Paper: Intro to Portfolio Management

General Instructions:
The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers.

Code: 501A

Failure to comply with the above Four instructions would lead to rejection of assignment.
Specific Instructions:
There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks (25 marks) unless specified explicitly

Question No 1:
a) Discuss the five fundamental factors that influence the risk premium of an investment. b) You are considering two assets with the following characteristics: E(R1) = .15 1 = .10 W1 = .5 E(R2) = .20 2 = .20 W2 = .5 Compute the mean and standard deviation of two portfolios if r1,2 = 0.40 and 0.60, respectively. Plot the two portfolios on a risk-return graph and briefly explain the results c) Discuss the reason for the differences in measured beta. Does the suggested relationship appear reasonable? Why or why not?

Question No 2:
I) Assume that you expect the economys rate of inflation to be 3 percent, giving a risk free return of 6 percent and a market return (RM) of 12 percent. a. b. Draw the SML under these assumptions. Subsequently, you expect the rate of inflation to increase from 3 percent to 6 percent. What effect would this have on the risk free return and the market return? Draw another SML on the graph from Part a. Draw an SML on the same graph to reflect a risk free return of 9 percent and an RM of 17 percent. How does this SML differ from that derived in Part b? Explain what has transpired

c. II)

Discuss why the investment and financing decisions are separate when you have a CML.Given the CML, discuss and justify the relevant measure of risk for an individual security

Question No 3.
I) The following information describes the expected return and risk relationship for the stocks of two of Xs competitors. Expected Return Stock X 12.0% Standard Deviation 20% Beta 1.3

Stock Y 9.0 15 0.7 Market Index 10.0 12 1.0 Risk-free rate 5.0 Using only the data shown in the preceding table: a. Draw and label a graph showing the security market line and position stocks X and Y relative to it. b. Compute the alphas both for Stock X and for Stock Y. Show your work. c. Assume that the risk-free rate increases to 7 percent with the other data in the preceding matrix remaining unchanged. Select the stock providing the higher expected risk-adjusted return and justify your selection. Show your calculations. II) How does the SML differ from the CML?

Question No 4.
a) b) State the modern approach in the construction of portfolio. Consider two situations: A young man X in early twenties and another young man Y in the late thirties X and Y earns same amount of money. Mr.Y has a family, a house, a car and all the encumbrances related with the marital status. Both of them like to invest in securities, what would be their constraints and objectives? Ajay, aged 26 is chalking out an investment program to invest in common stocks. Ajay is married and working in a MNC. He is paid 10 lakhs per year. He is having a well furnished house and a car. He is a member of the life insurance scheme. He purchased his house on loan scheme. The MNC with whom he is working has given him 15 years of job contract. They may or may not renew their contract. Assist him in his investment plan. You are supposed to advice him about the components of his portfolio worth of 8 lakhs

c)