MBA 3 SEMESTER, F1-investment analysis & MANAGEMENT

RD

Case Studies COMPULSORY QUESTION

SECTION: D
1. A financial analyst is analyzing two investment alternatives of Z and Y. The estimated rates of return and their chances of occurrence for the next year are given in the table below: Probability of Occurrence 20.20 0.60 0.20 Rates of Return Y Z 22% 5% 14% 15% (4%) 25%

a) Determine each alternatives expected rate of return, variance and standard deviation. b) Is Y comparatively riskless? c) If the financial analyst wishes to invest half in Z and another half in Y. Calculate Portfolio Return and Risk would the risk be reduced by this combination. Explain the reasons for it. What should be the ideal proportion in the securities Y and Z to reduce the risk to its minimum level?

2. Assume that risk free return is 8% and the variance of the index returns is 12%. Find the Optimal Portfolio using
Sharpes Optimization Model (SOM).

Security A B C D E F G H

Expected Return E(Ri) 20 18 12 16 14 10 17 15

B (beta) 1.0 2.5 1.5 1.0 0.8 1.2 1.6 2.0

ei^2 (residual) 40 35 30 35 25 15 30 35

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3. From the following data compute: a) Expected return and risk on individual securities A and B. b) Expected return and risk on portfolio if the share of investment in each of the securities is 50% each. c) Coefficient Correlation. Scenario 1 2 3 Chance 0.25 0.50 0.25 Return (%) A 20 18 16 B 30 26 12

4. Mr. Florence Emperador is a disabled person along with his wife who are in their late fifties. He spent 30 years in Westminster Bank as an executive. He sold his car because he could not drive and depends upon public transport for his travel. He gets pension from the bank of `96,000 p.a. (after tax). He and his wife need `1,60,000 annually for livelihood. The couple have accumulated a portfolio of secuties over the past 30 years and funds provided from the estate of his mother, who died several years ago. Exhibit I details their current holdings. Exhibit: I Portfolio of Mr. and Mrs. Florence Emperador as on March 31, 2012
Common/ Equity Shares Cost Name of the Company Dividend

200 100 100 300 100 500 Bonds 10,000 1,00,000 1,00,000 1,00,000 50,000 1,50,000 1,00,000 Institution/ Company ICICI I.W.B.I Bond G.O.I Bond Karnataka State Konkan Railway H.D.F.C

10 10 10 10 10 10

HCL Info systems Bright Software Satyam Nestle Godfrey Philips Glaxo India Limited Coupon 12.0% 11.5% 11.0% 10.5% 10.5% 11.0% 11.5% Coupon% 0% 4.5%

25% 20% 25% 20% 30% 30% Cost (% of par) 95% 96% 100% 107% 100% 100% 96% Cost 1,21,000 3,60,000

Maturity Date 2010 2005 2007 2002 2008 2005 2009

Reserves 1,21,000 3,60,000

Cash/ Equivalent Current Account Savings

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The real estate fetched a rent of `10,000 per month. The book price of the estate is `1,00,000 but market value is ` 20,000 paying dividend of 5% with current market value of ` 25,000. Questions:a) Identify and describe an appropriate set of investment objectives and investment constraints for Mr. Florence Emperador and write a comprehensive investment policy statement based on the objectives and constraints. b) Does the present portfolio fulfill their objectives? Why or why not? c) State and explain your asset allocation recommendation for Mr. Florence Emperador based on your answer to question (a). d) Identify current holdings you would eliminate from the portfolio and justify your action in each case. 5. A financial analyst is analyzing two investment alternatives of A and B. The estimated rates of return and their chances of occurrence for the next year are given in the table below: Probability of Occurrence 40.40 1.20 0.40 Rates of Return A B 22% 5% 14% 15% (4%) 25%

d) Determine each alternatives expected rate of return, variance and standard deviation. e) Is A comparatively riskless? f) If the financial analyst wishes to invest half in B and another half in A. Calculate Portfolio Return and Risk would the risk be reduced by this combination. Explain the reasons for it. What should be the ideal proportion in the securities A and B to reduce the risk to its minimum level?

6. Assume that risk free return is 8% and the variance of the index returns is 12%. Find the Optimal Portfolio using
Sharpes Optimization Model (SOM).

Security A B C D E F G H

Expected Return E(Ri) 40 36 24 32 28 20 34 30

B (beta) 2.0 5.0 3.0 2.0 1.6 2.4 3.2 4.0

ei^2 (residual) 80 70 60 70 50 30 60 70

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7. From the following data compute: a) Expected return and risk on individual securities X and Y. b) Expected return and risk on portfolio if the share of investment in each of the securities is 50% each. c) Coefficient Correlation. Scenario 1 2 3 Chance 0.50 1.00 0.50 Return (%) X 40 36 32 Y 60 52 24

8. Mr. Shaifudeen is a disabled person along with his wife who are in their late fifties. He spent 30 years in Westminster Bank as an executive. He sold his car because he could not drive and depends upon public transport for his travel. He gets pension from the bank of `192,000 p.a. (after tax). He and his wife need `3,20,000 annually for livelihood. The couple have accumulated a portfolio of secuties over the past 30 years and funds provided from the estate of his mother, who died several years ago. Exhibit I details their current holdings. Exhibit: I Portfolio of Mr. and Mrs. Shaifudeen as on March 31, 2012
Common/ Equity Shares Cost Name of the Company Dividend

400 200 200 600 200 1000 Bonds 10,000 1,00,000 1,00,000 1,00,000 50,000 1,50,000 1,00,000 Institution/ Company ICICI I.W.B.I Bond G.O.I Bond Karnataka State Konkan Railway H.D.F.C

10 10 10 10 10 10

HCL Info systems Bright Software Satyam Nestle Godfrey Philips Glaxo India Limited Coupon 12.0% 11.5% 11.0% 10.5% 10.5% 11.0% 11.5% Coupon% 0% 4.5%

25% 20% 25% 20% 30% 30% Cost (% of par) 95% 96% 100% 107% 100% 100% 96% Cost 2,42,000 7,20,000

Maturity Date 2010 2005 2007 2002 2008 2005 2009

Reserves 2,42,000 7,20,000

Cash/ Equivalent Current Account Savings

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The real estate fetched a rent of `10,000 per month. The book price of the estate is `2,00,000 but market value is ` 40,000 paying dividend of 5% with current market value of ` 50,000. Questions:e) Identify and describe an appropriate set of investment objectives and investment constraints for Mr. Shaifudeen and write a comprehensive investment policy statement based on the objectives and constraints. f) Does the present portfolio fulfill their objectives? Why or why not? g) State and explain your asset allocation recommendation for Mr. Shaifudeen based on your answer to question (a). h) Identify current holdings you would eliminate from the portfolio and justify your action in each case.

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