x 0.75 =
0.87525

ii.

βASSET of PQR Ltd. 𝑅𝐸𝑉𝑒𝑁𝑈𝑒

𝑆𝐸𝑁𝑆𝑇𝐼𝑉𝐼𝑇𝑌 𝑜𝑓 𝑃𝑄𝑅 𝐺𝐸𝐴𝑟𝐼𝑁𝐺

𝑃𝑄𝑅

= Asset βWEST x 𝑅𝐸𝑉𝐸𝑁𝑈𝐸 𝑆𝐸𝑁𝑇𝐼𝑉𝐼𝑇𝑌 𝑂𝐹 𝑊𝐸𝑆𝑇 𝐷𝐼𝑉𝐼𝑆𝑖𝑂𝑁 x 𝐺𝐸𝐴𝑅𝐼𝑁𝐺 𝑊𝐸𝑆𝑇
= 1.167 x

1.5
1

x

1.8
2

= 1.575545
iii.

βASSET of XYZ before acquisition = WEIGHTED β
(0.25 x 1.7505) + (0.50 x 1.167) + (0.25 x 0.87525)
= 1.24

βASSET of XYZ after acquisition=
(0.25 x 1.750) + (0.50 x 1.575545) + (0.25 x 0.87525)
= 1.44
iv.

Required rate of return of new project is discount rate of new project
RR = RF + (RM – RF)β
11 + 1.575545 (24 – 11) = 31.48%

57

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q104

Debt
0.30
0.2

Weight
β

Equity
0.70

Project β = 1.2 𝑬 𝑫

ΒASSET = βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫
1.2 = 0.30 x 0.20 + 0.70 x βE
βEQUITY = 1.62
ii.

Debt – Equity = 40 : 60
After re financing βASSET will remain same 𝑬 𝑫

ΒASSET = βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫
1.2 = βEQUITY x 0.60 + 0.30 x 0.40
βEQUITY = 1.8

Q105

i.

Required return on Equity
RRE = RF + β (RM – RF)
= 6 + 1.40 (6)
= 14.4%

ii.

ΒASSET = βEQUITY x
= 1.40 x 𝟒 𝟕

+0 𝑬

+ 𝑬
:𝑫 𝟑

x 𝟕

βDEBT x 𝑫 𝑬

:𝑫

= 0.8
iii.

Cost of capital = RF + β (RM – RF)
= 6 + 0.8 (6)
= 10.8%

iv.

Discount rate = Cost of capital = 10.8%

v.

RR = RF + β (RM – RF)
= 6 +1.5 (6)
= 15%

58

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q106

i.

Required return on Equity
RRE
= RF + β (RM – RF)
= 8 + 1.5 (10)
= 23%

ii.

ΒASSET 𝑬 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟔 𝟒

= 𝟏𝟎 x 1.5 + 𝟏𝟎 x 0
= 0.9
iii.

Company’s cost of capital
8 + 0.9 (10)
= 17%

iv.

Any new business should yield more than cost of capital of company. So, discount
rate shall be Cost of capital i.e 17%

v.

D: E = 1: 9
Asset β will remain same 𝑬

ΒASSET 𝟏 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟗

0.9 = 0 x 𝟏𝟎 + βEQUITY x𝟏𝟎

βEQUITY = 1
vi.

Since βASSET is same so cost of capital will remain same i.e 17%

vii.

β = 1.2
RR = RF + β (RM – RF)
= 8 + 10 (1.2)
= 20%

59

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q107

ΒASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟎
.𝟕𝟎 𝟎

.𝟑 (𝟏;𝟎.𝟑𝟎)

= 1.40 x 𝟎.𝟕: .𝟑 (𝟏;𝟎.𝟑𝟎) + 0 x 𝟎.𝟕: .𝟑 (𝟏;𝟎.𝟑𝟎)
= 1.08
After change in Debt equity ratio, Asset β will remain same
ΒASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟎
.𝟔

1.08 = βEQUITY x 𝟎.𝟔: 𝟎.𝟒 (𝟏;𝟎.𝟑𝟎)
βEQUITY = 1.584

Q108

AE is an all equity company therefore Asset β shall be equal to βEQUITY
So βASSET = 1 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

ΒASSET

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

1

= βEQUITY x 𝟑𝟕𝟒𝟒:𝟑𝟓𝟓𝟔 (𝟏;𝟎.𝟑𝟓) 𝟑𝟕𝟒𝟒 𝟏

βEQUITY = 𝟎.𝟔𝟏𝟖𝟑 = 1.62
Q109

i.

