MBA 4th Semester

INVESTMENT MANAGEMENT
Unit I
Problems on Measurement of Return and Risk

1. Calculate the expected return from the data given below :

Return Probability
20 0.10
30 0.20
40 0.10
50 0.30
60 0.20
70 0.10

2. From the following data, calculate expected return and standard deviation.
Possible Outcome Return (%) Probability
1 5 0.25
2 9 0.50
3 13 0.25

3. Calculate the expected return and risk (SD) for Prima Ltd., for 2018, given the
following information.
Probabilities Return
0.15 0.20
0.20 0.16
0.40 0.12
0.10 0.05
0.15 -0.05

4. The shares of XYX Ltd., has the following anticipated return with associated
probabilities.
Return (%) Probabilities
-20 0.05
-10 0.10
10 0.20
15 0.25
20 0.20
25 0.15
30 0.05
Find the expected returns and the risk measured in terms of standard deviation.

5. An asset has the possible returns with associated probabilities :

Possible Returns (%) : 20 18 8 0 -6
Probabilities : 0.10 0.45 0.30 0.05 0.10
Calculate the expected rate of return and the standard deviation of returns.
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6. The XYZ Ltd., had the following annual returns over the past 5 years.
Year : 2014 2015 2016 2017 2018
Return (%) : 10 -5 14 -6 20

Determine XYZ Ltd., average return and standard deviation of returns over the past 5
years.

7. The H. Ltd., has the following probability distribution of expected future streams.
Probabilities Forecasted returns (%)
0.15 -15
0.10 -10
0.20 5
0.20 12
0.15 20
0.10 30
0.10 10

Determine the expected return and standard deviation of returns of H. Ltd.

8. Stocks of Alpha Co., performs well relative to other stocks during recessionary period. T
he stock of Beta Co., on the other hand, done well during growth period. Both are
currently 0selling for Rs. 50 per share. Other details are as follows :

Economic Conditions Probability Return of Alpha Co. Return of Beta Co.

High Growth 0.3 10 % 30 %
Low Growth 0.3 5% 20 %
Stagnation 0.2 20 % 10 %
Recession 0.2 30 % 5%

Calculate the expected return on stocks of Alpha Co., and Beta Co., and standard
deviation of both the companies. Comment on the return and risk involved in the
investment in Alpha and Beta Companies.
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9. Given the date below on two companies A and B, calculate the expected return from
companies and standard deviation as a risk measure of companies. Which is better for
return and risk estimates.

Outcome Company A Company B

Return Probability Return Probability
1 6 0.3 8 0.2
2 10 0.5 14 0.5
3 12 0.2 18 0.3

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10. Calculate the standard deviation for the following two companies.
State of X Y
Economy Return Probability Return Probability
A -8 0.1 14 0.1
B 10 0.2 -4 0.2
C 8 0.4 6 0.4
D 5 0.2 15 0.2
E -4 0.1 20 0.1

11. The following are the returns of share S and the market M for the last six years :

Year Return of S (%) Return of M (%)

2012 18 15
2013 9 7
2014 20 16
2015 -10 -13
2016 5 4
2017 12 7
Calculate the co-variance and correlation coefficient of returns.

12. Stock A and B had the following returns over the past 5 years. Determine the co-
variance and correlation coefficient for the two companies.

Year Return of A (%) Return of B (%)

2014 8 10
2015 -9 -12
2016 14 18
2017 16 20
2018 20 14

13. The Sunrise and Sunset Companies have the following probability distribution of returns.

Economic Probability Returns (%)

Conditions Sunrise Sunset
High Growth 0.10 32 30
Normal Growth 0.20 20 17
Slow Growth 0.40 14 6
Stagnation 0.20 -5 -12
Decline 0.10 -10 -16

You are required to :

(a) Determine the expected co-variance of returns, and
(b) The correlation of returns between Sunrise and Sunset Companies.

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14. The JC Ltd., and SC Ltd., have the following joint probability distribution of returns for
next year :
State Probability Returns of JC (%) Returns of SC (%)
Boom 0.10 14 20
Recession 0.20 -5 -2
Normal 0.40 10 9
Recovery 0.10 9 14
Slow Growth 0.20 12 18
(a) Determine the expected co-variance of returns for the JC Ltd., and SC Ltd.
(b) What is the correlation of returns between JC Ltd., and SC Ltd.

15. A stock consisting of Rs. 100 pays no dividend. The possible prices at the end of the
year and probabilities are given below. Calculate expected return, standard deviation
and coefficient of variation.
Prices at the end of the year Probability
90 0.10
95 0.20
100 0.40
110 0.20
115 0.10

16. The following forecasts have been made for investments A and B.
A B
Return (%) Probability Returns (%) Probability
10 0.05 2 0.05
15 0.20 12 0.25
20 0.50 20 0.40
25 0.20 28 0.25
30 0.05 38 0.05
Calculate the expected return and standard deviation.

17. The following joint probability distribution gives the returns expected for next year by
Supergood Fund Ltd., and Investwell Fund Ltd.

State of Prob Returns of Returns of

Economy Supergood Fund Ltd. Investwell Fund Ltd.
Very good 0.10 17 % 23 %
Above normal 0.20 -2 % 1%
Normal 0.40 13 % 12 %
Not so good 0.20 12 % 17 %
Very bad 0.10 15 % 21 %

You are required to find (i) Co-variance, and (ii) Correlation of return between the two
firms.
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18. Calculate the standard deviation of the returns on Stock A and Stock B. Which is riskier.
Returns are in percentages.

Return on Stock A : 4 8 12 15 18
Probability : 0.20 0.10 0.30 0.14 0.26
Return on Stock B : 5 11 14 16 20
Probability : 0.10 0.10 0.20 0.50 0.10

19. From the following data, calculate expected return and risk associated with securities A
and B, also mention which security is riskier.

Chance Probability Return of A (%) Return of B (%)

1 0.25 26 28
2 0.50 22 20
3 0.25 12 18

20. Calculate the co-variance and coefficient of correlation from the following data. Stocks
are X and Y and their returns are :

Stock Return
X 14
Y 26
X 22
Y 10