ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Risk Return Basics/Portfolio

Management
Learning Objective of the Chapter:

1) Risk and uncertainty.

2) Meaning of Portfolio Management.
3) Computation of Return of individual security.
4) Computation of Return of portfolio of securities.
5) Computation of total risk of individual security.
6) Computation of total risk of portfolio of securities.
7) Computation of systematic risk of individual security.
8) Computation of systematic risk of portfolio of securities.
9) CAPM return.
10) Security Market Line.
11) Over valuation and under valuation.
12) Allocation of total risk into systematic and unsystematic risk.
13) Computation of beta of unlisted company.
14) Computation of CML return

Risk and uncertainty

In common parlance the term 'Risk' and 'uncertainty' have synonymous meaning. However, they differ
from each other's explained below:

Risk
Risk may be defined as "the chance of future loss that can be foreseen" in other words, in case of risk
an estimate can be made about the degree of happening of the loss. This is usually done by assigning
probabilities to the risk on the basis of past data and the probable trends.

Uncertainty
Uncertainty may be defined as "the unforeseen chance for future loss or damages" in case of
uncertainty since the firm cannot anticipate the future loss and hence, it cannot directly deal with it in
its planning process as is possible in the case of risk.
For example, a firm cannot foresee the loss which may be due to destruction of its plant on account
of earthquake.

PORTFOLIO MANAGEMENT
Portfolio Management Meaning:

CA RAJENDRA MANGAL JOSHI 1

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

 Portfolio is the term used for all the securities held by an investors.
 The term portfolio management mean shuffling within the portfolio to achieve the objective of
the portfolio.

PORTFOLIO Risk
Return MANAGEMENT

I) Computation of Expected rate of return

a) For individual security:

(i) If probability is not given

R̅A = ΣR̅A
N

Question No 1:
Return of
Demand Return of
Security B
Conditions Security A (RA)
(RB)
2017 10% 20%
2018 12% 24%
2019 5% 10%
ΣRA=27% ΣRB=54%
R̅A =27%/3 =9%
R̅B =54%/3 =18%

(ii) If probability is given

Question No: 2
Demand Conditions Probability (P) Return of Security A (RA) Return of Security B (RB)
Strong 30% 100% 20%
Normal 40% 15% 15%

CA RAJENDRA MANGAL JOSHI 2

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Weak 30% (70%) 10%

Compute expected return for security A and B.

Solution:
Demand Probability Return of Security Return of Security
RA X P RB X P
Conditions (P) A (RA) B (RB)
Strong 30% 100% 20% 30% 6%
Normal 40% 15% 15% 6% 6%
Weak 30% (70%) 10% (21%) 3%
R̅A =15% R̅B=15%

(iii) Computation of Holding Period Return (HPR)

Return = Dividend return + Capital gain or loss

= D1/P0 + (P1-P0)/P0

Question No: 3
Stocks X and Y have the following historical dividend and price data:
Year Stock "X" Stock "Y"
Dividend Year-end Dividend Year-end price
(Rs.) price(Rs.) (Rs.) (Rs.)
2014 - 12.25 - 22.00
2015 1.00 9.75 2.40 18.50
2016 1.05 11.00 2.60 19.50
2017 1.15 13.75 2.85 25.25
2018 1.30 13.25 3.05 22.50
2019 1.50 15.50 3.25 24.00
Calculate:
(i) Realized rate of return (or holding period return) for each stock in each year.
(ii) Calculate expected rate of return of stock X and Y.

Question No: 4
Compute the expected return of Question No 3 if following probability of occurrence are given:
Year Probability (Rs.)

CA RAJENDRA MANGAL JOSHI 3

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

2015 10%
2016 15%
2017 20%
2018 25%
2019 30%

b) Computation of Return for Portfolio of Securities:

Return of the portfolio is the weighted average of return of the individual security in the portfolio.

RP = RA X W A + RB X WB…………………..+ Rn X Wn

Question No: 5
In Question No: 2, if Mr. R hold 50% of his investment in security A and 50% in security Y, what will
be his portfolio return?

Solution:
__
RP = RA X W A + W B X RB
=15%X0.5 + 15% X 0.5
= 15 %

II) Measurement of Risk

a) For Individual security:
 Risk of the individual security is measured by computing the standard deviation.
 Higher the standard deviation higher will be the risk.
If Probability not given,

Variance (VX) = σ2 = Σ(X-X̅)2

n
𝝈 = √𝐕𝐚𝐫𝐢𝐚𝐧𝐜𝐞

If probability is also given,

Variance = 𝝈𝟐 = Σ(X-𝐗)2 x P

𝝈 = 𝐕𝐚𝐫𝐢𝐚𝐧𝐜𝐞

Question No: 6
Compute the standard deviation for security A and B from the date given in Question No: 2.

CA RAJENDRA MANGAL JOSHI 4

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Solution:

Demand (RB-
Pro. (RA- (RB- (RA-R̅B)2
Condition (RA) (RA-R̅A) (RB-R̅B) R̅B)2 x
(P) (RB) R̅A)2 R̅B)2 xP
s P

20 (100%- (20%-
Strong 30% 100%
% 15%)=85% 15%)=5% 7,225 25 2,167.50 7.50
15 (15%- (15%-
Normal 40% 15%
% 15%)=0 15%)=0 - - - -
10 (-70%- (10%-
Weak 30% -70%
% 15%)=-85% 15%)=-5% 7,225 25 2,167.50 7.50

Σ 4,335.00 15.00

VA = 4,335
VB = 15
σA = 65.84 %
σB = 3.87 %

III) Computation of Co-variance (COV)

If Probability not given

COVXM = Σ (X-X̅)(M-M̅)
N

If probability is also given

COVXM = Σ (X-X̅)(M-M̅) x P

Cov is a measure that combines the variance (or Volatility) of stock’s returns the tendency of
those return to move up or down at the same time other stock’s move up or down.

Question No: 7
Compute the COVXY for Question No 1 & 2.

IV) Correlation Co-efficient:

rAB = COV AB/σA σB

CA RAJENDRA MANGAL JOSHI 5

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Correlation coefficient can be computed from +1 to -1.

