Q1.

You can form a portfolio of two assets, A and B, whose returns have the following characteristics:
Stock Expected Return Standard Deviation Correlation
A 10% 20%
0.5
B 15% 40%
Create a portfolio with an expected return of 12%. What is the standard deviation of this portfolio? (1 + 4 = 5 points
Portfolio weights:
A 60.0% 1 Mark for finding the 2 weights (60% for A and 40% for B).
B 40.0%
Check 12.00%
Portfolio Standard Deviation: 24.33% 4 marks

Q2. The risk-free rate of return is 5%. The market risk premium is 10%. Which of the following three stocks is
Stocks Beta Expected Return Reqd return Status
A 0.8 15% 13% Undervalued
B 1.5 18% 20% Overvalued
C 2 25% 25% Correctly Valued

A is undervalued 1.5 Marks

B is overvalued 1.5 Marks

Q3. A 10-year bond is issued with a face value of Rs.1,000, paying coupon of Rs.60 every year. If the yield to
Coupon Rate Nothing happens 1 Mark
Price Decreases 1 Mark
Redemption Value Nothing happens 1 Mark

Q4 An 8%, five-year bond yields 6%. If this yield to maturity remains unchanged, what will be its price one ye
Coupon rate 8%
n 5
yield 6%
Bond Price Today ₹ 108.42 1 Mark
Bond Price after 1 year
Method 1: ₹ 106.93 3 Marks If someone has directly found the price corre
Method 2: ₹ 106.93 3 Marks
ortfolio? (1 + 4 = 5 points)

following three stocks is/are undervalued? Which ones are overvalued? (3 Points)

very year. If the yield to maturity increases shortly after the bond is issued, what happens to the bond’s (3 Points)

at will be its price one year hence? Assume annual coupon payments and a face value of Rs.100. (4 Points)

tly found the price correctly, give 4 marks.