# Module IV - Mock Test Session I - Risk 1. Returns on securities A and B are given below.

Identify the security of preference based on risk and return Probability .3 .4 .3 A 10 5 12 B 18 3 6

2. Returns on securities A and B are given below. Identify the security of preference based on risk and return A 10 5 12 B 18 3 6

3. Calculate Beta, Alpha and R squared Index return 5 8 12 14 16 10 -5 -7 22 -3 Scrip return 9 3 6 10 2 4 7 8 9 12

4. Questions 8, 9, 10, 12, 16 and 17 from Punithavathy Pandian (Chapter 9) 5. Multiple choice questions from Punithavathy Pandian (Chapter 9)

Session II - Diversification Mr. X has a portfolio comprising equities, bonds and real estate. The standard deviations are 0.1689, .0716 and .0345 respectively. The correlations are: 0.45 for equity and bonds 0.35 for equity and real estate 0.2 for bonds and real estate From the information given above, 6. Calculate portfolio risk (SD) if weights are 25%, 50% and 25% respectively 7. Calculate portfolio risk (SD) if weights are 20%, 40% and 40% respectively For questions 8 through 12 Assessment of five economic scenarios is given below Probability .05 .2 .5 .2 .05 8. 9. 10. 11. 12. Stocks 74 20 14 0 -30 Holding period return (%) Bonds 4 -10 9 35 0 Cash 6 6 6 6 6

What is the expected return on shares What is the expected return on bonds What is the standard deviation of stocks What is the standard deviation of bonds What is the correlation co-efficient between stocks and bonds

For questions 13 and 14 Suppose you invest in 4 securities. Company A has an expected return of 20%, B – 10%, C – 12% and D – 9%. You have invested Rs. 40,000. 13. What more information is needed to find return on the portfolio? a. b. c. d. market value of investment beta of shares proportion of investment none of the above

14. Assuming that the portfolio is equally weighted, what is the return on the portfolio Additional questions – Review problems from Punithavathy Pandian Questions 8 through 18

Session III - CAPM For questions 15 through 18. Risk free rate of return Expected rate of return on market portfolio Beta of security A Beta of security B 15. 16. 17. 18. 8% 16% 0.7 1.4

Expected rate of return on security A will be Expected rate of return on security B will be If a security has expected return of 20%, its beta will be If the risk free return is 6% and expected return is 20%, beta will be

For questions 19 through 22 Mr. X has made investments in the following 5 securities on 1.1.2005. The # of shares bought, purchase price and expected price on 31.12.2005 are shown in the table below Securities A B C D E 19. 20. 21. 22. # of units 100 150 75 100 125 Cost price 50 30 20 35 40 Expected year end price 65 40 25 32 47

What is the weight of D in the above portfolio based on cost price What is the expected rate of return on security A What is the return on security E What is the return on the overall portfolio

For questions 23 through 25 You are trying to decide between two funds. The risk free rate is 8% and the market return is 12%. Average return on Fund A is 18% and that on fund B Is 16%. The SD for Fund A and B is 20% and 15% respectively. 23. What is the Sharpe performance measure for fund A and B? Which is better? 24. What is the Treynor performance measure for fund A and B? Which is better? 25. What is the Jensen’s measure for fund A and B? Which is better?

Session IV - Bonds Bond Pricing 1. A zero coupon bond with par value of Rs. 1000 will mature in 3 years and investors expect it to yield 10% pa. What will be its current price? 2. A Rs. 100 par value bond bearing a coupon rate of 12% will mature after 5 years. What is the price of the bond if the discount rate is: i. 15% ii. 12% iii. 10% 3. A Rs. 100 par value bond bears a coupon rate of 14% and matures after 5 years. What is the value of the bond if required rate of return is 12% and interest is payable: i. Yearly ii. Half yearly iii. Quarterly iv. Monthly v. Daily YTM 4. Market value of a Rs. 1000 par value bond, carrying a coupon rate of 10%, paid annually and maturing after 7 years is Rs. 750. What is the YTM 5. Market value of a Rs. 1000 par value bond, carrying a coupon rate of 10%, paid semi-annually and maturing after 7 years is Rs. 750. What is the YTM 6. A Rs. 100 par value bond bearing coupon of 11% payable annually matures after 5 years. The expected YTM is 15% and present market price is Rs. 82/-. Should the investor buy the bond? 7. Ravi buys a 10 year bond, when it has 6 years left to maturity. The bond carries a face value of Rs. 100 and pays interest annually @ 8%. Ravi buys it for Rs. 85. What is the YTM? Duration 8. Calculate the duration of bond A and bond B with 7% and 8% coupons having maturity period of 4 years. Face value is Rs. 1000/-. Both bonds are currently yielding 6% 9. Calculate the duration of bond A and bond B with 5% and 6% coupons paid half yearly having maturity period of 3 and 5 years respectively. Face value is Rs. 1000/-. Both bonds are currently yielding 7% 10. Mr. A has a sum of Rs. 45000 with him to make a one time investment. He needs Rs. 50,000 after 2 years and has a choice of two types of bonds: Bond A 7% 4 904.9 10% Bond B 6% 1 963.64 10%

