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INSTITUTE FOR TECHNOLOGY & MANAGEMENT

PGDM (Jrs) Term I (2012)

Decision Sciences
Test I

Max. Marks: 20 Max. Time: 75 Mins

SOLUTION OF THE QUESTIONS NOTE : i. This paper contains 4 question. All questions are compulsory. ii Calculators are permitted iii Graph Papers will not be supplied. If required, draw Charts on answer sheet itself. iv. Marks against each question has been mentioned below that question Q 1: Mutual Fund industry provides different modes of investment for the prospective investors. The different modes of investment in a mutual fund are by cash in any designated bank, by cheque or demand draft in any collection center, by ATM payment, by direct ECS payment, by Systematic Investment Plan (SIP). The SIP plans have been especially designed for those persons who do not want to investment in lumpsum rather they want to investment systematically ie., on monthly basis. The mutual fund companies claim that, if the investors use the SIP mode, they get benefit by way of lowering of average cost. Justify their claim with the help of the data given in the following table. The data pertains to the NAV of a mutual fund on 10th of every month in a financial year. Apr 80.52 May 81.49 Jun 71.87 Jul 72.64 Aug 81.74 Sep 87.49 Oct 93.75 Nov Dec 97.30 104.98 Jan Feb 111.39 122.2 1 Mar 127.84

(3 Marks) Solution: STEP 1 : The claim of the mutual fund relates to the benefits accrued to the investor if they choose the SIP route. To verify the same, we take a situation whereby an investor decides to invest Rs 100 /- per month. The allotted number of units would be as follows:

Month

NAV

No of units gained (assume Rs 100 is deposited in SIP every month ) 1.24

APRL MAY JUNE JULY AUG SEPT OCT NOV DEC JAN FEB MARCH

80.52 81.49 71.87 72.64 81.74 87.49 93.75 97.3 104.98 111.39 122.21 127.84 1.23 1.39 1.38 1.22 1.14 1.07 1.03 0.95 0.9 0.82 0.78 13.15

Total units for 12 months in SIP =

STEP 2 : Now, as an alternative of SIP route the investor may select to invest Rs 1200/- at any point of time in the entire year. Since, when the investor (s) might enter is not known thus, average NAV would be ideal parameter to decided how much units will be allotted. 80.52 + 81.49 + ...................................... + 127.84 Average NAV = = ---------------------------------------------------------12 94.435

Thus, The investor would get = (1200 / 94.435) = 12.70715 units

STEP 3 : Comparison and Interpretation: Since the average number of units allotted under the lumpsum investment is lower than the total number of units allotted under the SIP mode.

Thus, the claim of the Mutual Fund Company is appropriated and justified. Disclaimer: The above calculations shown are indicative and based upon historic data. It may get repeated in future or may not. There is no guarantee that this concept will always hold true, however in the given circumstances it gets proved. Moreover, empirical evidences show that SIP route is always better than lumpsum investments Marking Scheme: Each STEP contains 1 marks Q 2 (A): The coefficient of variation of wages of male and female workers is 55% and 70% respectively, while their corresponding standard deviations are 220 and 154. Calculate the average wage of a worker given the fact that 80% of them are male. (2 Marks) 2A. MALE CV= 55% SD=220 Nm = 80 (no. Of males) CV (M) = (SD/MEAN) *100 STEP 1 : 55 = ( 220 / mean ) x 100, Thus, Mean of Males = 400 Similarly, Mean of Females = 220 STEP 2: COMBINED MEAN =[ Nm * MEAN male + Nf * MEAN female ] / (N m + N f ) SUBSTITUTING we get combined mean as 364. so average wage of worker is 364. Marking Scheme : Each step is worth 1 marks Q 2 (B) : Which of the following statements is not true? Standard deviation is unchanged if a) a constant is added to all the observations b) a constant is subtracted from all the observations c) a constant is either added or subtracted from all observations d) all the observations are multiplied by a constant. e) All the above (1 Marks) FEMALE CV= 70% SD=154 Nf = 100-80= 20 (No. Of females) CV (F) = (SD/MEAN)*100

Assume there are 100 workers in the organization.

