Assignment

1. 1
Subject: Portfolio Management
Instructions:
 Answer all the questions.
 Marks allotted 100. Each Question carries equal marks.
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
 Each Question mentioned in this assignment should be answered within the word limit
specified
 The student should only use the Rule sheet papers for answering the questions.
 The student should attach this assignment paper with the answered papers.
 Failure to comply with the above Five instructions would lead to rejection of assignment
Question.1
(a) Explain Efficiency Market Theory.
(b) Security market is thronged by four types of players/ transactors. Explain the key players of
Security Market.
Question.2
XYZ ltd has a 100% equity financed company with a beta of 1.24. it is a diversified company
with three operating divisions- East, West and Central. The operating characteristics of east are
50% more risky than west and central is 25% less risky than west. West is having twice market
value than that of east, while central is having equal market value than that of east. The market
return is 24% and standard derivation is 16%. At present the west division has started showing
under performance, the management of XYZ ltd planned to sell the west division and use the
entire amount to purchase PQR ltd. PQR ltd is an all equity company and having similar market
as of west division. PQR ltd has revenue sensitivity of 1.5 times that of west division of XYZ ltd
has a operating gearing ratio of 1.8. current operating gearing ratio in west at 2.00.
Assume risk free rate 11% no synergetic benefits from disinvestment and acquisition and
taxation is to be ignored.
Required to calculate:
a) Assets beta for each division of XYZ ltd.
b) Calculate assets beta for PQR ltd.
c) Calculate assets beta for XYZ ltd after disinvesting and acquisition.
d) Calculate the discount rate applicable to new investment project.

2. 2
Question.3
(a) LG is a manufacturing company whose shares are listed on the Delhi stock exchange. It is
expecting to have surplus cash resources available for at least 12 months. The board has decided
to develop an investment portfolio of marketable securities. The company’s financial advisers
have recommended four securities for the board to consider. These are as follows:
Security 1 regularly traded shares in a medium – sized Indian company. The equity beta is
quoted as 1.2.
Security 2 shares in a relatively small but rapidly growing Indian company in a high technology
industry. The shares have an equity beta of 1.6.
Security 3 shares are in British bank which are listed on London International stock exchange but
not in India. They are currently quoted at pound 25.50. An equity beta is unavailable, but LG’s
stockbroker estimates that the expected rate of return on the shares is 12% per annum.
Security 4 is short dated government bonds.
The expected return on treasury bills is 5% per year and that of the market is 12%. LG’s equity
beta is 0.8 and this is not expected to change in the foreseeable future. The board can invest in
one or more of these securities in any proportion.
Calculate the risk and expected return of the investment portfolio, assuming 30% of available
funds is invested in each of securities 1 and 2 and 20% in each of securities 3 and 4.
(b) What are the criteria which must be kept in mind in selection of Securities?
Question.4
Consider the following information:
Investors Investment objective
A
B
Earn a return of 18%
Can assume relevant risk for 18% return
Can assume a risk up to a variance in return of
250%
Further it is gathered that: Risk free
interest rate, Rf = 7% Return on market portfolio, Rm = 15 S.D. in the return on
market portfolio, σm = 20%
You are required to find:
(a) Risk level (Standard Deviation) of portfolio constructed by investor A.
(b) Expected level of return earned by the portfolio constructed by investor B.