PAPER 1

Portfolio Management and Mutual Fund

Question No. 1 is compulsory.
Attempt any 4 out of remaining 5 questions.
Total Marks 100 marks
Question – 01
Attempt all (2 marks each)
1. Sharpe‘s measure of the portfolio performance is based on
(a) Systematic risk of the portfolio
(b) Unsystematic risk of the portfolio
(c) Total risk of the portfolio
(d) Market risk of the portfolio
2. Historically, when the market return changed 10%, the
return on stock of Arihant Ltd changed by 16%. If variance
of market is 257.81, what would be the systematic risk for
Arihant Ltd?
(a) 320%
(b) 480%
(c) 660%
(d) Insufficient information

3. According to the CAPM, the intercept of Security Market

Line (SML) should be equal to ……….
(a) Zero
(b) the expected risk premium on the market portfolio
(c) the risk free rate
(d) the expected return on the market portfolio
4. The portfolio‘s risk premium is 12% and the standard
deviation of market and the portfolio are 4 and 3,
respectively. The fund‘s beta value is 1.5. The Treynor index
is
(a) 3.0
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 (b) 8.0
(c) 4.0
(d) 12
5. If the covariance between the returns on a portfolio BC and
returns on the market index is 25 and the variance of
returns on the market index is 20, what will be the
systematic risk of BC under the variance approach?
(a) 1.25
(b) 1.56
(c) 5.45
(d) 31.25
6. There are three stocks in a portfolio.

Stock Amount Beta

A 2,00,000 2

B 2,00,000 1.8

C 1,00,000 0.9
We want to increase beta to 1.90 then how much amount
should be invested or borrowed at risk free rate.
(a) Invest Rs. 52,632

(b) Borrow 1,25,650

(c) Borrow Rs. 52,632
(d) Invest Rs. 1,23,500
7. A portfolio manager realized an average annual return of
15%. The beta of the portfolio is 1.2 and the standard
deviation of return is 25%. The average annual return for
the market index was 11% and the standard deviation of the
market returns is 20%. The risk-free rate is 4%. Calculate
the Sharpe ratio for the portfolio.
(a) 0.16
(b) 0.44
(c) 0.55
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 (d) 0.64
8. Correlation between stock & market= 0.9

Standard deviation of stock = 20%

Standard deviation of error term.

(a) 5.29
(b) 76
(c) 8.72
(d) 10.54

9. Arbitrage Pricing Theory was Developed by

(a) William Sharpe
(b) Harry markowitz
(c) Stephan Ross
(d) Black Scholes
10. Beta is the slope of
(a) The security market line
(b) The capital market line
(c) A characteristic line
(d) The CAPM
11. Which among the following increases the NAV of a mutual
fund scheme?
(a) Value of investments
(b) Receivables
(c) Accrued income
(d) All of (a), (b) and (c)
12. B can earn a return of 18% by investing in equity shares on
his own. Now he is considering a recently announced equity
based Mutual Fund Scheme in which initial expenses are
1% and annual recurring expenses are 2%. How much
should be Mutual Fund earn to provide B, a return of 18%?
(a) 18.18%
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 (b) 20.18%
(c) 22.18%
(d) 21%
13. Identify the statement that applies to open-end mutual
funds
(a) They do not redeem or issue shares
(b) Shares of such funds are traded on organized
exchanges
(c) Their price can’t fall below the NAV
(d) Exit from such funds involves selling shares to other
investors.
14. Mr. Pandey has formed a portfolio and the characteristics of
his portfolio are given below:
Security Cipla Ranbaxy Treasury Index
bill fund
Weight (Wi) 0.07 0.25 0.25 0.43
Beta (βi) 1.72 0.89 ? ?

Beta of his Portfolio is

(a) 0.8512
(b) 0.9539
(c) 0.7729
(d) 1.5067
Question – 02 (A)
Ms. Sreenidhi is learning the portfolio management techniques
and wants to test one of the techniques she has developed on
KIFS Equity Fund and compare the gains and losses from the
technique with those from a passive buy and hold strategy.
The KIFS Equity Fund consists of equities only and the ending
NAVs of the fund she constructed for the last 10 months are
given below:

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 Month Ending NAV (₹/unit)
Jan-22 100
Feb-22 78
Mar-22 92
Apr-22 86
May-22 102
Jun-22 98
Jul-22 100
Aug-22 102
Sep-22 118
Oct-22 120

Assume

(i) Sreenidhi had invested a notional amount of ₹ 5 lakhs

equally in the equity fund and a conservative portfolio (of
bonds) in the beginning of January 2022 and the total
portfolio was being rebalanced each time the NAV of the
fund increased or decreased by 15% compared to the NAV of
previous month.

