20BH/MC/IA64 – Unit 3 Questions

1. S Ltd has invested $50,000 in a portfolio of shares. She has invested 30% in shares of
A Ltd and balance in shares of B Ltd. The expected returns from these two companies
are 15% and 12%. Find the expected return in % and in absolute amount.
2. The risk and return of 2 projects are shown below:

As investor plans to invest 80% of the available funds in Project X and 20% in Y. The
correlation coefficient between the returns of the project is +1.0. Find out the risk and
return of the portfolio X and Y.
3. An investor has created a portfolio of 5 securities:
Security Current Value in Rs. Expected Value in rs.
1 2500 4000
2 4000 5000
3 10000 12000
4 5000 7000
5 3500 5000
Total 25000 33000
Find out the expected rate of return of the portfolio.
4. An investor is interested to construct a portfolio of 2 investments, S and Q. The
following information is available:
S Q
Expected Return 12% 20%
Standard Deviation 10% 18%
Correlation Coefficient 0.15
The following portfolio options are available:
i) All funds are invested in S
ii) Equal funds invested in both
iii) 75% in S and 25% in Q
iv) 25% in S and 75% in Q
v) All funds are invested in Q
Required:
a) Expected return under different portfolios
b) Risk factors associated with the portfolios
c) Best portfolio from point of risk
d) Best portfolio from point of return
5. The following information is available in respect of two securities, Swift and Styles:
Swift Styles
Expected Return 15% 20%
Standard Deviation 10% 15%
Weight 50% 50%
Covariance is 100. Find the risk and return of the portfolio. Find the correlation
between the returns of Swift and Styles
6. The following information is available from Ms. Ashley’s portfolio:
A B
Expected Return 20% 12%
Standard Deviation 24% 16%
Weight 50% 50%
i) Find out the correlation between the returns if standard deviation of the
portfolio is 20% and 18%
ii) Find out the standard deviation of the portfolio comprising A and B in the ratio
of 25% and 75% respectively.
7. Calculate expected return and standard deviation of investment X and Y. What will be
the return if total investment is divided one half in each?
Economic Condition Probability Return from A Return from B
Dull 0.2 10% 6%
Stable 0.5 14% 15%
Growth 0.3 20% 11%
Also calculate the covariance and correlation.
8. The following are the expected return and risk of two securities A and B.
Risk Return
A 10% 20%
B 12% 25%
The correlation coefficient between the return of A and B is 0.5. An investor is to decide about
the portfolio of A and B as 75% + 25% or 25% + 75%. Which one should be accepted?
9. Selena owned 5 securities at the beginning of the year. The volume of shares, Current Price
and Expected year end price are as follows:
Securities No. of Shares Current Price Expected Year End Price
A 150 40 55
B 100 30 40
C 85 20 25
D 90 30 35
E 125 40 45
What is the expected return of Selena’s Portfolio for the year?