Assignment (Take-Home) Fall – 2020

Subject: Financial Management and Application Submission Date: 20th Nov-

2020
Program: BBA Max. Marks: 10

Instructions
Please follow the instructions carefully:
1. Attempt all questions. You can give your answers in handwritten or in type-written form as
per your convenience.
2. If you are giving handwritten answers then you must use A4 paper sheet with sufficient
margin on left and right side. For the word file Use 12 pt. font size and Times New Roman
font style along with 1-inch page margins.
3. You are required to solve and upload your answer file within the given deadline. The
deadline to upload answer file on your respective Blackboard folder is 20th Nov 2020
before 21:00
4. Please make sure to mention your name and your registration number on top of the first
page of your answer file.
5. Solve the questions in sequence as given in the assignment paper.
6. After solving all the answers, make the serial numbering on all your answer sheets.
7. After completing assignment, you are required to make its Snapshot (or Scan) and make its
single .pdf file by arranging all your sheets in sequence.
8. Make the file name as per given format: Subject Name (last four digits of your Registration
Number) e.g. Financial Management and Applications (2342).
9. You must avoid any blur or dull pictures. It is recommended to use black color pen to write
your answers.
10. Do not use pencil.
11. Recheck your answers before the submission on Blackboard to correct any content or
language related errors.

Mini Project
Assume that after completion of your BBA you have started working as a financial planner at JS
Capital Limited. In a second week of Job you got an assignment to invest Rupees 100,000 for a
client. Because the funds are to be invested in a business at the end of 1 year, you have been
instructed to plan for a 1-year holding period. Moreover, your manager has restricted you to the
investment alternatives in the following table, shown with their probabilities and associated
outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks
later.)

Estimated rate of returns

T-
State of the Probability Bills NesCom Nawab PK_Steel Pak Market portfolio
Recession 0.1 3% -14.25 12.25 1.75 -9.75
Below average 0.2 3% -4.75 5.25 -8.25 -2.75
average 0.4 3% 6.25 -0.5 0.25 3.75
Above average 0.2 3% 13.75 -2.5 19.25 11.25
Boom 0.1 3% 21.25 -10 11.75 17.75
Expectred Returns
St. Deviation 0%
CV
Beta              

JS Capital staff has estimated the probability values for the state of the economy, and also
estimated the corresponding rate of return on each alternative under each state of the economy.
Nescom. is technology firm, Nawab collects past-due debts, and PK_Steel manufactures steel
products. JS capital also maintains a “market portfolio” that owns a market-weighted fraction of
all publicly traded stocks on Pakistan exchange market; you can invest in that portfolio and thus
obtain average stock market results. Given the situation described, answer the following
questions:

1. Why is the T-bill’s return independent of the state of the economy? Do T-bills promise a
completely risk-free return? Explain?
2. Why are NesCom returns expected to move with the economy, whereas Nawab’s are
expected to move counter to the economy?
3. Calculate the expected rate of return on each alternative.
4. You should recognize that basing a decision solely on expected returns is appropriate
only for risk neutral individuals. Your client is risk-averse, the riskiness of each
alternative is an important aspect of the decision. One possible measure of risk is the
standard deviation of returns. Calculate this value for each alternative.
5. What type of risk is measured by the standard deviation?
6. Suppose you suddenly remembered that the coefficient of variation (CV) is generally
regarded as being a better measure of stand-alone risk than the standard deviation when
the alternatives being considered have widely differing expected returns. Calculate the
CVs and interpret the results.
7. Suppose you created a two-stock portfolio by investing Rupees 50,000 in Nescom and
Rupees 50,000 in Nawab. Now Calculate the expected return of portfolio, the standard
deviation of portfolio and the coefficient of variation of portfolio. Also write about how
the riskiness of this two-stock portfolio compares with the riskiness of the individual
stocks if they were held in isolation?
8. Assume that the expected rates of return and the beta coefficients of the alternatives
supplied by an independent analyst are as follows:

Security Estimated rate of returns Beta

Nescom 5% 1.5
Market 4 1
Pk_Steel 3.5 0.75
T_Bills 3 0
Nawab 1 -0.6

 What is a beta coefficient, and how are betas used in risk analysis?
 Do the expected returns appear to be related to each alternative’s market risk?
 Is it possible to choose among the alternatives on the basis of the information developed
thus far?
9. Assumes that the risk-free rate is 3.0%, and risk premium is expected return on market
portfolio less risk.
 Write out the security market line (SML) equation; use it to calculate the required
rate of return on each alternative?
 How do the expected rates of return compare with the required rates of return?
Identify the undervalued companies?