Coupon Nper Current price Yield

Session V - Pricing of equity shares 1. XYZ Ltd. Is expected to provide a dividend of Rs. 2 and fetch a price of Rs. 18 a year hence. What price would it currently sell for if investors expect 12% returns? 2. XYZ Ltd. Is expected to provide a dividend of Rs. 2 today, which will grow by 5% each year. What price would it currently sell for if investors expect 12% returns? 3. XYZ Ltd. Is expected to provide a dividend of Rs. 5 today, which will grow by 6% each year. If price per share = Rs. 50/-, what is the expected rate of return? 4. XYZ Ltd. Is expected to provide a dividend of Rs. 2 today, which will remain constant each year. What price would it currently sell for if investors expect 12% returns? 5. The current dividend on a share of XYZ limited is Rs. 2. The company will enjoy an above normal growth rate of 20% for the next 6 years post which it will stabilise at 10%. Investors expect a return of 15%. What is the intrinsic value of its equity share 6. The current dividend on a share of XYZ limited is Rs. 5. The company will enjoy an above normal growth rate of 18% for the next 5 years post which it will stabilise at 12%. Investors expect a return of 22%. What is the intrinsic value of its equity share 7. XYZ Ltd.’s earnings and dividend are expected to decline @ 4%. Previous dividend was Rs. 1.50. If current market price is Rs. 8/-, what is the rate of return investors are expecting from the stock 8. The current dividend on an equity share of XYZ Ltd. Is Rs. 4/-. Present growth rate is 20%, this will decline linearly each year and stabilise at 10% over a period of 8 years. What is the intrinsic value of the share if investors expect 18%. 9. ABC Ltd. earns a RoE of 25% and distributes 40% of its earnings as dividend. Its earnings this year were Rs. 100/- and expected rate of returns are 20%. Find: a. Ploughback ratio b. Growth rate c. Dividend for the next year d. Current price 10. ABC Ltd. has yielded 16.27% returns in the past 5 years. Returns will grow at this rate for the next 4 years. Recent dividend paid by the company to its stockholders was @ 40%, latest EPS is Rs. 35/- and P/E is 4.8. Face value of a share is Rs. 10/-. If an investor wishes to buy and hold this stock for another 4 years, what would be the ideal price if his required rate of return is 20%? 11. The price of a share is Rs. 30 and expected EPS for the next year is Rs. 2.50. Investors require a return of 16%. What proportion of the price is accounted for by PVGO

Session VI - Derivatives 1. Mr. A bought a call option on a share of Reliance Industries Ltd. for Rs. 100/- giving him the right to buy the share for Rs. 800/- a month later. The current market price is Rs. 840/-. If the market price on the expiration date is the following, answer the questions below: a. Rs. 1000 b. Rs. 700 c. Rs. 900 What would be your recommendation for him? What are his payoffs under each option? Is the option “in the money”, “out of the money” or “at the money”? What is the intrinsic value? What is the time value? 2. Mr. A bought a put option on a share of Reliance Industries Ltd. for Rs. 100/- giving him the right to sell the share for Rs. 800/- a month later. The current market price is Rs. 840/-. If the market price on the expiration date is the following, answer the questions below: a. Rs. 1000 b. Rs. 700 c. Rs. 900 What would be your recommendation for him? What are his payoffs under each option? Is the option “in the money”, “out of the money” or “at the money” for each of these options? What is the intrinsic value? What is the time value? 3. Mr. A sold a call option on a share of Reliance Industries Ltd. for Rs. 100/- at a strike price of Rs. 800/- a month later. The current market price is Rs. 840/-. If the market price on the expiration date is the following, answer the questions below: a. Rs. 1000 b. Rs. 700 c. Rs. 900 What would be your recommendation for him? What are his payoffs under each option? Is the option “in the money”, “out of the money” or “at the money”? What is the intrinsic value? What is the time value? 4. Mr. A sold a put option on a share of Reliance Industries Ltd. for Rs. 100/- at a strike price of Rs. 800/- a month later. The current market price is Rs. 840/-. If the market price on the expiration date is the following, answer the questions below: a. Rs. 1000 b. Rs. 700 c. Rs. 900 What would be your recommendation for him? What are his payoffs under each option? Is the option “in the money”, “out of the money” or “at the money”? What is the intrinsic value? What is the time value? 5. Use the option information given in the following table to answer the questions below. Ignore taxes and transaction costs (brokerage). Each contract is equal to 100 shares

Share A B C

Current price 52 40 35

Strike price 50 45 30

Call premium 3 months 6 months 3 4 1 1.25 6 6.30

Put premium 3 months 6 months 0.35 1.05 5.50 6.00 0.45 0.65

a. If you purchase one 3 month call contract on A, what profit or loss will you make on maturity if the price of A at that time is Rs. 57/b. If B’s price is Rs. 35 on maturity of the 6 month option, determine the value of five 6 month put contracts at their maturity date c. If you had purchased five 3-month call options of C and the price of C is Rs. 32 on maturity, determine your profit or loss on the investment

d. If you had purchased five 3-month puts on C, what would be your profit or loss on maturity if the share price was Rs.32/e. If your client wrote five 6-month call options on B’s share, what is his profit or loss on maturity if price of B at that time is Rs. 43/f. If your client wrote five 6-month put options on B, what would his profit or loss be on maturity if share price then was Rs. 43/-

6. Calculate the value of a call option using the “Binomial” model given the following information S = 200 u = 1.4 d = 0.9 E = 220 r = 0.1