First Set Currency


Portfolio Management-2


SKU: AMSEQ-209 Category:

Assignment – A

Question 1.(i) Sweat equity is the best form of reward for those who contribute to the growth of a company. Discuss.
(ii) Why do investor add real estate in their portfolio?
(iii) What are the steps taken by SEBI in the primary market to protect investors?

Question 2. (i) Discuss the dematerialisation and rematerialisation processes in NSDL?
(ii) ‘Stock market indices are the barometers of the stock market’ – Discuss?
(iii) How can increasing short interest give a bullish interpretation Why?

Question 3. (i) Explain the utility of the economic analysis and state the economic factors considered for this analysis.
(ii) what is meant by fundamental analysis? How does fundamental analysis differ from technical analysis?
(iii) What “industry life cycle exhibits the statius of the industry and gives the clue to entry and exit for investors” Elucidate.

Question 4. Stocks L and M have yielded the following returns for the past two years.

Years Return %
1995 12 14
1996 18 12

(i) What is the expected return on portfolio made up of 60 percent of L and 40 percent of M? Find out the standard deviation of each stock.
(ii) What is the covariance and co-efficient of correlation between stock L and M?
(iii) What is the portfolio risk of a portfolio made up of 60 percent of land 40 percent


Question 5. For the first four years XYZ firm is assumed to grow at a rate of 10 per cent. After four years the growth rate of dividend is assumed to decline linearly to 6 per cent. After 7 years, the firm is assumed to grow at a rate of 6 per cent infinitely. The next year dividend is Rs.2 and the required rate of return is 14 per cent. Find out the value of the Stock.

Assignment – B

Question 1. Mr. Rajan Tiwari is planning to invest in the equity stocks of Xerox India Limited. The current share price is Rs.150 per share. Xerox has declared a dividend of Rs.10 per share for the current year. Mr. Tiwari is of the opinion that the dividend per share will remain at the same level for the next two years, after which it will grown at the rate of 25% per annum in the third and fourth years. From the fifth year onwards, dividends are expected to grow at a normal rate of 12% per annum. If the required rate of return of Mr. Tiwari is 14% per annum, do you suggest him to purchase the share at the current price.

a. Intrinsic value of the stock is Rs.551.98 and it is recommended to purchase the share
b. Intrinsic value of the stock is Rs.551.98 and it is nor recommended to purchase the share.
c. Intrinsic value of the stock is Rs.517.83 and it is recommended to purchase the share.
d. Intrinsic value of the stock is Rs.517.83 and it is not recommended to purchase the share
e. Intrinsic value of the stock is Rs.150 and it is recommended to purchase the share.

Question 2. Vishnu ltd, has just paid a dividend of Rs.16 per share. As a part of its major reorganization of its operations, it has stated that it does not intend to pay any dividend for the next two years. In three years time it will commence paying dividend at Rs.12 per share and the directors have indicated that they expect to achieve dividend growth at 14% p.a. thereafter.

If the reorganization does not take place, dividend will be paid in the next two years and the expected dividend growth will remain at the present level of 8% p.a. The firm’s cost of equity is 18% (i.e. the return expected by the equity investors) and will be unaffected by the reorganization. What will be the value of firm’s shares in both the situations? Moreover, advice the directors to which process they should adopt for?

Question 3. Sundaram finance Ltd. has an investment opportunity available which will involve a capital outlay in each of the next 2 years and which will produce benefits during the following 3 years. A summary of the financial implications of this investment is given below.

Year Cash Flow (Rs.’000)
1 (2,000)
2 (2,000)
3 200
4 2,300
5 4,100

Sundaram Ltd., currently has 1,00,000 shares in issue. The dividend just paid was Rs.25 per share. In the absence of the above investment, dividends are expected at this level for the next 3 years, but will then demonstrate perpetual growth of 15 percent p.a. Sundaram finance Ltd. is currently all equity financed and the required rate of return of the equity investor is estimated to be 18 percent. The only possible way of financing the investment is, therefore, to reduce the dividend payments made in the next 2 years. Cash received from the new investment is therefore, to reduce the dividend payments made in the 10% will also be maintained because of other operations.

What will be the present market price? What will be the market price after the acceptance of the investment (assuming the market knows the dividend changes that will result from the investment using a dividend valuation model?)