2B. correct answer is d (All the observations are multiplied by a constant). Q 2 (C) : Scatter diagram depicts: a) variations in x and y b) joint variation in x and y c) variation in y for given values of x. d) variation in x for given values of y. e) none of the above (1 Marks) 2C. correct answer is b (Joint variation in x and y). Q 2 (D) :For a distribution based on 200 observations partly reproduced below, mean is 1.46. Find the missing frequencies: No. of Accidents 0 1 2 3 4 5 Frequency 46 25 10 5 ? ? (2 Marks) Solution No of accidents (x) 0 1 2 3 4 5 Total Given Total Mean= fixi /N Thus, we get two equations 1.46 = [140 + f2 + 2f3] / 200 Also given in the question is : 46 + f2 + f3 + 25 + 10 + 5 = 200 86+ f2 +f3 = 200 F3= 200 86-F2 F3 = 114 F2 Substitute II in I 1.46*200 = 140 + f2 + 2 ( 114 F2 ) Solving we get f2 = 76 Substituting in II we get f3 = 38 Marking Scheme: If any student is in a position to frame the equations -------- 1 Marks Finding of the Missing Values ------------ 1 Marks ---------------- (I) ------------------------- (II) (II)

Frequency (f) 46 f2 f3 25 10 5 N = 86 + f2 + f3 200

fixi 0 f2 2f3 75 40 25 140 + f2 + 2f3

Q 3: Dr Jhamjham is running a security trading company. She provides Portfolio Management Services (PMS) to the clients. One of the customers once asked her can you enlighten me on the beta of a stock. In reply to this query, she said beta of a security is nothing but the slope of the line of regression and it is calculated with the same formula. The customer was not in a position to understand the calculation part of the beta and requested Dr Jhamjham to illustrate with an example. In turn Dr Jhamjham asked Rimzhim to collect the information and make the customer understand the concept of beta of a stock. Rimzhim has collected the data pertaining to ICICI banks equity shares as given in the table. After having collected the data, she will first calculate the Rate of Return (ROR) for both the series ie., ROR for ICICI shares and NIFTY. She will be using the formula given below for calculating ROR: Current value previous value ROR = ----------------------------------------Previous value She will further assume that ROR of ICICIs shares will be Y series and that of CNX NIFTY as X series. Average Closing price of ICICIs bank Average Closing value of S&P CNX Year Month shares NIFTY 2009 Jan 140.5 1154.67 Feb 149.9 1178.72 Mar 149.3 1084.64 Apr 133.75 1038 May 121.15 1122.32 Jun 137.95 1272.21 July 150.15 1337.86 Aug 159.15 1538.08 Sep 179.7 1610.21 Oct 204.5 1770.08 Nov 247 1837.98 Dec 250.1 2139.93 Since Rimzhim is having multiple jobs at hand, she is not in a position to proceed further with the calculations. Please help Rimzhim by providing her the value of correlation coefficient through which she will be calculating the value of beta. In short, you are required to calculate the correlation between the two ROR. Can we prove that there exists a relationship between the CNX NIFTY and ICICI banks stocks using t-test. Also calculate Coefficient of determination. Interpret the results. (5 Marks)
X S. no 1 2 3 4 5 6 7 8 9 ICICI 140.5 149.9 149.3 133.75 121.15 137.95 150.15 159.15 179.7 CNX NIFTY 1154.67 1178.72 1084.64 1038 1122.32 1272.21 1337.86 1538.08 1610.21 ICICI ROR 148.9 148.3 132.75 120.15 136.95 149.15 158.15 178.7 Y CNX NIFTY ROR 1177.72 1083.64 1037 1121.32 1271.21 1336.86 1537.08 1609.21

