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Capital Market and Portfolio Management
Capital Market and Portfolio Management
MANAGEMENT
ANSWER 1:
INTRODUCTION:
There is no association between the shares. The symbol (+) or (-) is also important in creating the
relationship. This positive or bad mark allows us to establish whether or not the returns on these
stocks are correlated, or whether they move in the same way. The energy of a relationship is also
shown by the location of the co-efficient cost between -1 and +1.
In this case, we'll start by calculating the daily returns on equities A, B, and C.
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Daily return = Pt/Pt-1
Where,
Pt = Price at the end of the day
Pt-1 = Price at the end of the previous day
Using the daily returns obtained previously, we will now determine the average return on each
stock, which may be used to estimate the stock's predicted return.
= 81.90%
Expected return from stock B = -41%-8%+58%/3
= 3.24%
Expected return from stock C = -17%+180%+14%/3
= 59.21%
If all three stocks are given identical weight in the portfolio, the portfolio's projected return will
be
= .33*.8190 +.33*.0324+.33*.5921
= .4763 or 47.63%
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Now we shall calculate covariance between stock A, stock B, and Stock C:
= (.00122+.00266+.00011)/3
= .0013
To determine the volatility of the portfolio, we need to determine the standard deviation of
the portfolio. The formula of standard deviation for the given case would be:
(Wa) X (Ra-ERa) + (Wb) X (Rb- ERb) + (Wc) X (Rc- ERc) + 2*Wa*Wb*Wc*Cov (a, b, c)
Where,
Ra- ERa = Standard deviation of Stock A i.e., the difference between the actual and expected
return of Stock A
Rb- Erb = Standard deviation of Stock B i.e., the difference between the actual and expected
return of Stock B
Rc- Erc = Standard deviation of Stock C i.e., the difference between the actual and expected return
of Stock C
Cov (a,b,c) = how changes in a stock’s returns are related to changes in the market’s returns
(0.33) 𝑋 (2.4570 − .8190) + (0.33) 𝑋 (. 0973 − 0324) + (0.33) 𝑋 (1.7761 − .5921) + 2 ∗ .33 ∗ .33 ∗
= 1.22%
Correlation is the term used to describe the relationship between outstanding stock performance.
Correlation is determined by dividing the covariance of each inventory by its standard deviation.
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The standard deviation of the shares A, B, and C is calculated as the difference between the daily
and average price of the stock.
= 1.025
= 1.65
Average price of Stock C= 0.6+0.5+1.4+1.6/4
= 1.025
Based on the average prices the standard deviation of stocks is:
Stock A= 97%
Stock B= 51%
Stock C= 106%
CONCLUSION:
The portfolio's standard deviation with equities A, B, and C having the same weight (as stated) is
1.22 percent, according to the assumptions. Furthermore, the stock correlation is negative, which
means that the return on one inventory is unaffected by the return on another.
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ANSWER 2:
INTRODUCTION:
The term CAPM, or Capital Asset Pricing Model of Value Analysis, refers to a formulation that
explains the relationship between systematic chance and the expected return on an inventory. The
CAPM is the most popular name for this connection. CAPM is widely used in financial control to
analyse stock risks and forecast asset returns, taking into consideration both the risk associated
with these equities as well as the cost of capital. The time value of money is represented by the
risk-free rate of return in the CAPM recipe. The CAPM method's unique components result in the
investor taking on additional risk. An ability assignment's beta is a percentage of the amount of
dangers that the investment adds to a portfolio that mimics the market. A stock's beta will be
greater than one if it is riskier than the market. The algorithm allows a stock with a beta of less
than one because it lowers the portfolio's risk.
The maximum risk that funding can bring to an open market portfolio is represented by the beta
of an asset or investment.
The market risk premium, which is the predicted return on the market over the risk-free fee
generated within the market or on price T-bills, is used to calculate the return on inventory using
the Capital asset pricing model. The threat-free rate is then applied to the goods' beta and
marketplace threat top rates. The ultimate outcome should give a financial backer a significant
return or rebate rate to use in determining the inventory's value.
The capital assets pricing version (CAPM) is computed by using the following equation:
= R - β (ERR)
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A variety of assumptions underpin the CAPM model, which may contribute to its unreliability.
Several assumptions supporting the concept have been proven untrue.
The two most important assumptions regarding this economic hypothesis are:
1. Securities markets are relatively active and effective (huge documents relating government
agencies are grabbed and assimilated quickly and frequently).
2. Those business sectors are crushed by sensible, risk-averse investors seeking money from
their speculations.
Regardless of these problems, CAPM components are widely employed since they allow for easy
comparisons of various investment options.