Food division
ΒASSET 𝑬 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟏 𝟎

.𝟒

= 0.9 x 𝟏.𝟒 + 0 x 𝟏.𝟒
= 0.642
Chemical division
ΒASSET

= βEQUITY x
= 1.2 x 𝑬

+ 𝑬
:𝑫 𝟏

+ 𝟏
.𝟐𝟓

βDEBT x 𝑫 𝑬

:𝑫

0

= 0.96
Machine Tools
ΒASSET 𝑬 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟏

= 1.4 x 𝟏.𝟓 + 0
= 0.933
ii.

βASSET for midland as a whole shall be average of βASSET of all its division
(0.643 x 0.5) + (0.960 x 0.3) + (0.933 x 0.20)
= 0.7961
ΒASSET 𝑬 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟏

0.7961 = βEQUITY x 𝟏.𝟐𝟓
βEQUITY = 0.9951

60

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BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

iii.

The cost of capital of each division may be calculated as required return on assets of
division
Cost of capital
= RF + βASSET (RM – RF)
Food division
= 10 + 0.643 (18 – 10) = 15.144%
Chemical division
= 10 + 0.960 (18-10) = 17.68%
Tools Divisions
= 10 + 0.933 (18 – 10) = 17.464%

iv.

It is assumed that Amalgamated foods fairly represent Food Industry and studge
chemicals and Chunky tools fairly represent chemical and tool industry. Further it is also
assumed that Food, chemical and machine tools division of Midland Industry fairly
Represent Amalgamated foods, Studge chemicals and chunky tools respectively
So, each division of Midland Industry fairly represents their respective Industry. So above
calculations are reliable

Q110

Since each company in the Industry represents overall industry so, β of one firm of that industry
is equal to β of other firm of the same industry.
So βAsset of Gamma is equal to βASSET of Alpha Ltd.
Asset β of Alpha

βASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)
4

= 1.30 x 4:1 (1;0.40) + 0
= 1.13
asset β of Gamma shall also be 1.13 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

βASSET

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

1.13

= βEQUITY x 𝟑:𝟐 (𝟏;𝟎.𝟒) + 0 𝟑

βEQUITY = 1.582

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BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q111

βASSET 𝑬 𝑫

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫 𝟏

= 1.32 x 𝟏.𝟐 + 0

= 1.1

βASSET of Birla Motors will be equal to βASSET of Industry because it is assumed that Birla
Motors is representing industry 𝑬 𝑫

βASSET

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫

1.1

= βEQUITY x 𝟏.𝟑 + 0 𝟏

βEQUITY = 1.43

Q112

i.

RR

=
=
=

ii.

RREQUITY =
=
=

RF + βASSET (RM – RF)
12 + 1.1(9)
21.9%
RF + βEQUITY (RM – RF)
12 + 1.43(9)
24.87%

βASSET of B Ltd. will be equal to βASSET of A Ltd.
A Ltd.

βASSET 𝑬 𝑫

+ βDEBT x 𝑬
:𝑫 𝑬
:𝑫 𝟏 𝟎

.𝟓𝟎
+ 0.30 x 𝟏.𝟓𝟎 𝟏
.𝟓𝟎

= βEQUITY x
= 1.50 x

= 1.1
βASSET of B Ltd. Will be same as βASSET of A Ltd. 𝑬 𝑫 𝟏 𝟎

.𝟖𝟎

βASSET

= βEQUITY x 𝑬:𝑫 + βDEBT x 𝑬:𝑫

1.1

= βEQUITY x 𝟏.𝟖𝟎 + 0.45 x 𝟏.𝟖𝟎

βEQUITY = 1.62

Q113

βASSET ofXY Ltd. will be equal to βASSET of AB Ltd.
AB Ltd.

