Tunis Business School

University of Tunis Fin 400 : Investment and portfolio Management

Dr. Manara Toukabri

Tutorial 1
Part (I): Return/Risk, Min Variance, CAPM

Exercise1 :
In a stock exchange market, the market portfolio has these features:

𝑅𝑓 = 5%

1) Draw the CML

2) Give the price of risk
3) Mr John and Mrs Kate invest 100 $ (each one).
Mr John invest 50$ in risk free rate and 50$ in market portfolio
Mrs Kate invest 200$ in the market portfolio and borrow 100$ at 𝑅𝑓

Describe these two portfolios and draw them in the space ( ,

Exercise 3:
By simplification motive, we can assume that only two stocks constitute the financial market.

A B
E(R) 20% 12%
σ𝑅 30% 15%
The corrolation 0,1.
coefficient ρ
1) Find the wealth invested in stock (A) and stock (B) in order to constitute a portfolio
with an expected return equal to 14%? Determine the risk of this portfolio? (5points)
2) Find the wealth invested in stock (A) and stock (B) in order to constitute the minimum
risk portfolio? (10 points)
3) Calculate the expected return and variance of this minimum risk portfolio? (5points)
4) We assume that the risk free rate=8%; if we invest 50% of the wealth in 𝑅𝑓, 25% in
the stock (A) and 25% in the stock (B), calculate the expected return and the risk of
this new portfolio? Comment (5points)
 Tunis Business School
University of Tunis Fin 400 : Investment and portfolio Management
Dr. Manara Toukabri
Exercise 5:
The table below summarizes data of stock (A), stock (B), market portfolio and risk-free rate:

A B M 𝑅𝑓
E(R) 30% 20% 25% 5%
V(R ) 18% 10% 10% -
Cov(𝑅𝐴, 𝑅𝐵) 5%
Cov(𝑅𝐴, 𝑅𝑀) 15%
Cov(𝑅𝐵, 𝑅𝑀) 5%

An investor decides to constitute a portfolio (P) composed by 70% of stock (A) and 30% of
stock (B).

1) Calculate the expected return of the portfolio (P)? (5points)

2) Calculate de variance of the portfolio (P)? (5 points)
3) Identify the appropriate proportion of wealth invested in stock (A) and stock (B) in
order to obtain the minimum risk portfolio? (15points)
4) Calculate the expected return of the minimum risk portfolio? (5points)
5) Calculate the variance of the minimum risk portfolio? (5points)

Exercise 6:
We assume that the probabilities distribution of the returns of two stocks X and Y are
summarized in the table below:

Probability Stock X Stock Y

30% 20% -10%
20% -15% 25%
40% 40% 30%
10% 10% 10%
The risk-free rate 7%.

1. Calculate the expected return of the stock X and the stock Y? (2points)
2. Calculate the variances of the return of the stock X and the stock Y? (2points)
3. Calculate the covariance between the stock X and the stock Y? (2points)
 Tunis Business School
University of Tunis Fin 400 : Investment and portfolio Management
Dr. Manara Toukabri
4. In order to obtain a minimum risk portfolio, give the appropriate part of wealth to
invest in stock (X) and stock (Y)? (3points)
5. Calculate the expected return of the minimum risk portfolio? (2points)
6. Calculate the variance of the minimum risk portfolio? (2points)
7. In order to simplify the realty, we suggest that the market portfolio contain 57, 05 % of
the stock X and 42, 95 % of the stock Y.
a. Calculate the expected return of the market portfolio? (2points)
b. Calculate the variance of the market portfolio? (2points)
8. Give the CML equation? Draw it? (3points)
9. The minimum risk portfolio is it an efficient portfolio? Justify your answer? (4points)

Exercise 7
The table below summarizes the historical data of the annual return during the four last years
of the stock (X), stock (Y) and the market (M).

Stock (X) Stock (Y) The Market (M)

23% 37% 26%
65% 56% 59%
45% -14% 35%
-19% -3% -15%

1) Calculate the expected return of the stock (X), the stock (Y) and the market (M)?
(3point)
2) Calculate the variance of the stock (X), the stock (Y) and the market (M)? (3 points)
3) Calculate the covariance between the stock (X), the stock (Y)? (1,5 points)
4) In order to obtain a minimum risk portfolio, give the appropriate part of wealth to
invest in stock (X) and stock (Y)? (3points)
5) Calculate the expected return of the minimum risk portfolio? (2points)
6) Calculate the variance of the minimum risk portfolio? (2points)
7) We assume that the risk-free rate is equal to 8%; calculate the expected return of an
efficient portfolio composed by the stock (X) and stock (Y) and with a standard
deviation equal to 29%? (4 points)