10 11 12

204.5 247 250.1

1770.08 1837.98 2139.93

203.5 246 249.1

1769.08 1836.98 2138.93

Correlatio n (r) Coeff. Of Det (r square) t cal t tab

0.932730 737 86.99866 272

7.76 2.262

Interpretation: The degree of linear relationship between the stock of ICICI bank and CNX NIFTY is very good. In short, correlation is very good (0.93). The strength of the relationship is also very good (87%). Thus, it can be said that, upto 87 % of the variations in the ICICIs security is because of the variations in the stock market. In other words, if the stock market rises then probably the ICICI banks stock will also rise and viceversa will also be true. Proof of the existence of relationship can be achieved by testing the correlation coefficient by using students t-test. Ho: There exists no relationship between ICICI banks stock and the CNX NIFTY H1: There exists a significant relationship between ICICI bank stock and the CNX NIFTY Using the formula, t cal = 7.76 and from the t-table on the question paper we get, t tab = 2.262. Interpretation: Since the calculated t is greater than the tabulated t at 9 d.f. and 5% level of significance, we reject the Null Hypothesis. Accordingly, there exists a significant relationship between the ICICI bank stock with CNX NIFTY. We can further clearly mention that, whenever there will be rise in the value of the stock market, there would be corresponding increase in the value of the stock of ICICI bank. Also, we know that the rising value of the market price of any stock leads to the shareholders value creation. Thus, stock market increase also affects the shareholders value creation. Marking Scheme: Only ROR values: 2 marks ROR and Correlation Values: 2 + 1 = 3 marks ROR + Correlation Values + Coefficient of Determination and / or t test: 2 + 1 + 1 = 4 marks ROR + Correlation Values + Coefficient of Determination and / or t-test + Interpretation = 5 marks

Q 4:

DIVERSIFICATION OF PORTFOLIO

Diversification is done by creating a portfolio of securities. Portfolio simply means a group of assets an investor owns. The assets can be stocks, bonds, commodities and so on. A portfolio can also have securities from different industries/sectors. The inclusion of different assets in portfolio helps the investor to reduce underlying risk. In the case of shares the diversification reduces the risk. Many analysts opine that if a portfolio is created including 15 securities the investor can reduce the risk to zero level. However studies reveal that although by increasing the number of securities in a portfolio we can reduce the risk, we cannot bring it down to zero level. To explain this, further portfolio of securities were created representing different sectors listed in National stock exchange. 15 companies listed in NSE were selected randomly of various sectors and portfolios have been created where number of securities are 1 , 2, 3, 5 , 7 and 10. Historic data of these securities from 15 June 2009 to 15 June 2012 were used for analysis of standard deviation, beta of stock for a period of three years and correlation coefficients. Refer the attached Sheets for getting the full data related to the various statistical results. Study the data carefully and interpret them giving full definition and explanation of the terms. Highlight your answer with usability of the statistical tools in this specific situation. (6 Marks) Solution: This question needs pure analytical thinking. The answer will have to be evolved rather than following any pattern. Any set strategy may not work because for the first time the students will come across for the first time this type of question. While attempting this type of questions, student needs to take a view point that traceability can be drawn to the theory for reaching to the analytics. Accordingly, first of all the student should trace linkages backwards. The following points illustrate it: A 1) Descriptive Statistics def : Collection, representation and characterization of data. It can be classified into broad categories Pictorial and Numerical methods. This case is using both methods. Chart is showing the s.d. and no of stocks while you have table for the same. A 2) Numerical methods primarily are the measures of central tendency and measures of dispersion. Definitions are required to be produced for both the above as asked in the question. A 3) The case also gives correlation coefficients between few stocks. For interpretation them student must define measures of association. A 4) In the question, there is a statement which is asking the student to highlight the usability of the tools and techniques used. Here the concept of risk (mean return) and return (standard deviation and variance) are to be mentioned. B) Having completed the above points, interpretation of the data needs to be made. Though the interpretation may differ from person to person but few generalized conclusions are given below which are indicative in nature:

B1) Risk of a portfolio is directly proportional to the number of stocks in it. B2) The standard deviation of the portfolio is decreasing with the increasing number of stocks in the portfolio. It means that, increasing number of stocks in the portfolio leads to declining in levels of portfolio risk. B3) The correlation between most of the stocks are very low which, indicates that inclusion of these stocks in the portfolio will reduce the portfolio risk. B4) If the correlation between the stocks are low, it produces good results for the portfolio. Marking Scheme: A1 to A4 contains 3 marks B (ie, B1 to B3) contains 3 marks Best of Luck Appendix A: d. f. 1 Tabulated t values at 2.5 % and 5% level of significance 2 3 4 5 2.02 2.57 6 1.94 7 1.9 8 1.86 9 1.83 10 1.81 11 1.8 12 1.79 2.18 1.966 >400

Values( 6.31 2.5%)

2.29 2.35 2.13

Values 12.70 4.30 3.18 2.77 (5%)

2.45 2.365 2.31 2.262 2.228 2.20