+1 = Perfectively Positive
-1 = Perfectively Negative
Between +1 to -1 = moderate

Question No: 8
Compute the rXY for Question No 1.

V) For the Portfolio risk:

 Risk of the portfolio of securities are measured by computing the combined standard
deviation.

 Computation of σ of two security portfolio :

σ12 = W1212 + W1212 + 2 W11 W22 r12

Question No: 9
Compute the standard deviation of portfolio from the date given in Question No: 2, if WA =50% and
WB=50% and rAB =0.9

Unlike portfolio return which is simply the weighted average of the return of the individual
security portfolio risk (i.e. δ) is not the weighted average; it will depend upon the co-relation
between securities.
I) If co-relation is perfectly positive:
σ12 = W1σ1 + W2σ2

II) If co-relation is perfectly negative:

σ12 = W1σ1 - W2σ2

III) If the co-relation is moderate, variation/ δ will moderately change depending upon whether
co-relation is ‘+ve’ or ‘-ve’.

σ12 = W1212 + W 1212 + 2 W 11 W22 r12

IV) If co-relation is Zero:
σ12 = √ W 21σ21 + W 22σ22

 Computation of σ for three security portfolio:

________________________________________________________________
σ123 = √ W 21 σ21+W 22 σ22+W 23 σ23+2W 1W 2σ1σ2r1.2+2W 1W3σ1σ3r1.3+2W 2W 3σ2σ3r2.3
OR

CA RAJENDRA MANGAL JOSHI 6

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

________________________________________________________________
σ123 = √ W 21 σ21+W 22 σ22+W 23 σ23+2W 1W 2Cov1.2+2W 1W 3Cov1.3+2W 2W 3Cov2.3

For eg. Security 1, 2, 3

1.1 2.1 3.1

1.2 2.2 3.2
1.3 2.3 3.3

____________________________________________________________________
σ123 = √ W1σ1W1σ1+ W2σ2W2σ2+W3σ3W3σ3 + W1σ1W2σ2+ W2σ1W2σ1+ W1σ1W3σ3+ W3σ3W1σ1
+W2σ2W3σ3+ +W3σ3W2σ2

VI) Computation of Co-efficient of Variation (CV)

CV   / R
The co-efficient of variation shows the risk per unit of the return and it provides a more meaningful
basis for comparison when the expected returns on two alternatives are not same.

VII) Risk Aversion Vs Required Rate of Returns

 Most investors are risk averse.
 Risk Averse investor are conservative investor they choose less risky investment.
 If Market dominated by the risk adverse investor, riskier securities must have higher
expected returns, than less risky securities.
 If above situation does not prevailed, buying and selling (arbitration process) in the market
will force it to occur.

VIII) Minimum Variance Portfolio:

W X = (σY2 –Cov XY)/ σ2x + σ2y – 2 Covxy

Where,
W X = is the proportion of investment in security X.
W Y = 1- W X

Example:
P Ltd. and Q Ltd. have low positive correlation coefficient of +0.5. Their respective risk and return
profile is as under:
Rp = 10% Rq =15%
σp = 20% σq = 25%
Compute the portfolio of P & Q to minimize risk.
Solution:

CA RAJENDRA MANGAL JOSHI 7

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

P Ltd. Q Ltd.
Return 10% 15%
Risk (S.D.) 20% 25%
Correlation (rPQ) 0.5

Covariance (COVPQ) = 𝜎 × 𝜎 × r
= 20 × 25 × 0.5 = 250

Overall risk,
.
Proportion of investment in security P =
×
( )
=
×
=
= = 0.71=71%

Proportion of investment in security Q = 1- 0.71

= 0.29=29%

IX) Capital Assets pricing model or method (CAPM)

Total Risk in portfolio management can be classified into:
i) Diversifiable / unsystematic /companies specific risk
ii) Non diversifiable / systematic / market risk

Companies specific risk can be totally eliminated. Therefore according to CAPM the risk which matters
in Portfolio management is systematic or non-diversifiable or market risk and degree of this risk for
different companies may be different and it is measured by Greek letter Beta (β).

CA RAJENDRA MANGAL JOSHI 8

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Β of a security measures the sensitivity of the returns of a security to market rate of returns. i. e. it
measures the change in the return of security for a given change in market rate of return.
For example beta equals 2 of X Ltd signifies that for 1 % change/variation in the market return the
return of X Ltd will change by 2%.
The beta of the market as a whole is average beta, being equal to one.
Securities with beta greater than 1 are call aggressive securities and those of beta less than 1 are
called defensive securities.

Statistically, Beta is calculated as below:

Β(X) = COV M,X/δ2M
= (δM δx rMX)/ δ2M
= δx rMX/ δM

Under CAPM the fundamentally required rate of return a security based upon its systematic risk is
calculated as below:
CAPM return of security x (RX) = RL + (RM-RL)βx
So under CAPM, Ke = Rx

X) Security Market Line (SML)

SML

XI) Market Risk Premium = (RM-RL)

XII) Security Risk Premium = (RM-RL) βx

Example
The risk premium for the market is 10%. Assuming Beta values of 0, 0.25, 0.42, 1.00 and 1.67.
Compute the risk premium on Security X.
Solution

CA RAJENDRA MANGAL JOSHI 9

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Market Risk Premium is 10%

β Value of X Risk Premium of Security X
0.00 0%
0.25 2.50%
0.42 4.20%
1.00 10.00%
1.67 16.70%

XIII) Why Beta of market is equal to 1

βm = Covmm / σm2
= rmm * σm * σm / σm2
= rmm
=1
The correlation of the rate of return on the market portfolio with itself must be positive and perfect.
Hence, it is proved that the Beta of the market portfolio is equal to 1.