Case Study


Mr. Prashant Gupta is interested in investing in equity shares of Infosys and Hamdard. Infosys Technologies Ltd. (NASDAQ: INFY) was started in 1981 by seven people with US$ 250. Today, it is a global leader in the “next generation” of IT and consulting with revenues of over US$ 4 billion. It offers span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing. Hamdard (Wakf) Laboratories, India is a famous pharmaceutical company in India known for its Unani and Ayurvedic products. It is the world’s largest manufacturer of Unani medicinesSome of its more famous products include Safi, Sharbat Rooh Afza, Cinkara, Roghan Badam Shirin and Pachnol. It is associated with Hamdard Foundation, India. Being conservative in nature, he wants to determine the risk associated with investments. In specific terms, he wants to seek data related to both levered and unlevered beta of these companies. He approaches Nitin Shah, a financial consultant to do the needful. Nitin has collected the relevant information detailed below:

1 0.1455 0.0432 0.0654
2 0.1291 0.307 0.1536
3 -0.1036 -0.0498 -0.0749
4 -0.0643 -0.0369 0.0473
5 -0.0673 -0.0272 -0.0178
6 0.1361 0.0286 -0.0291
7 -0.0111 -0.1088 -0.1465
8 0.0452 -0.1338 0.0194
9 0.0277 0.0913 0.0663
10 0.0581 0.011 -0.0022
11 0.0313 0.0581 0.0854
12 0.1021 0.1043 0.0127
13 0.1652 0.0876 0.0914
14 -0.0237 0.0617 0.0604
15 -0.0581 0.0877 -0.0099
16 -0.0077 0.14 0.0119
17 -0.0401 –0.0369 -0.008
18 -0.0589 0.0473 -0.0605
19 0.1335 0.1054 0.0746
20 0.0693 0.0249 0.0596
21 -0.0391 0.1082 0.048
22 -0.0086 0.048 0.0378
23 0.0196 0.068 0.0813

(i) Monthly returns on equity shares of Infosys and Hamdard for a period of 2 years (w.e.f. October 2006 to September 2008) along with portfolio of S&P CNX NIFTY.
(ii) Return on 364-days treasury bills issued by Government of India for the period 2007-08 is 5.15 per cent per annum and 0.419 per month. This rate is to be used as a proxy for risk-free rate of return.
(iii) Debt-equity ratio (based on the average of 2004 to 2008) is 1.6 per cent for Wipro and 31.4 per cent for Dabur.
(iv) Corporate tax is 35 per cent.

Compute the beta and interpret it for Prashant. Examine different circumstances with analysis of data.