(ii) There is no income earned from the conservative portfolio

during the period.

(iii) There is no taxation and entry/exit loads.

You are required to determine:

(i) Value of the portfolio for each level of NAV following the
Constant Ratio Plan.

(ii) Whether there are any errors in the technique developed by

Sreenidhi? If so briefly explain.

(10 marks)
Question – 02 (B)
Mr. S has invested in 3 different Mutual Fund Schemes. The
following are the details of the same:
Particulars Scheme A Scheme B Scheme C
Date of Investment 01-06-2022 01-07- 01-08-2022
2022
Net Asset Value at ₹ 11.00 ₹ 10.50 ₹ 12.00
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 Entry Date
Dividend received 12,500.00 17,000.00 4,000.00
upto 31-03-2023 (₹)
Unit NAV at 31-03- 11.25 11.48 10.80
2023 (₹)
Increase (Decrease) in 22,727.27 93,333.33 (50,000.00)
NAV (₹)
Effective Rate of Yield 4.2296% 14.6978% (-) 13.8190%
per annum

Ignore Entry/Exit load expenditure.

Assume 365 days in a year. Round off the investment to nearest

₹ 100.

You are required to calculate:

(i) The amount of investments made initially by Mr. S in these

schemes.

(ii) Number of units invested in the three schemes by Mr. S.

Advise also whether he can continue to hold this investment or

can he redeem now.

(8 marks)
Question – 03 (A)
An investor has the following constituent holdings in his
portfolio:
Security No. of Price per share Share
shares (₹) Beta
A 400 500 1.4
B 500 750 1.2
C 200 250 1.6

(i) Find the market value weighted average beta of his portfolio.
(ii) If the investor wants a target beta for his portfolio at 0.9,
how would he dispose of his securities and replace them
with Government securities if he want to sell in the order of
risk ? present the revised tabulation of his holding and
prove that the target beta has been achieved by your advice.

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(iii) If he is willing to invest further, how much investment
should he make in G Sec to make his beta 0.9, without
selling any share at all ?
(10 Marks)
Question – 03 (B)
T Ltd. has promoted an open-ended equity oriented scheme in
1999 with two plans—Dividend Reinvestment Plan (Plan-A) and a
Bonus Plan (Plan-B); the face value of the units was ₹ 10 each. X
and Y invested ₹ 5,00,000 each on 1.4.2001 respectively in Plan-
A and Plan-B, when the NAV was ₹ 42.18 for Plan - A and ₹
35.02 for Plan - B. X and Y both redeemed their units on
31.3.2008. Particulars of dividend and bonus declared on the
units over the period were as follows:
Date Dividend Bonus NAV
Ratio Plan A Plan B
15/09/2001 15 — 46.45 29.10
28/07/2002 — 1:6 42.18 30.05
31/03/2003 20 — 48.10 34.95
31/10/2003 — 1:8 49.60 36.00
15/03/2004 18 — 52.05 37.00
24/03/2005 — 1:11 53.05 38.10
27/03/2006 16 — 54.10 38.40
28/02/2007 12 1:12 55.20 39.10
31/03/2008 — — 50.10 34.10

You are required to calculate the annual return for X and Y after
taking into consideration the following information:

(i) Securities transaction tax @ 2% on redemption.

(ii) Liability of capital gains to income tax

(a) Long-term capital gain-exempt; and

(b) Short-term capital gains at 10% plus education cess at

3%.

(8 marks)
Question – 04 (A)
The returns of a portfolio A and market portfolio for the last 12
months are indicated as follows:
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 Month Portfolio A Market Portfolio
January -0.52 0.82
February 2.20 0.04
March 2.17 2.80
April 4.17 1.72
May 2.04 0.27
June 3.00 0.39
July 1.99 1.95
August 4.00 0.64
September -1.38 1.53
October 2.67 2.70
November 3.99 2.52
December 1.86 2.09
Standard Deviation (𝜎) 1.6223 0.9498

(i) You are required to find out the monthly returns

attributable to the sheer skill of the Portfolio Manager.

(ii) What part of the monthly return is attributable to the higher

risk assumed by the Portfolio Manager?