Taking beta into consideration admits that an inventory's price volatility can be utilised to assess
risk. Neither option is equally risky. Because inventory returns (and related hazards) are not
routinely communicated, historical data is not always reliable.
The CAPM model's other basic assumptions all revolve on the risk-free rate. It is not true in real-
time markets since the risk-free rate of the bonds might fluctuate over time.
Illustrative market portfolio used to determine Market Risk Premium. Unlike stock, it cannot be
sold or converted into an option.
In this case, we must compare the predicted return from the store to the CAPM-consistent return.
The Expected returns from the stocks as given in the question can be calculated and depicted
as below:
Particulars Tata Adani Power Ranbaxy PNB
Risk-free rate 7% 7% 7% 7%
β 1.7 1.4 1.1 1.2
Return from 18% 18% 18% 18%
market (Rm)
Expected return 21% 16% 23% 19%
from stock
CAPM 25.7% 22.40% 19.10% 20.20%
CONCLUSION:
For Tata, the stock may be regarded expensive because the projected rate of return (on the stock
Tata), i.e., 21%, no longer surpasses the return computed using CAPM. Because the predicted rate
of return (from the stock Adani power), i.e., 16 percent, no longer surpasses the return consistent
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with CAPM, it can be concluded that the stock is overpriced. Because the expected rate of return
(on the stock Ranbaxy) is better than the CAPM rate of return, it is possible to say that the inventory
is underpriced for Ranbaxy.
For PNB, the stock may be regarded overvalued because the projected rate of return (from the
stock PNB), i.e., 19 percent, no longer surpasses the return estimated using CAPM.
As a result, Tata, Adani Power, and PNB are all overvalued, whereas Ranbaxy is undervalued.
ANSWER 3A.
INTRODUCTION:
Investing has always been exciting. It allows investors to build money and broaden their financial
horizons. Investing has captivated us all from the start. What began as a simple investment in gold,
real estate, and other traditional assets has grown to include stock, debt, commodities, and more.
Today's financial market is large and full of alternatives. There are numerous options, each with
its own set of advantages and disadvantages. But how do you go about investing? Is it all
straightforward to choose or are there elements influencing investment choices? They are.
The factors that influence our investment decisions are the same whether we are seasoned investors
or newcomers. We examine the aspects that influence our financial decisions. Follow.
CONCEPT
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design a sound investment portfolio based on their needs and profile. Create a strategy that helps
you structure and balance your portfolio while also maximising your return.
CONCLUSION:
In addition, an investor may select the investment that is best acceptable for them, based mostly
on the features listed above, and determine the amount of rent they will charge for that investment
throughout the selection and selection process.
ANSWER 3B.
INTRODUCTION:
It is a contract for a monetary asset that may be bought or sold. A financial instrument transaction
involves contractual obligations between parties. If a corporation pays cash for a bond, another
party must supply a financial instrument to complete the transaction. One corporation must offer
cash, while the other must furnish a bond.
Checks, bonds, and securities are basic financial instruments. Financial instruments are classified
as cash, derivatives, and foreign exchange.
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1. Cash Instruments: Cash instruments are financial products whose values are immediately
affected by market conditions.
- securities
- deposits, and loans.
Securities: A security is a monetary-valued financial instrument traded on the stock
exchange. A security indicates ownership of a portion of a publicly traded corporation
on the stock exchange when purchased or sold.
Deposits and Loans: Both deposits and loans are considered cash instruments because
they represent monetary assets that have some sort of contractual agreement between
parties.
2. Derivative Instruments: Derivative instruments are financial products whose values are
based on underlying assets such as commodities, currencies, bonds, stocks, and stock
indexes.
Synthetic agreements, forwards, futures, options, and swaps are the five most frequent
derivatives instruments. This is covered in greater depth further down.
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3. Foreign Exchange Instruments
Foreign exchange instruments are financial instruments that are traded on a foreign exchange
market, principally currency agreements and derivatives. There are three types of currency
agreements: Spot, Outright Forwards, Currency Swap.
Spot: A currency agreement in which the actual currency exchange occurs no later than
the second working day after the agreement's original date. The money exchange is done
"on the spot," hence the term "spot" (limited timeframe).
Outright Forwards: A currency arrangement in which the actual exchange of money
occurs "forwardly" and before to the actual date of the agreed-upon requirement is defined
as follows: It is advantageous in situations where currency rates fluctuate and change often.
Currency Swap: A currency swap is the act of buying and selling currencies with different
defined value dates at the same time.
CONCLUSION:
Based on his or her investment objectives, an investor may decide to keep either an equity device
or a debt instrument in his or her portfolio at any one time. The inclusion of a mix of these various
forms of financial instruments in their investment portfolio will also help to boost the diversity of
their portfolio.
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