XIV) Portfolio beta:

Portfolio beta is the weighted average of all individual securities’ beta included in the portfolio.
Β P = W1β1+W2β2…………………+ Wnβn

XV) CAPM Return of the Portfolio

(RP) = RL + (RM-RL) βP

Example
Treasury Bills give a return of 5%. Market Return is 13% (i) What is the market risk premium (ii)
Compute the β Value and required returns for the following combination of investments.
Treasury Bill 100 70 30 0
Market 0 30 70 100

Solution
Risk Premium Rm – Rf = 13% - 5% = 8%
β is the weighted average investing in portfolio consisting of market β = 1 and treasury bills (β =
0)

CA RAJENDRA MANGAL JOSHI 10

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Portfolio Treasury Β Rj = Rf + β × (Rm – Rf)

Bills: Market
1 100:0 0 5% + 0(13%-5%)=5%
2 70:30 0.7(0)+0.3(1)=0.3 5%+0.3(13%-5%)=7.40%
3 30:70 0.3(0)+0.7(1)=0.7 5%+0.7(13%-5%)=10.60%
4 0:100 1 5%+1.0(13%-5%)=13%

Example
Pearl Ltd. expects that considering the current market prices, the equity share holders should get a
return of at least 15.50% while the current return on the market is 12%. NRB has closed the latest
auction for Rs. 2500 crores of 182 day bills for the lowest bid of 4.3% although there were bidders
at a higher rate of 4.6% also for lots of less than Rs. 10 crores. What is Pearl Ltd’s Beta?
Solution
Determining Risk free rate: Two risk free rates are given. The aggressive approach would be to
consider 4.6% while the conservative approach would be to take 4.3%. If we take the moderate
value then the simple average of the two i.e. 4.45% would be considered
Application of CAPM
Rj = Rf + β (Rm – Rf)
15.50% = 4.45% + β (12% - 4.45%)
. % . % .
β= =
% . % .
= 1.464

XVI) Under price Over Price:

a) Graphical method:

 Securities plotted above the line are better performing securities i.e. underpriced.
 Securities plotted on the line are fairly priced securities.
 Securities placed below the line are low performing securities i.e. overpriced.

Question No: 10
Rf = 6%
Rm = 10%
β=1
Plot the following securities into security market line
A B C D E F G
Return 12% 11% 8% 9% 10% 13% 14%
Beta 0.25 1.25 1 0.75 1 0.5 0.75

CA RAJENDRA MANGAL JOSHI 11

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Beta Required return

0.25 6% + 0.25 (10%-6%) = 7%
0.5 6% + 0.50 (10%-6%) = 8%
0.75 6% + 0.75 (10%-6%) = 9%
1 10
1.25 11
Return

Better performing / Underpriced = A, F, G

Equilibrium point – B, E, D
Low performing / Overpriced = C
b) Comparison with expected return and CAPM return:

(i) When CAPM < Expected Return – Buy: This is due to the stock being undervalued
i.e. the stock gives more return than what it should give.

(ii) When CAPM > Expected Return – Sell: This is due to the stock being overvalued
i.e. the stock gives less return than what it should give.

(iii) When CAPM = Expected Return – Hold: This is due to the stock being correctly
valued i.e. the stock gives same return than what it should give.

Question No: 11
The expected returns and Beta of three stocks are given below
Stock A B C
Expected Return (%) 18 11 15

CA RAJENDRA MANGAL JOSHI 12

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Beta Factor 1.7 0.6 1.2

If the risk free rate is 9% and the expected rate of return on the market portfolio is 14% which of
the above stocks are over, under or correctly valued in the market? What shall be the strategy?
Solution
Required Rate of Return is given by
Rj = Rf + β (Rm-Rf)
For Stock A, Rj = 9 + 1.7 (14 - 9) = 17.50%
Stock B, Rj = 9 + 0.6 (14-9) = 12.00%
Stock C, Rj = 9 + 1.2 (14-9) = 15.00%
Required Return % Expected Return % Valuation Decision
17.50% 18.00% Under Valued Buy
12.00% 11.00% Over Valued Sell
15.00% 15.00% Correctly Valued Hold

XVII) Capital Market Line (CML) Return

0 σo σ1 σ

CA RAJENDRA MANGAL JOSHI 13

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

For example,
RL = 6%
RM = 15%
σM =25%
If Mr. A has total amount of Rs. 1,00,000
Now Mr. A invest Rs. 40,000 @ RL and invest Rs. 60,000 in market portfolio (RM).

Now Mr. A’s return of portfolio will be = 6% X Rs. 40,000/Rs. 100,000 +15% X Rs. 60,000/Rs. 100,000
= 2.4% + 9%
= 11.4 %
σP = W1212 + W 1212 + 2 W 11 W22 r12
= W 2σ2
= W MσM
= 25% x 0.6 = 15%

Now Mr. A invest Rs. 150,000 in market portfolio (RM) by taking loan of Rs. 50,000 @ RL.

CA RAJENDRA MANGAL JOSHI 14

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Now Mr. A’s return of portfolio will be = 6% X Rs. (-50,000)/Rs. 150,000 +15% X Rs. 150,000/Rs.
100,000
= (-2%) + 22.5%
= 20.5%
σP = W MσM
= 25% x 150% = 37.5%

CML Return = RL + (RM-RL) X σX

σM

Example: You are able to both borrow and lend at the risk-free rate of 9%. The market portfolio
of securities has an expected return of 15% and a standard deviation of 21%. Determine the
expected return and standard deviations of the following portfolios:
(a) All wealth is invested in the risk-free asset.
(b) All wealth is invested in the market portfolio.
(c) One third is invested in the risk-free asset and two thirds in the market portfolio.
(d) All wealth is invested in the market portfolio. Furthermore, you borrow an additional one third of your
wealth to invest in the market portfolio.

