Risk and Return

Assignment to be submitted by December 4, 2014

1. The probability that stock X will rise by 25% is 30% and the chance that it declines by 5% is
70%. The expected return and standard deviation of stock X are ________ and ________,

2. The standard deviation of stock X and Y are 13% and 13% respectively. If the correlation
coefficient between X and Y is 0.5% then the covariance is ________.

3. For XYZ Ltd., if the market and stock returns are – 0.5 and 6.83, with beta value as 0.584 then
value of alpha from the equation of characteristic line is _____.

4. Given the risk-free rate is 12% and the expected return on the market portfolio is 18%. The
following are the expected returns for three stocks with their betas:
Expected return (%) Expected beta
Stock I 19 1.5
Stock II 18.5 0.75
Stock III 22 1.4
Based on these expectations, which of the following stocks is overvalued?

5. The standard deviation of Greaves Ltd. stock is 24% and its correlation coefficient with the
market portfolio is 0.5. The expected return on the market is 16% with a standard deviation of
20%. If the risk-free return is 6%, the required rate of return on Greaves Ltd., scrip is ________.

6. Mr. Ramesh has the following scrips in his portfolio:

Industries Beta Proportion (%) of investment
Ballarpur Industries 0.95 15
GE Shipping 1.1 20
SBI 1.25 30
Ahmedabad Electric Co. 0.8 5
BSES 1.05 20
Bombay Dyeing 0.7 10
What is the required rate of return (%) on his portfolio, if risk-free return is 4% and return on
market is 14%.

7. Consider stock P and Q. The expected return on stock P and stock Q are 10% and 20%
respectively. If standard deviation of stock P is 2% and stock Q is 5%, what is the expected
return and standard deviation of a portfolio combining these two stocks in equal proportion if
their correlation coefficient is 0.4?

8. What is the equilibrium price of a share for which beta is 1, current dividend is Rs.2.5 per
share, growth rate is 6%, risk free return is 9% and return on market is 18%?

9. An investor is seeking the price to pay for a security, whose standard deviation is 4.00 percent.
The correlation coefficient for the security with the market is 0.8 and the market standard
deviation is 3.2 percent. The return from the government securities is 6.2 percent and from the
market portfolio is 9.8 percent. The investor knows that, by calculating the required return, he
can then determine the price to pay for the security. What is the required return on security?
10. Based on the following information, answer following questions.
The expected return on the market portfolio and the risk-free rate of return are estimated to be
15% and 11% respectively. XYZ Ltd., has just paid a dividend of Rs.3 per share with annual
growth rate of 9%. The sensitivity index  of XYZ Ltd., has been found to be 1.2.
a. The equilibrium price for the shares of XYZ Ltd., is Rs.__________.

b. If the risk Premium further increases by 2%, then the change in price is Rs.________.

c. If the expected growth rate in dividends increases to 12%, then the new price is Rs._______.

d. The change in price is Rs._____ if market sensitivity index of XYZ Ltd., becomes 1.5.

11. Based on the following information Answer Questions 135 to 137.

Following information is provided concerning the returns on the shares of Zeenath Ltd., and
on the market portfolio, according to the various conditions of the economy.
Condition of Prob. of condition Return on Return on market
economy occurring Zeenath Ltd.
(1.) 0.2 10% 5%
(2.) 0.4 15% 16%
(3.) 0.4 20% 18%
a. The current risk-free interest rate is 9 percent. The coefficient of correlation between the returns
on Zeenath Ltd., is __________.

b. The beta factor for Zeenath Ltd., is _________.

c. Is Zeenath Ltd., efficiently priced according to the CAPM and the information given above?

12. The following information in provided for security A: Rf = 8%,  = 1.4, Km = 14%, if last paid
dividend is Rs.2.00, current purchase price is Rs.14 and growth rate is 9% then what is the
equilibrium price of the stock?

13. There are two stocks A and B, about which the following information is given:
Expected return on stock A = 15%
Expected return on Stock B = 25%
Standard deviation of Stock A = 3%
Standard deviation of Stock B = 6%
What should be the weightage in stock B for the minimum variance portfolio if their correlation
coefficient is 0.6?
 Risk and Return
FAS Group Assignment to be submitted by December 9, 2014

Student in a FAS group need to collect data and do the following analysis:

1. Select a stock and collect the daily stock prices from BSE or NSE for last one year.
2. Collect Index closing values (proxy for market) for the following indices:
a. BSE (Sensex, BSE 200 and BSE 500) OR
b. NSE (Nifty, CNX 200 and CNX 500)
3. Calculate the daily risk and return for the stock
4. Calculate annual risk and return for the stock
5. Calculate the market risk and return for the three indices.
6. Collect the risk free rate (360 day t-bill yield) from RBI website
7. Calculate the beta for the stocks using the three market indices
8. Calculate the systematic risk in the stock using CAPM (Characteristic line).
9. Calculate the expected return for the stock using CAPM (SML).