Assignment – C

S. No. Question A B C D
1 Which of the following is /are true? All investments are speculative by nature Genuine investments involve calculated risks which are consistent with the expected returns The ultimate objective of an investment or speculative stock is to increase the terminal wealth of the person concerned Both b and c above
2 Which of the following is not an investment constraint? Liquidity The absence of the need for regular income the preferred time horizon Risk tolerance
3 A straight debenture is one which Offers straight interest payments and is redeemed at par Can be transferred by simple endorsement and delivery Does not have a charge on any of the company’s assets Is automatically converted into a share at maturity
4 The issuing company has to create a Debenture Redemption Reserve up to _________ of the amount of debentures to be redeemed, before the date of redemption 10% 25% 30% 50%
5 Which of the following is not a non-security form of investment? National savings scheme Purchase of gold and art objects Bank deposits Corporate fixed deposits
6 Corporate fixed deposits Are secured by the fixed assets of the issuing company Have no upper limit on the interest rate they offer Have a minimum maturity of 3 years Cannot exceed 10% of the share capital plus free reserves
7 The threshold limit for total FII investments in an Indian company is 10% 24% 30% none
8 Risk(s) affecting all the securities in the market is/are Risk due to variability in returns due to changed investors’ expectations Financial risk Inflation risk both a & c
9 The risk for the whole market as measured by ‘Beta’ is 1 0 -1 Greater than 1
10 Of the following, systematic risk encompasses Business risk Inflation risk Interest rate risk Both b and c
11 Securities which are plotted above the SML line are Under priced Over priced Favourable investments Both a and c
12 Covariance between a stock and a market index and the variance of the market index were found to be 33.56 and 19.15 respectively. The Beta of the stock is 1.55 1.75 1.85 1.95
13 The beta of a stock is 1.12 and its covariance with the market is 220. The standard deviation of market returns is 16% 14% 12% 11.30%
14 The characteristic line established the relationship between Return on a security and its beta return on a security and its standard deviation Return on the security and return on the market Risk of the security and risk of the market
15 Which of the following statements is true? Slope of SML is known as beta Slope of CML is known as beta CML includes inefficient portfolios CML is a relationship between total risk and required return.
16 Government securities are free from Default risk Purchasing power risk Interest rate risk Reinvestment risk
17 Riskiness’ of a security in the context of security analysis essentially means Variability of the security’s returns Variability of returns above a benchmark mentioned by clients Variability of returns below a benchmark mentioned by clients Market risk
18 Market Indicators are employed in Studying the behavior of the stock market Evaluating the performance of the portfolios Calculating betas of the securities All of the above
19 As the business cycle enters the initial phase of economic recovery the stock prices generally Decline Maintain the same trend as before Rise Rise to an extent and then take a downturn
20 Cyclical industries are those Which experience high growth rates when economy is booming Which perform irrespective of the economic conditions Which experience downtrend when economy is in recession Both a and c
21 High growth rates in earnings and market shares is a characteristic of companies which are in Maturity stage Expansion stage Pioneering stage Declining stage
22 Which among the following is not volatile? Cyclical growth industries Growth industries Cyclical industries Defensive industries
23 In a balance sheet, equity and fixed assets are expressed in terms of their Market value Cost Book value Replacement value
24 The measurement of leverage is PAT/Equity Equity/Debt Total assets/Equity Total assets/Debt
25 Which of the following is/are cyclical industries? Steel and Iron Construction Shipping Cement
26 An industry in the expansion stage of its life cycle is indicated by High P/E ratios High dividend pay out ratios High dividend yield High investment in R & D
27 A business division with high growth but low relative market share is referred to as a Cash cow Profit center Question Mark Star
28 during an inflationary period a company can artificially show higher profits by Moving from FIFO and LIFO method of inventory valuation Moving from LIFO to FIFO method of inventory valuation Shifting from FIFO to the weighted method of inventory valuation None of the above
29 An industry in the growth stage of its life cycle is indicated by High P/E ratios High dividend pay out ratios High dividend yield High investment in R & D
30 Which of the following is not an entry barrier? Profit differentiation Switching costs Capital requirements Low value addition
31 For a symmetrical triangle to be formed in a series of rallies The succeeding peaks are lower than the preceding ones at the top The succeeding crest at the bottom are lower than the preceding ones The succeeding crest at the bottom are higher than the preceding ones Both a and c
32 If a vertical rally or decline comes to a temporary halt to consolidate the gain/loss after which the prices move in the same direction, give rise to Flag Rectangle Gap Both a and b
33 Which of the following is a measure of momentum against itself? Relative strength indicator Rate of change MACD Stochastic
34 In a technical analysis the exponent value for calculating a 10 day Exponential Moving Average will be 0.2 0.1 2 20
35 In technical analysis the odd-lot theory is a classic example of Oscillator Breadth of market indicator approach Contrarian opinion theory Dow Theory
36 The argument that when stock prices increase, the closing prices have a tendency to be closest to the peaks of the period, forms the basis of Exponential moving average Confidence index Elliott wave theory Stochastic
37 Which of the following best measures the strength of market advances of declines? Moving average analysis Stochastic Gap analysis Breadth of market indicators
38 Which of the following is an assumption of technical analysis? market value is determined by the interaction of different judgmental value parameters Supply and demand are governed by factors which are only rational Stock prices tend to fluctuate widely over appreciable period of time and hence cannot be predicated Chart patterns tend to repeat themselves
39 An investor buys an option contract for a premium or Rs. 200. The exercise price is Rs. 20 and the current market price of the share is Rs. 17, if the share price after three months reaches Rs. 25, what is the profit made by the option holder on exercising the option. Contract is for 100 shares. Ignore the transaction charges Rs. 200 Rs. 250 Rs. 300 Rs. 350
A put option was written at a premium of Rs. 400. The current market price of the stock is Rs. 38 and the exercise price of the contract is Rs. 35. After a period of two months the price of the stock is Rs. 30. The amount of the profit made by the option holder is Rs. ___________ 325 250 150 100


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