Solution:
Given,
Risk-free rate = 9%
Expected return on market portfolio = 15%
Market Risk = 21%
Risk-free asset Market

Return 9% 15%
S.D. 0% 21%

(a) If all wealth is invested in risk-free asset, then expected return is 9% and risk will be 0%.
(b) If all wealth is invested in market portfolio, expected return is 15% and risk will be 21%.
(c) If one third is invested in the risk-free asset and two thirds in the market portfolio.
Return = 9% × 0.33 + 15% × 0.67
= 2.97 + 10.05
= 13.02

Risk = 0.33 + 21% × 0.67

= 14.07
(d) If all wealth is invested in the market portfolio by adding an additional 1/3 of your wealth to invest in
the market portfolio:
Expected return = 1 + × 15% - × 9
= × 15% -
= 17%
Or, = 15% + × 15% − × 9% = 17%

CA RAJENDRA MANGAL JOSHI 15

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Risk = × 21% − 0 ×
= 28%

XIX) Allocation of total risk of security into Systematic risk and unsystematic risk
Total risk (σ) = Systematic risk + Unsystematic risk.
The systematic risk can be calculated by using following formula:
S.D. approach
Systematic risk = S.D. of market index X βi
= σm βi
Unsystematic risk = Total variance - Systematic risk.
∈i = σi - Systematic risk.
Total risk (σi) = Systematic risk + Unsystematic risk.
= βi σm +∈i
Variance approach
Systematic risk = Variance of market index X β2i
= σ2m β2i
Unsystematic risk = Total variance - Systematic risk.
∈i2 = σi2 - Systematic risk.
Total risk (σ2i) = Systematic risk + Unsystematic risk.
= βi2 σ2m +∈2i

Question No: 12
The following details are given for X and Y companies’ stocks and the NEPSE Index for a period
of one year. Calculate the systematic and unsystematic risk for the companies’ stocks.
X Stock Y Stock NEPSE
2
Variance of return (σ ) 6.30 5.86 2.25
Beta 0.71 0.685

Solution:

Company X:
Systematic risk = βi2 × Variance of market index
= (0.71)2 × 2.25 = 1.134
Unsystematic risk (∈i2) = Total variance of security return - systematic risk
= 6.3 – 1.134

CA RAJENDRA MANGAL JOSHI 16

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

= 5.166
2
Total risk (σ x) = βι2 × σm2 + ∈t2
= 1.134 + 5.166 = 6.3

Company Y:
Systematic risk
Unsystematic risk
Total risk (σ2y)
= β i 2 × σ m2
= (0.685)2 x 2.25 = 1.056
= Total variance of the security return - systematic risk.
= 5.86-1.056 = 4.804
= βι2 × σm2 + ∈t2
= 1.056 + 4.804 = 5.86

XX) Computation of Beta of unlisted company

Steps:

• Identity the proxy firm (listed firm).

Step 1
• Compute the Beta of proxy firm.
Step 2 • Beta (listed firm) = COVXM / σ2M
• De-leverage
Step 3 • ꞵU = ꞵL / [1+D/E(1-t)]
• Re-leverage
Step 4 • ꞵL = ꞵU X [1+D/E(1-t)]

Note:
Unlevered beta (ꞵU) also known as Assets Beta.

Levered beta (ꞵL) also known as Equity Beta.

Some More Questions

Question No. 13:

An investor holds the following portfolio:
---------------------------------------------------------------------------------------------------
Share Beta Investment (Rs.)

CA RAJENDRA MANGAL JOSHI 17

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

---------------------------------------------------------------------------------------------------
Sigma 0.8 2,500,000
Beta 1.2 3,500,000
Alpha 1.5 4,000,000
----------------------------------------------------------------------------------------------
You are required to answer the following questions: (3+3=6 Marks)
i) What is the portfolio beta of the investor?
ii) What is the expected rate of return on the investor’s portfolio, if the risk-free rate is 8
percent and the expected return on market portfolio is 18 percent?
(June 2009)

Answer:
i. The portfolio beta of the investor is 1.22. (W.N. 1)
ii. The expected rate of return on the investor’s portfolio is 20.2 percent. (W.N. 2)

Working Notes
W.N.1
For given beta, the required rate of return is obtained using the following formula:

Share Investment (NRs.) Weight Beta Weight * Beta

Sigma 2,500,000 0.25 0.8 0.20
Beta 3,500,000 0.35 1.2 0.42
Alpha 4,000,000 0.40 1.5 0.60
Σ Weight * Beta = Portfolio Beta 1.22

W.N.2
We have Expected Return on Investor's Portfolio E (rp) = Rf + Bp (Rm – Rf)
Where
Rf = Risk Free Return
Bp = Portfolio Beta
Rm = Return on Market Portfolio

Hence,
E (rp) = 8 % + 1.22 (18 % - 8%)
= 20.2 %

Question No. 14:

a) A risky portfolio has an expected market return of 14%. What should be the proportion of investment
in risky and risk free investment of a portfolio to secure 20% expected portfolio return, where
government securities are earning 5%? (5 Marks)
b) Jessica wishes to know the expected return on her following portfolio, when the risk-free rate is 7%
and the return on market is expected to be 20%. (5 Marks)

CA RAJENDRA MANGAL JOSHI 18

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Security Percentage of Portfolio Beta factor of Security

R 15 0.2
S 10 1.2
T 5 1.8
U 30 0.9
V 25 0.2
W 15 0.8

c) Explain the concept of an efficiency frontier. (5 Marks)

(December 2009)

Answer:
a) Expected market return on risky portfolio, E (rm) = 14%
Risk free rate of return (rf) = 5%
Expected return on total portfolio, E (rp) = 20%
Now,
E (rp) = Wm * E (rm) + (1- Wm) * rf
20% = Wm * 14% + (1- Wm) * 5%
Wm = 15/9= 1.667
Wf = 1-1.667 = -0.667
Therefore, the proportion of risky investment in the portfolio is 166.67%, and
the proportion of risk free investment is –66.67%.

b) Portfolio’s beta (β) = 0.15*0.2+0.1*1.2+0.05*1.8+0.3*0.9+0.25*0.2+0.15*0.8

= 0.68
Now,
Expected return on the portfolio of Jessica would be
Rp = Rf+ β (Rm – Rf)
= 7% + 0.68 (20% – 7%)
= 15.84%
Therefore, Jessica’s expected rate of return on portfolio is 15.84% .

(c) The efficiency frontier traces out the set of available portfolio combinations consistent with risk
aversion, i.e. all portfolios which maximize expected returns for a given risk or minimize risk for a given
return. The aim of any rational risk-averting investor is to locate on the boundary, although precisely
where will depend on the extent of his or her risk-aversion.

