CA FINAL

STRATEGIC FINANCIAL MANAGEMENT

PORTFOLIO MANAGEMENT
SOLUTIONS

Question 1
Constant Dollar value plan.

Hence, the ending value of the mechanical strategy is Rs.24,06,476 and buy &
hold strategy is Rs.26,00,000.

SANJAY SARAF SIR 1

Question 2

We find that puma has a positive return under all scenarios while the other
two stocks sometimes offer negative returns. So, we will go long in Puma by
short selling Him Ice Ltd. & Kalahari Biotech. Given the current markets price,
1 possible arbitrage portfolio would be –

Buy 1 share of Puma -70

Short sell 2 shares of Him 40
Short sell 2 shares of Kalahari 30
0
Let us now calculate the pay off from this portfolio under different
macroeconomic sceneries —
Scenario 1 – Recession —

Pay off from Him = 10% of 15 × 2 = 3

Pay off from Kalahari = –20% of 20 × 2 = –8%
Pay off from Puma = 15% of 70 × 1 = 10.5
 Total pay off = 10.5 – 8 + 3 = 5.5

Scenario 2 : Moderate growth.

Pay off from H = –17% of 15 × 2 = –5.1

Pay off from K = –10% of 20 × 2 = -4
Pay off from P = 25% of 70 = 17.5
 Total Pay off = 8.4

Scenario 3 : Boom

Pay off from H = –14% of 15 × 2 = –4.2

Pay off from K = 6% of 20 × 2 = 2.4
Pay off from P = 20% of 70 × 1 = 14
 Total Pay off = 12.2%

Comment : This is an arbitrage portfolio as it involves no investment &

provides a +ve payout under all economic scenarios.

SANJAY SARAF SIR 2

Question 3

i. Re = Rf + FRP1 + FRP2 + FRP3

i.e. Re = 6 + 4 + 5 + 6
ii. a. Ril : E(R) = 6 + 4 × 0.6 + 5 × 1.3 + 6 × 1.8 = 25.7
Infy : E(R) = 6 + 5.6 + 10 + 11.4 = 33%

b. We have Target  = 1
WRIL × 0.6 + (1 – WRIL ) × 1.4 = 1
–0.8WRIL = –0.4
0.4
WRIL   0.5
0.8
Winfy = 1 – 0.5 = 0.5

c.  of portfolio = 1
 of portfolio = 0.5 × 1.3 + 0.5 × 2 = 1.65
 of portfolio = 0.5 × 1.8 + 0.5 × 1.9 = 1.85
d. Method 1 :
E(RP ) = weighted avg.
= 0.5 × 25.7 + 0.5 × 33 = 29.35%
Method 2 :
E(RP ) = 6 + 4+ 5 + 6
= 6 + 4 × 1 + 5 × 1.65 + 6 × 1.85
= 6 + 4 + 8.25 + 11.10 = 29.35
e. Step-1 : Calculation of weights.

SANJAY SARAF SIR 3

 4000 2
WR f  
6000 3
8000 4
WRIL  
6000 3
2000 1
WInfosys  
6000 3
[you may verify that sum of weight = 1]
2 4 1
1 of portfolio=  0   0.6   1.4  0.8 + 0.47 = 1.27
3 3 3
2 4 1
2 of portfolio=  0      = 1.73 + 0.67 = 2.4
3 3 3
2 4 1
3 of portfolio=  0     = 2.4 + 0.63 = 3.03
3 3 3

Question 4

i. Step-1 Computation of weights

Own fund = 1,20,000
(+) Funds from short selling = 40,000
Total (Amt Invested in X) = 1,60,000
1,60,000 4
Wx  
1,20,000 3
40,000 1
Wy  
1,20,000 3
W  1
Step-2 Calculation of sensitivities
4 1
1 of the portfolio =  0.7   1.4 = 0.93 – 0.47 = 0.46
3 3
4 1
2 of the portfolio =  0.8   1.6 = 1.07 – 0.53 = 0.54
3 3

SANJAY SARAF SIR 4

ii. Calculation of weights
Own fund = 1,20,000
Borrowed = 60,000
Total = 1,80,000

60,000
WRF   0.5
1,20,000
2, 40,000
x  2
1,20,000
60,000
y   0.5
1,20,000
β1 of portfolio = –0.5 × 0 + 2 × 0.7 – 0.5 × 1.4 = 1.4 – 0.7 = 0.7
β2 of portfolio = –0.5 × 0 + 2 × 0.8 – 0.5 × 1.6 = 1.6 – 0.8 = 0.8

iii. We have   R   R f  FRP11  FRP22

X : 9  FRP1 0.7  FRP2 0.8  14 ……………… (i)
Y : 9  FRP1 1.4  FRP2 1.6  18 ………………(ii)
FRP1 × 0.7 + FRP2 × 0.8 = 4…...................…….(iii) [subtracting (i) from (ii)]
FRP1 × 0.7 = 4 – FRP2 × 0.8…...................…(iv)
Note: This sum is not solvable any more.

SANJAY SARAF SIR 5

Question 5
3 factor APT is given by
  R   R f  FRP11  FRP22  FRP33 = 4.5 + 6.85 β1 – 3.5 β2 + 0.65 β3

a. Market Index
β1 = weighted avg
= 0.1 × 0.9 + 25% of 0.80 + 15% of 0.85 + 50% of 1.165
= 0.09 + 0.20 + 0.5825 + 0.1275
= 1 (obviously)
β2 = weighted avg
= 0.1 × 0.75 + 25% of 1.39 + 15% of 2.05 + 50% of 2.75
= 0.075 + 0.3475 + 0.3075 + 1.375
= 2.105
β3 = weighted avg= 0.1 × 1.25 + 25% of 1.35 + 15% of 6.75 + 50% of 8.65
= 0.125 + 0.3375 + 1.0125 + 4.325
= 5.8
E(Rm) = 4.5 + 6.85 × 1 – 3.5 × 2.105 + 0.65 × 5.8
= 4.5 + 6.85 – 7.3675 + 3.77
= 7.7525%
b. CAPM
E  R   R f   R m  R f   = 4.5 + 6.85

for the market index,  = 1

 E(Rm) = 4.5 + 6.85 × 1 = 11.35%
c. WA  0.9  WD  1.165  1
 1  WD   0.9  WD  1.165  1
0.9 0.9WD  WD  1.165  1
0.265WD  0.1
0.1
WD   38%
0.265
WA  1  0.38  62%

SANJAY SARAF SIR 6

Question 6
Factor β Shock = Actual value – SH × 
Expected Value
GNB 1.3 1 1.3
Ination 1.85 -1 -1.85
Interest rate 1.4 -1.7 -2.38
Stock Market Index 1.75 2 3.5
Industrial Production 1 -2 -2
-1.43
Add : Rf 9.5
Return 8.07

Question 7

SANJAY SARAF SIR 7

Case 1  10% significance (t = 1.771)
C  t 4.74
U t 10.98
r i.e 7 lies between 4.74 & 10.98 
Market is efficient in the weak form.

SANJAY SARAF SIR 8