βASSET 𝑬

+ 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟒

x 𝟒:𝟏(𝟏;𝟎.𝟑𝟎) + 0

= βEQUITY x
= 1.1

βDEBT x 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= 0.94
βASSET of XY Ltd. Will be same as βASSET of AB Ltd. 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

βASSET

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

0.94

= βEQUITY x 𝟒:(𝟏;𝟎.𝟑𝟎) + 0 𝟒

βEQUITY = 1.43

62

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH
Q114

βASSET

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟏

= 1.35 x 𝟏:𝟎.𝟏𝟐(𝟏;𝟎.𝟑𝟓)
= 0.92
βASSET of A Ltd. Will be same as βASSET of shoe co. 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

βASSET

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

0.92

= βEQUITY x 𝟏:𝟎.𝟓𝟎 (𝟏;𝟎.𝟑𝟓) 𝟏

βEQUITY = 1.219

Debt equity Ratio = 4 : 6
Tax rate = 34%

Q115

βASSET

βEQUiTY = 1.25 𝑬

+ βDEBT 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟔

1.25 x
+0 𝟔
:𝟒 (𝟏;𝟎.𝟑𝟒)

= βEQUITY x
=

x

RF = 6%

(RM – RF) = 3% 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

=
0.8681
Asset β of other company will be same i.e 0.8681, Since other company is all equity
company so Asset β is equal to equity β.
RREQUITY = RF + βEQUITY (RM – RF)
= 6 + 0.8681(3)
= 8.6043
Q116

i.

Asset β of Adhesive business
βASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)
= 1.15 x 𝟏 𝟏

:𝟎.𝟐𝟓(𝟏;𝟎.𝟒𝟎)

=1
If XYZ enters into Adhesive Business, its Asset β will be same as asset β of PQR Ltd. i.e 1
ii.

Rate of return on XYZ’s Adhesive business 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

βASSET

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

1

= βEqUITY x 𝟏:(𝟎.𝟖𝟎)(𝟏;𝟎.𝟔𝟎) + 0

ΒEQuITY

= 1.32 𝟏

RREQUITY = RF + βEQUITY (RM – RF)
= 10 + 1.32(15 – 10) = 16.60% 𝑬 𝑫

RR of XYZ Ltd. = kEQUITY .𝑬:𝑫 + KDEBT. 𝑬:𝑫 𝟏 𝟎

.𝟖𝟎

= 16.60 x 𝟏.𝟖𝟎 + 14(1-0.60)𝟏.𝟖𝟎

63

=

11.71%

fb-id PRAVINN MAHAJAN CA CLASSES

BG-3/3D PASCHIM VIHAR, NEAR PUNJABI BAGH

PRAVINN MAHAJAN CA CLASSES 9871255244, 8800684854

Q117

Proxy β of Excellent Ltd. For Electronic business is average of Asset β of other companies in
Electronic business
Asset β of other companies
Superior Ltd
βASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)
= 1.33 x
= 𝟎

.𝟓𝟎 𝟎
.𝟓𝟎:𝟎.𝟓𝟎(𝟏;𝟎.𝟑𝟓)

+0

0.806

Admirable Ltd.

βASSET 𝑬 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= βEQUITY x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) + βDEBT x 𝑬:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟎
.𝟔𝟎

= 1.30 x 𝟎.𝟔𝟎:𝟎.𝟒𝟎 (𝟏;𝟎.𝟑𝟓) + 0
= 0.907
Asset β = weighted average of β of Individual projects
= WELECTRONIC BS. ΒELECTRONIC BS + WOTHER BS . βOTHER BS
0.907 =
0.8 x βELECTrONIC BS + 0.2 x 1.4
βELECTrONIC BS
= 0.784
Meritorious Ltd.
βASSET 𝑬

+ βDEBT 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝟎
.𝟔𝟓
+0 𝟎
.𝟔𝟓:𝟎.𝟑𝟓 (𝟏;𝟎.𝟑𝟓)

= βEQUITY x
= 1.05 x

x 𝑫

(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆) 𝑬
:𝑫(𝟏;𝒕𝒂𝒙 𝒓𝒂𝒕𝒆)

= 0.78
ΒELECTRONIC Bs for Excellent Ltd. = 𝟎

.𝟕𝟖:𝟎.𝟗𝟎𝟕:𝟎.𝟕𝟖𝟒
= 𝟑

0.79

ΒEQUItY of Security 1 is 1.2
Q118

ΒEQuItY of security 2 is 1.6
Since return on shares of British bank is equal to RM i.e return on market (12%). So β of shares
of British bank is equal to β of Market i.e 1.
β of security Y is 0
β of Invetment Portfolio of these 4 securities is Weighted average of β of securities in the
portfolio
βP = 0.3 x 1.2 + 0.3 x 1.6 + 0.20 x 1 + 0.20 x 0
= 1.04
RRP = RF + βP (RM – RF)
= 5 + 1.04(12-5) = 12.28%

64

fb-id PRAVINN MAHAJAN CA CLASSES

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