Question No: 15
M/s X. Ltd. has three divisions, each of approximately the same size. Its Finance Department has
estimated the rates of return for different states of nature as given. (15 Marks)

CA RAJENDRA MANGAL JOSHI 19

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

State Probability Rm Rate of Return Rate of Return Rate of

of Division 1 of Division 2 Return of
Division 3
Great 0.25 0.35 0.40 0.6 0.20
Good 0.25 0.20 0.36 0.3 0.12
Average 0.25 0.13 0.24 0.16 0.08
Horrible 0.25 -0.08 0 -0.26 -0. 02

a) If the risk free rate is 9 %, what rate of return does the market require for each division?
b) What is the beta of the entire company?
c) If the company has 30 percent of its funds provided by riskless debt and the remainder by equity
what is the equity beta for the company?
d) Which of the divisions should be kept? Which should be spun off?
e) What will the company's beta be if the actions in part (d) are undertaken?
(June 2010)
Answer:
Calculation of the expected return of market, division1, division 2, division 3.

State Prob. Rm R1 R2 R3 pjRm pjR1 PjR2 PjR3

Great 0.25 0.35 0.40 0.6 0.20 0.0875 0.10 0.15 0.05
Good 0.25 0.20 0.36 0.3 0.12 0.05 0.09 0.075 0.03
Average 0.25 0.13 0.24 0.16 0.08 0.0325 0.06 0.04 0.02
Horrible 0.25 -0.08 0 -0.26 -0. 02 -0.02 0 -0.065 -0.005
Total 0.15 0.25 0.20 0.095

Expected Return from market E(Rm) = ∑ pjRm= 0.15 =15%

Expected Return from division 1 E(R1) = ∑ pjR1= 0.25 =25%
Expected Return from division 2 E(R2) = ∑ pjR2= 0.20 =20%
Expected Return from division 3 E(R3) = ∑ pjR3= 0.095 =9.5%
Calculation of the market variance ( cov1m, cov2m,cov3m)

State [Rm-E(Rm)]2 *Pj [R1-E(R1)][Rm- [R2-E(R2)][Rm- [R3-E(R3)][Rm-

E(Rm)] * Pj E(Rm)] * Pj E(Rm)] * Pj
Great 0.01 0.0075 0.02 0.00525
Good 0.000625 0.001375 0.00125 0.0003125
Average 0.0001 0.00005 0.0002 0.000075
Horrible 0.0132 0.014375 0.02645 0.0066125
Total 0.02395 0.023300 0.0495 0.01225

Market Variance σm2 = ∑[Rm-E(Rm)]2 * Pj = 0.02395

CA RAJENDRA MANGAL JOSHI 20

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Covariance between division 1 and market cov1m = ∑ [R1-E(R1)][Rm-E(Rm)] * Pj =0.023300

Covariance between division 2 and market cov2m = ∑[R2-E(R2)][Rm-E(Rm)] * Pj = 0.0495
Covariance between division 3 and market cov3m = ∑[R3-E(R3)][Rm-E(Rm)] * Pj = 0.01225
Calculation of Betas
Beta of division 1 β1 = cov1m/ σm2= 0.023300/0.02395 = 0.97287
Beta of division 2 β 2= cov2m/ σm2= 0.0495/0.02395 = 2.067
Beta of division 3 β3 = cov3m/ σm2= 0.01225/0.02395 = 0.5115

a. Required Rate of return for each division

E(Rj) = Rf + [E(Rm) – Rf] βj
E(Rj) = 9% + [15% – 9%] βj
E(R1) = 9% + [15% – 9%] 0.97287 = 14.8%
E(R2) = 9% + [15% – 9%] 2.067 = 21.4%
E(R3) = 9% + [15% – 9%] 0.5115 = 12.1%

b. The Beta of the entire company

Average beta (β) = 0.97287 + 2.067 + 0.5115/3 = 1.18614
c. The equity beta for the company
Proportion of riskless debt (Wd) = 0.3
Beta of the riskless debt (βd) =0
Proportion of equity (Ws) = 0.70
We have,
β = βdWd + βsWs
1.18614 = 0*3.3 + 0.7 * βs
βs = 1.18614/0.7 = 1.6945

OR,
ꞵL (Equity Beta) = ꞵU x [1+D/E(1-t)]
= ꞵU x [1+D/E]
= ꞵU x [(E+D)/E]
= ꞵU x [(0.7+0.3)/0.7]
= 1.18614/0.7
= 1.6945

d. Division 1 should be kept. Division 2 and division 3 spun off.

e. If the action in Part (d) taken, the company's beta will be equal to division 1. So the company's beta
will be 0.97287.
Question No: 16
An investor saw an opportunity to invest in a new security with excellent growth potential. He wants to
invest more than he had, which was only Rs. 100,000. He sold another security short with an expected
rate of return of 15%. The total amount he sold was Rs. 400,000, and the total amount he invested in the

CA RAJENDRA MANGAL JOSHI 21

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

growth security, which had an expected rate of return of 30%, was Rs. 500,000. Assuming no margin
requirements, what is the investor’s expected rate of return?
(4 Marks)
[June 2011]

Answer:
Computing the portfolio weights for each security is done with the formula:
Investment in A (sold short)
Total equity investment
From the given problem, we find:
WA = - Rs, 400,000/ Rs. 100,000 = - 4.0
WB = Rs. 500,000 / Rs. 100,000 = 5.0
Rp = (- 4 x 0.15) + (5 x 0.30) = - 0.60 + 1.50 = 0.90, or 90%.
Thus, the expected rate of return on this portfolio is 90%.

Question No: 17
Stock X has an expected rate of return of 10 percent, a beta coefficient of 0.8, and a standard deviation of
expected return of 15 percent. Stock Y has an expected rate of return of 15 percent, a beta coefficient of
1.5, and a standard deviation of expected returns of 20 percent. The risk-free rate is 4 percent, and the
market risk premium is 6 percent.
Required: (2+2+2+2=8 Marks)
i) Which stock is riskier in terms of total risk?
ii) Which stock is riskier for diversified investor?
iii) Calculate each stock’s required rate of return. What is its significance?
iv) Calculate expected return of a portfolio that has Rs. 60,000 invested in Stock X and
Rs. 40,000 invested in Stock Y?
[December 2011]
Answer:
Given,
Stock X Stock Y
Expected rate of return 10% 15%
Beta coefficient 0.8 1.5
Standard deviation of expected return 15% 20%
Rf = 4%
Market risk Premium (MRP) = 6%
i. Total risk is measured by coefficient of variance (CV).
CV of stock X= standard deviation/Expected rate of return
CV of stock X= 0.15/0.1= 1.5
CV of stock Y= 0.2/0.15=1.3333

CA RAJENDRA MANGAL JOSHI 22

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Since stock X has higher CV, stock X is riskier than stock Y.

ii. Which stock is riskier for diversified investor?

