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# Session 1: Risk and Return

1. Suppose the rate of return on your investments for 5 years is as given below. What is the arithmetic return and geometric return? What is the cumulative wealth index assuming you had invested Rs.100 at the beginning of the 5 years? Year 1 2 3 4 5 Total return 90% 10% 20% 30% -90%

2. Mr Jeet bought one share of Sun Pharma on December 1, 2008 for Rs.1071.55. The closing price of the share (adjusted for stock split) at the end of each of the 3 consecutive years is as below. What is the annual return on the investment? What is the arithmetic return and geometric return? What is the cumulative wealth index? Date 1-Dec-08 30-Nov-09 30-Nov-10 30-Nov-11 Share price 1071.55 1451.80 2237.75 2627.50

3. Probability distribution of returns for 2 stocks India Steel Ltd and TastySoya ltd is given below: Bear Market Normal market Probability 0.20 0.5 India Steel Ltd -20% 18% Tasty Soya Ltd -15% 20% a) What is the expected return for the 2 stocks? b) What are the std deviations of returns for the 2 stocks? c) Assuming that of your Rs.10,000 portfolio, you invest Rs.9000 in India Steel stock and Rs.1000 in Tasty Soya stock, what is the expected return on your portfolio? 4. An investor invests Rs.90,000 in a listed bond that is being traded at Rs.900 for a face value of Rs.1000 and earns annual interest of 7.5%. The price of the bond at the end of the year would depend upon the state of the economy that will prevail at that time. The expected scenarios are as under: Interest rates Probability Year-end bond price Bull Market 0.3 50% 10%

High 0.20 850 Unchanged 0.50 915 Low 0.30 985 An alternative investment is in a Treasury Bill that yields a certain rate of 5%. Calculate the realized return, expected return and risk premium for the bond. What is the expected end-of-year rupee value of the investment? 5. The probability distribution of the HPR on the stock market index fund is given below. Suppose the price of a put option on a share of the index fund with exercise price of Rs.110 and maturity of one year is Rs.12. State of the economy Probability Ending price HPR

Boom 0.25 140 44% Normal growth 0.50 110 14% Recession 0.25 80 -16% a) What is the probability distribution of the HPR on the put option? b) What is the probability distribution of the HPR on a portfolio consisting of one share of the index fund and one put option? c) In what sense does buying a put option constitute a purchase of insurance in this case?

6. The following are the investment opportunities available for an investor. Which one should he select? a) One-year fixed deposit with a local co-operative bank at 10% pa compounded semiannually b) One-year fixed deposit with a well-known NBFC at 9.95% pa compounded quarterly c) One-year fixed deposit with a Post Office at 9.65% pa compounded monthly

7. A company is planning a private placement of 1-year bonds. Its investors have indicated that they require an effective annualized return of 8.75%. If the bonds are to pay a semi-annual coupon, what should be the coupon fixed by the company?

8. Dr. Joshi had invested Rs.10 lacs in a portfolio management scheme on January 1, 2010. On checking the monthly account statement sent by his portfolio manager he finds that his investment is worth Rs.10,12,450(including dividends) on October 31, 2011. The PMS manager claims that he has outperformed his benchmark which is the S&P CNX Nifty. Nifty total returns index was 6495.62 on January 4, 2010 and closed at 6755.07 on October 31, 2011. Is the PMS manager correct in his claim?

9. An investor is trying to compare the performance of 3 mutual fund schemes as on 1.12.2011. Which scheme should he select for investment? Sundar Midcap Star Daichi Midcap Frank Midcap

Start date 1-Jan-09 1-Jul-09 1-Oct-08 Returns since inception 8% 7% 10% No.of days till 1/12/2011 741 560 833 10.A one-year bank deposit pays 8.5% p.a. If the inflation rate is 9%, what is the real rate of return on the FD?