Assume that the risk-free rate of return is 12% per annum and
the portfolio is fully diversified.
(10 marks)
Question – 04 (B)
On 01-07-2010, Mr. X Invested ₹ 50,000/- at initial offer in
Mutual Funds at a face value of ₹ 10 each per unit. On 31-03-
2011, a dividend was paid @ 10% and annualized yield was
120%. On 31-03-2012, 20% dividend and capital gain of ₹ 0.60
per unit was given. Mr. X redeemed all his 6271.98 units when
his annualized yield was 71.50% over the period of holding.
Calculate NAV as on 31-03-2011, 31-03-2012 and 31-03-2013.
For calculations consider a year of 12 months.
(8 marks)
Question – 5 (A)
Ramesh wants to invest in stock market. He has got the following
information about individual securities:

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 Security Expected Beta 𝛔𝟐 cl
Return
A 15 1.5 40
B 12 2 20
C 10 2.5 30
D 09 1 10
E 08 1.2 20
F 14 1.5 30

Market index variance is 10 percent and the risk free rate of

return is 7%. What should be the optimum portfolio assuming no
short sales?
(10 marks)

Question – 05 (B)
Based on the following data, estimate the Net Asset Value (NAV)
on per unit basis of a Regular Income Scheme of a Mutual Fund:
Listed Equity shares at cost (ex-dividend) 40.00
Cash in hand 2.76
Bonds & Debentures at cost 8.96
Of these, Bonds not listed & not quoted 2.50
Other fixed interest securities at cost 9.75
Dividend accrued 1.95
Amount payable on shares 13.54
Expenditure accrued 1.76
Current realizable value of fixed income securities of face value of
₹ 100 is ₹ 96.50.
Number of Units (₹ 10 face value each): 275000
All the listed equity shares were purchased at a time when
market portfolio index was 12,500. On NAV date, the market
portfolio index is at 19,975.
There has been a diminution of 15% in unlisted bonds and
debentures valuation.
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Listed bonds and debentures carry a market value of ₹ 7.5 lakhs,
on NAV date.
Operating expenses paid during the year amounted to ₹ 2.24
lakhs.
(8 marks)
Question – 06 (A)
Mr. Abhishek is interested in investing ₹ 2,00,000 for which he is
considering following three alternatives:

(i) Invest ₹ 2,00,000 in Mutual Fund X (MFX)

(ii) Invest ₹ 2,00,000 in Mutual Fund Y (MFY)

(iii) Invest ₹ 1,20,000 in Mutual Fund X (MFX) and ₹ 80,000 in

Mutual Fund Y (MFY)

Average annual return earned by MFX and MFY is 15% and 14%
respectively. Risk free rate of return is 10% and market rate of
return is 12%.

Covariance of returns of MFX, MFY and market portfolio Mix are

as follow:

MFX MFY Mix

MFX 4.800 4.300 3.370

MFY 4.300 4.250 2.800

Mix 3.370 2.800 3.100

You are required to calculate:

(i) Variance of return from MFX, MFY and market return,

(ii) Portfolio return, beta, portfolio variance and portfolio

standard deviation,

(iii) Expected return, systematic risk and unsystematic risk;

and

(iv) Sharpe ratio, Treynor ratio and Alpha of MFX, MFY and
Portfolio Mix

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 (10 marks)
Question – 06 (B)
M/s. Siri Ltd. Has a surplus amount of ₹ 3 crores to invest and
has shortlisted the following equity shares:
Company Beta
S Ltd. 1.6
K Ltd. 1
P Ltd. -0.3
D Ltd. 2
C Ltd. 0.6

Required:

(i) If M/s. Siri Ltd. invests an equal amount in all securities,

what is the beta of the portfolio?

(ii) If M/s. Siri Ltd. invests 15% of its investment in S Ltd., 15%
in P Ltd., 10% in C Ltd. and the balance in equal amount in
the other two securities, what is the beta of the portfolio?

(iii) If the expected return of market portfolio is 12% at a beta

factor of 1.0, what will be the portfolios expected return in
both the situations given above?

(iv) If the Company changes its policy to invest in any 3

securities with a minimum of 20% in each of these 3
securities to diversify risk, you are requested to advise the
company to have a right mix of securities to maximize the
return in the following two scenarios and also calculate the
expected return:

(1) Bull Phase: Expected Market returns 10%

(2) Bear Phase: Expected Market returns -5%
(8 marks)

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