For diversified investor, the stock having higher Beta is more riskier. Beta measures the risk
of individual assets relative to the market portfolio. The beta of the market portfolio is 1.
Assets with beta less than 1 are called defensive assets and assets with beta greater than 1
are called aggressive assets. Risk free assets have a beta equal to zero. Therefore, Stock Y is
riskier as it has higher beta.

iii. Calculate each stock’s required rate of return. What is its significance?
Required rate of return= Rf +Beta × MRP

Required rate of return of X = 4%+6% × 0.8=8.8%

Required rate of return of Y= 4%+6%×1.5=13%
iv) Calculate expected return of a portfolio that has Rs 60,000 invested in Stock X and
Rs 40,000 invested in Stock Y
Expected Rate of Stock X = 10%
Expected Rate of Stock Y = 15%
Expected Rate of Portfolio = 10% 0.6 + 15% 0.4
= 6% + 6%
= 12%

Questions No. 18

P has an expected return of 22 percent and standard deviation of 40 percent. Q has an expected return
of 24 percent and standard deviation of 38 percent. P has a beta of 0.86 and that of Q is 1.24. The
correlation between the returns of P and Q is 0.72. The standard deviation of the market return is 20
percent.

Required: (2+2+2+1=7 Marks)

i) Is investing in Q better than investing in P?
ii) If you invest 30 percent in Q and 70 percent in P, what is your expected rate of return
and the portfolio standard deviation?
iii) What is the market portfolio’s expected rate of return and how much is the risk-free
rate?
iv) What is the beta of portfolio if P’s weight is 70 percent and Q's 30 percent?

[June 2013]

Answer:

CA RAJENDRA MANGAL JOSHI 23

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

i) P has lower return and higher standard deviation than Q. Therefore, investing in Q will give more
return with less volatility. However, investing in both will yield diversification advantage.

(ii) Expected rate of return (rp) = 22× 0.7 + 24 × 0.3 = 22.6%

Portfolio standard deviation(σ )

= 𝑊 𝜎 + 𝑊 𝜎 + 2𝑊 𝑊 × 𝑟 𝜎 𝜎

=√0.7 × 0.4 × 0.3 × 0.38 + 2 × 0.7 × 0.3 × 0.72 × 0.4 × 0.38

=√0.0784 + 0.0129960 + 0.0459648
=√0.1373608
=0.37
=37%

i) The risk- free rate will be the same for P and Q. Their rates of return are given as follows:
rp, 22=rf +(rm-rf) 0.86
rq, 24=rf+(rm-rf) 1.24
rp-rq , -2= (rm-rf) (-0.38)
rm-rf ,-2/-0.38=5.26%
rp , 22=rf+(5.26) 0.86
rf = 17.5%
rq = 24=rf+(5.26) 1.24
rf = 17.5%
rm – 17.5 =5.26
rm = 22.76%
∴Market portfolio expected return (rm) = 22.76%
Risk-free rate (rf) = 17.5%

iv) 𝛽pq = 𝛽p× 𝑤p+𝛽q× 𝑤q =0.86× 0.7 + 1.24 × 0.3 = 0.974

Question No. 19

The data for the three securities A, B and C are as follows:

1.

Securities Likely Return Standard Deviation

A 16% 0.21
B 16% 0.20
C 21% 0.25

Does anyone security dominates another? Which type of investor prefers security C?
(3 Marks) [June 2013]

CA RAJENDRA MANGAL JOSHI 24

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Answer:
-In case of security A and B return is equal but security B has comparatively lower standard
deviation i.e. it has lower risk, hence security B dominates security A.
-Investors who prefer high return will prefer security C irrespective of having risk i.e. high standard
deviation. He belongs to risk taking group.

Question No. 20
Following is the data regarding six securities:
Securities A B C D E F
Return % 10 10 15 5 11 10
Risk (SD) % 5 6 13 5 6 7

Required: (2+4=6 Marks)

i) Which of three securities will be selected by an investor and why?

ii) Assuming perfect negative correlation, analyse whether it is preferable to invest 80%
of money in Security A and 20% in Security C or to invest 100% of money in Security E.
[December 2014]

Answer:

i) Arranging the securities in the increasing order of risk:

Risk % Return % Security Invest

5 10 A Yes
5 5 D No
6 10 B No
6 11 E Yes
7 10 F No
13 15 C Yes

Securities A, E and C should be selected. The investor will try to minimize risk and maximize return.
Therefore, security A is better than D, security E is better than B and C is better with highest
return.

(ii) Calculation of overall return and overall standard deviation (Risk) when 80% in Security A and
20% in Security C is invested.

Overall return = ReturnA×WeightA+ ReturnC×WeightC

CA RAJENDRA MANGAL JOSHI 25

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

= 10%×0.8 + 15%×0.2

=11%

Overall Variance (SD2) = (SDA× WA)2 + (SDC× WC)2 + 2× (SDA× WA) × (SDC× WC) ×rAC

SD2 = (5×0.80)2 + (13×0.20)2 + 2 ×(5×0.8) × (13×0.2) × (-1)

SD2 = 16 + 6.76 + 2 X 4 X 2.6 X (-1)

= 22.76 - 20.8

= 1.96

SD = 1.4

Summary

Alternative-1 Alternative-2
(100% in E)
(80% in A and 20% in C)

SD (%) 1.4 6

Overall return (%) 11 11

Conclusion:

Since same return i.e. 11% is available from lower risk (SD) of 1.4 %, Alternative-1 is preferable
over alternative-2.

