NUMERICAL EXAMPLES FOR PORTFOLIO THEORY

Question#1

A stock costing Rs.120 pays no dividends. The possible prices that the stock
might sell for at the end of the year with the respective probabilities are:

Price Probability

115 0.1

120 0.1

125 0.2

130 0.3

135 0.2

140 0.1

Required:

(i) Calculate the expected return.

(ii) Calculate the Standard deviation of returns.

(iii) Calculate the Expected Return and the Standard deviation of returns
assuming that the company pays a dividend of Rs. 10 each year.

Question#2

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Following information is available in respect of expected dividend, market
price and market condition after one year.

Market Market Dividend per

Probability
condition Price - Rs. share - Rs.

Good 0.25 115 9

Normal 0.50 107 5

Bad 0.25 97 3

The existing market price of an equity share is Rs.105 (Face Value - Rs.10).
Find out the expected return and variability of returns of the equity shares.

Question#3

Consider the following information about two securities – A and B:

 Standard deviation of security A = .30

 Standard deviation of security B = .20

 Proportion of investment in A = 0.6

 Proportion of investment in B = 0.4

 Correlation coefficient = +1.0

You are required to calculate the standard deviation of the portfolio.

Question#4

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From the following information about two securities – X and Y, you are
required to calculate standard deviation of the portfolio:

 Standard deviation of security X = .30

 Standard deviation of security Y = .20

 Proportion of investment in X = 0.6

 Proportion of investment in Y = 0.4

 Correlation coefficient = 0.0

You are required to calculate the standard deviation of the portfolio.

Question#5

Mr. A is interested to invest Rs.1,00,000 in the securities market. He selected

two securities B and D for this purpose. The risk return profile of these
securities are as follows :

Expected Return
Security Risk ( σ )
(ER)

B 10% 12%

D 18% 20%

Co-efficient of correlation between B and D is 0.15.

You are required to calculate the portfolio return of the following portfolios of
B and D to be considered by A for his investment.

(i) 100 percent investment in B only;

(ii) 50 percent of the fund in B and the rest 50 percent in D;

(iii) 75 percent of the fund in B and the rest 25 percent in D; and

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(iv) 100 percent investment in D only.

Also indicate that which portfolio is best for him from risk as well as return
point of view?

Question#6

An investor has decided to invest to invest Rs.1,00,000 in the shares of two

companies, namely, ABC and XYZ. The projections of returns from the shares
of the two companies along with their probabilities are as follows:

Probabilit ABC(
XYZ(%)
y %)
0.20 12.0 16.0
0.25 14.0 10.0
0.25 -7.0 28.0
0.30 28.0 -2.0

You are required to

(i) Comment on return and risk of investment in individual shares.

(ii) Compare the risk and return of these two shares with a Portfolio of
these shares in equal proportions.

(iii) Find out the proportion of each of the above shares to formulate a
minimum risk portfolio.

Question#7

From the following information about two securities – X and Y, you are
required to calculate MINIMUM VARIANCE PORTFOLIO:

 Standard deviation of security X = .25

 Standard deviation of security Y = .15

 Correlation coefficient = -1.0

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Question#8

Following is the data regarding six securities:

U V W X Y Z

Return (%) 10 10 15 5 11 10

Risk (%) (Standard 5 6 13 5 6 7

deviation)

(i) If an investor has to select three securities then Which of three

securities will be selected by him?

(ii) Assuming perfect correlation, analyze whether it is preferable to invest

80% in security U and 20% in security W or to invest 100% in Y.

Question#9

The following details are given for X and Y companies’ stocks and the
Bombay Stock Exchange Sensex for a period of one year. Calculate the
systematic and unsystematic risk for the companies’ stocks.

X Stock Y Stock Sensex

Average return 0.15 0.25 0.06
Variance of
6.30 6.86 2.25
return
β 0.71 0.685
Correlation Co-
0.424 0.392
efficient
Co-efficient of 0.18 0.15
determination

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 (r2)

Question#10

The following data in respect of three securities have been estimated:

Security σ(%) Correlation with
Market Index, m
A 20 0.60
B 18 0.95
C 12 0.75
The standard deviation of market portfolio is observed to be 15%.

You are required to determine the following:

(i) What is the sensitivity of returns of each stock with respect to the
market; that is what is the eta of each security?
(ii) What are the covariances among the various securities?
(iii) What would be the risk of portfolio consisting of all the three
securities equally?
(iv) What is the beta of the portfolio consisting of equal investment in
each security?
(v) What is the total, systematic and unsystematic risk of the portfolio in
(iv) above?

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