Content Total Pages : 2 18 June 2002, Examination FM44 ; SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Time : Three Hours} (Maximum Marks : 100 Note : (i) The paper is divided into two sections: Section-A and Section-B. There are four questions in each section. A student is free to do any five questions. Each question carries 20 marks. (ii) Marks will be given to right procedures also in numerical questions. (iii) Use of scientific calculator would be allowed but it should be of non-programmable type. Use of digital diary and programmable scientific calculator is not allowed. SECTION-A 1. In broad terms. why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? 20 2 (a) There are basically four factors that differentiate stock market indices. What are they? Comment on each. (b) Is it necessarily true that, all clse the same, am index with more stocks is better? What is the issue bere? 10410 3. What is interest rate risk? What are the roles of a bond's coupon and maturity in determining its level of interest rate risk. 20 4. If the returns on two stocks are highly correlated, what does this mean? If they have 10 correlation? If they are negatively correlated? 20 18/60/2/18 [PT.O,SECTION-B Content 5. An investment has an expected return of 6 percent per year with a standard deviation of 3 percent. Assuming that the returns on this investment are at least roughly normally distributed, how frequently do you expect to lose motiey? x 6. My Money Ltd, just paid a dividend of Rs. 2.50 per share. The growth rate in dividends is expected to be a constant 65 percent per year indefinitely. Investors require a 20 percent return on the stock for the first three years, then a 1S percent return for the next three years, and then a 10 percent return thereafter. What is the current share price for My Money? 20 7. Consider the following stocks and T-bill returns for the period 1996-2002: i Year Stocks (%) T-Bills(%) | | 1996 324 n2 1997 [as 147 L 1998 214 | 105 i 199 25 88 i 2000 63 99 _ l 2001 I 32.2 I. 2002 185 i 62 (b) Calculate (©) Calculate premium. Calculate the observed risk premium in each year for the common stocks the average returns and the average risk premium over this penod.\ the standard deviation of returns and the standard deviation of the risk can happen and what it means. Is it possible that the observed risk premium can be negative? Explain bow this Sx4=20 8. Both bond A and bond B have 8 percent coupons and are priced at par value. Bond ‘A has 2 years to maturity, while bond B has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in price of bond A? Of bond B? If rates were to suddenly fall by 2 percent instead, what would the percentage change in price of bond A be now? Of bond B? Illustrate your answers by graphing bond prices versus YTM. What docs this problem tell you about the interest rate risk of longer-term bonds? 18/60/2/18