Question No. 21
The Investment Analytics Division of R Investment Bank presented the following forecast pertaining to
share price and dividend of X Bank Ltd., an "A" Class Licensed Institution, during its regular performance
review meeting for the current financial year 2072-73:

Economic Share Price (Rs.) Dividend (Rs.)

Conditions High Low Average
High Growth 350 300 325 22
Expansion 310 280 295 18

CA RAJENDRA MANGAL JOSHI 26

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Stagnation 280 250 265 13

Decline 230 200 215 10

The Bank has recently declared dividend of Rs. 13 per share and is currently trading at Rs. 265 per share
in the Nepal Stock Exchange. Due to the ongoing political stalemate and the aftermath of recent mega
earthquake, the Analytics Division has estimated higher probability for the stagnant economic conditions
and lower probability for the high growth conditions. The probability estimates are presented as under:

Economic Conditions Probability

High Growth 10%
Expansion 20%
Stagnation 60%
Decline 10%

Required: (7 Marks)
Calculate and evaluate the expected rate of return and the riskiness of shares of X Bank Ltd.
[December 2015]

Answer:
Tables showing calculation of Expected Rate of Return
Table -1
Economic Share Price Dividend Expected Expected Return
Conditions High Low Average Dividend Capital Gain
Return %
1 2 3 4 5 6=5/CP 7=(4-CP)/CP 8=6+7

High Growth 350 300 325 22 8.30% 22.64% 30.94%

Expansion 310 280 295 18 6.79% 11.32% 18.11%
Stagnation 280 250 265 13 4.91% 0% 4.91%
Decline 230 200 215 10 3.77% -18.87% -15.10%
Note: Here, current market price is considered as cost price( C P) to the investment bank.
Table -2
Economic Conditions Return Probability Expected Return
1 2 3 4=2×3
High Growth 30.94% 10% 3.09%
Expansion 18.11% 20% 3.62%
Stagnation 4.91% 60% 2.95%
Decline -15.10% 10% -1.51%
Total 8.15%

CA RAJENDRA MANGAL JOSHI 27

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

The expected return of share is 8.15%; however, the total return is anticipated to vary between -
15.10% under the adverse condition to 30.94% under the most favorable condition. The expected return
is the average return of share computed by adjusting probabilities for various economic conditions.
The riskiness of Share is based on the following formula:
n
ơ2 = ∑ [ RI - E(R)]2 × PI
I=1

Where;
RI = Return on various economic conditions,
E(R) = Expected Rate of Return
PI = Probability of various economic conditions
Economic Return Expected Differences Square of Probability Expected
Conditions Return in Return Difference Variance
1 2 3 4=2-3
High Growth 30.94% 8.15% 22.79% 5.19% 10% 0.52%
Expansion 18.11% 8.15% 9.96% 0.99% 20% 0.19%
Stagnation 4.91% 8.15% -3.24% 0.10% 60% 0.06%
Decline -15.10% 8.15% -23.25% 5.40% 10% 0.54%
Total 1.31%

ơ2 = 1.31%
ơ =
√1.31% = 11.44%
The share's average dispersion is 10.89% which is considered high and therefore a risky investment for
share investors. Considering the low expected rate of return and high standard deviation, rational
investors will look into other better alternatives.

Question No. 22

The following data relating to two securities, A and B.

A B

Expected return 22% 17%

Beta factor 1.5 0.7

Assume Risk Free Interest (Rf)=10% and Return Market (Rm)=18%. Find out whether the securities A and
B are correctly priced? (5 Marks)

CA RAJENDRA MANGAL JOSHI 28

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

[June 2016]

Answer:

Calculation of return under CAPM

Company A=Rf+B(Rm-Rf)
=10+1.5(18-10)
=22%
Company B=Rf+B(Rm-Rf)
=10+0.7(18-10)
=15.6%
Security E(R) Expected Return Return under CAPM Position

A 22% 22% Correctly Priced

B 17% 15.6% Under Priced

The return from security A exactly equal to the calculated return under CAPM hence it is correctly priced
securities.

The return from security B is better than the return under CAPM. It indicates a favorable position .i.e.
the security is currently traded at underpriced position.

Question No. 23
The following data relate to two securities, A and B:
A B
Expected Return 22% 17%
Beta Factor 1.5 0.7
Risk Free Interest rate is 10% and Return on Market is 18%.
Required: (5 Marks)
Find out whether the securities A and B are correctly priced?
[June 2017]
Answer:
Calculation of return under CAPM
Company A=Rf+B(Rm-Rf)
=10+1.5(18-10)
=22%
Company B=Rf+B(Rm-Rf)
=10+0.7(18-10)
=15.6%

Security E(R) Expected Return Return under CAPM Position

CA RAJENDRA MANGAL JOSHI 29

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

A 22% 22% Correctly Priced

B 17% 15.6% Under Priced

The return from security A exactly equal to the calculated return under CAPM hence it is correctly priced
securities.
The return from security B is better than the return under CAPM. It indicates a favorable position; i.e. the
security is currently traded at underpriced position.

Question No. 24

Mr. X, an investor, is seeking the price to pay for the security whose standard deviation is 5%. The
correlation coefficient for the security with the market is 0.75 and the market standard deviation is 4%.
The return from the risk-free securities is 6% and from the market portfolio is 11%. Mr. X knows that only
by calculating the required rate of return, he can determine the price to pay for the security.

Required: (5 Marks)
What is the required rate of return on the security?
[December 2017]
Answer:

Standard deviation of the security = 5%

Correlation coefficient of portfolio with market = 0.75%
Market standard deviation = 4%
Risk-free rate of return = 6%
Expected return on market portfolio = 11%

The market sensitivity index i.e. the beta factor can be calculated as follows:

Standard deviation of the security 0.05

β= ------------------------------------------------------× CORsm = -------------×.75= 0.9375
Standard deviation of Market 0.04

Now, the expected return on the investment can be ascertained with the help of CAPM
equation as follows:
Rs = Irf +(Rm-Irf) β
= 6 + (11-6)×0.9375
= 10.69%

Question No. 25

CA RAJENDRA MANGAL JOSHI 30

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Ms. Smile currently holds two equity shares X and Y in equal proportion with the following risk and return
characteristics:
Return (RX) 24% Return (RY) 19%
σX 28% σY 23%
The returns of these securities have a positive correlation of 0.6.
Required: (3+2=5 Marks)
i) Calculate the portfolio return and risk.
ii) How much should the correlation coefficient be to bring the portfolio risk to her desired 15% level?
[June 2018]
Answer:

i) The portfolio return and risk are as under:

Portfolio Return [E(RP)] = RX × ProportionX + RY × ProportionY
= 24% × 50% + 19% × 50%
= 12% + 9.5%
= 21.5%

Portfolio risk [σP]= √ ơX2× ProportionX2 + ơY2×ProportionY2 + 2 × ơX×

ProportionX × ơY × ProportionY × CorrelationXY

= √ 282 × 0.502 + 232 × 0.502 + 2 × 28 × 0.50 × 23 × 0.50 × 0.6

= √ 521.45 = 22.84%
ii) If Ms Smile desires the portfolio standard deviation to remain at 15%, then correlation
of equity shares X and Y shall be -0.321 as below:
152 = 282 × 0.502 + 232 × 0.502 + 2 × 28 × 0.50 × 23 × 0.50 × CorXY
225 = 328.25 + 322 CorXY
CorXY = (225 - 328.25)/322
= - 0.321

Question No. 26

As an investment manager, you are given the following information of investments:

Investment in Initial Return (Rs.) Market price at Beta

Price (Rs.) year end (Rs.)

CA RAJENDRA MANGAL JOSHI 31

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Cement Ltd. (Equity share) 25 2 (Dividend) 50 0.80

Steel Ltd. (Equity share) 35 2 (Dividend) 60 0.70

Liquor Ltd. (Equity share) 45 2 (Dividend) 135 0.50

GON Bond. 1,000 140 (Interest) 1,005 0.99

Risk free return may be taken at 14%.

Required: (5+2=7 Marks)

i) Calculate expected rate of returns of portfolio by using CAPM.

ii) Calculate average return of the portfolio.
[December 2018]
Answer:
In the given case, market return is not given. Hence, we should calculate the market return
assuming the given securities represent the market as follows:
Investment in Market Price
Initial Price (Rs.) Return (Rs.) at year end (Rs.)
Cement Ltd 25 2 50
Steel Ltd 35 2 60
Liquor Ltd 45 2 135
GON Bond 1,000 140 1,005
Total 1,105 146 1,250
Market Return (Rm) = Closing price + Return – Opening price
Opening price
= (1250+146-1105)/1105
= 0.2633 i.e. 26.33%
Now,
i) Expected Return on Individual security
Under CAPM, expected return = Rf + (Rm – Rf)β
Cement Ltd 14% +0.8 (26.33%-14%) = 23.86%
Steel Ltd 14% +0.7 (26.33%-14%) = 22.63%
Liquor Ltd 14% +0.5 (26.33%-14%) = 20.16%
GON Bonds 14% +0.99 (26.33%-14%) = 26.21%
ii) Average Return of portfolio
= 23.86%×25/1105 + 22.63%×35/1105 + 20.16%×45/1105 + 26.21%×1,000/1105
= 25.80%

CA RAJENDRA MANGAL JOSHI 32

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

Question No. 27
Mr. X is to invest his funds in two securities, P & Q. The relevant information is as follows:
P Q
Expected return 12% 20%
Standard deviation 10% 18%
Coefficient of correlation ‘r’ between P & Q = 0.15
He has decided to consider only five portfolios of P & Q as follows:
(a) All funds invested in P
(b) 50% of funds in each of P & Q
(c) 75% funds in P and 25% in Q
(d) 25% funds in P and 75% in Q
(e) All funds invested in Q
Required: [7 Marks]
i) Calculate return under different portfolios.
ii) Calculate Risk factor associated with these portfolios.
iii) Which portfolio is best for him from the risk point of view?
iv) Which portfolio is best for him from the return point of view?
[June 2019]

Answer:
Given that,
Return of P (Rp) = 12%
Return of Q (Rq) = 20%
Std Deviation of P (σp) = 10%

Std Deviation of Q (σq) = 18%

Coefficient of correlationbetween P & Q (r) = 0.15
i) Expected Return under different portfolio
Portfolio Return = Rp x Wp + Rq x Wq Return
All funds invested in P = 12% x 1 + 20% x 0 12%
50% of funds in each of P & Q = 12% x 0.50 + 20% x 0.50 16%
75% funds in P and 25% in Q = 12% x 0.75 + 20% x 0.25 14%
25% funds in P and 75% in Q = 12% x 0.25 + 20% x 0.75 18%
All funds invested in Q = 12% x 0 + 20% x 1 20%
ii) Risk Factor associated under different portfolio
Risk = (σpWp) + (σqWq) + 2 (σpWp) (σqWq) r
All funds invested in P

= (10%𝑥1) + (18%𝑥0) + 2 (10%𝑥1)(18%𝑥0)0.15

= 10%
50% of funds in each of P &Q

CA RAJENDRA MANGAL JOSHI 33

 ICAN REVISION CLASS, FINANCIAL MANAGEMENT

= (10%𝑥0.50) + (18%𝑥0.50) + 2 (10%𝑥0.50)(18%𝑥0.50)0.15

= 10.93%
75% funds in P and 25% in Q

= (10%𝑥0.75) + (18%𝑥0.25) + 2 (10%𝑥0.75)(18%𝑥0.25)0.15

= 9.31%
25% funds in P and 75% in Q

= (10%𝑥0.25) + (18%𝑥0.75) + 2 (10%𝑥0.25)(18%𝑥0.75)0.15

= 14.09%
All funds invested in Q

= (10%𝑥0) + (18%𝑥1) + 2 (10%𝑥0)(18%𝑥1)0.15

= 18%
iii) Portfolio of investment of 75% in P and 25% in Q is best for him from the point of
risk as this portfolio has lowest risk of 9.31%
iv) Portfolio of investment of 100% in Q is best for him from the point of return as this
portfolio has highest return of 20%

*****

CA RAJENDRA MANGAL JOSHI 34