BBA/B.Com Investment Analysis and Portfolio Management Dec 2024

Description

Investment Analysis and Portfolio Management

December 2024 Examination

 

 

Q1. How does Arbitrage Pricing Theory (APT) explain the relationship between risk and expected return? What types of risks are associated with APT, and how do they affect investment decisions? (10 Marks)

Ans 1.

Introduction

Arbitrage Pricing Theory (APT) is a financial model that seeks to explain the relationship between risk and expected return for a portfolio of assets. Developed by economist Stephen Ross in 1976, APT serves as an alternative to the more widely known Capital Asset Pricing Model (CAPM). Unlike CAPM, which assumes that market risk is the sole determinant of expected returns, APT suggests that multiple macroeconomic factors influence the returns of a security. These factors could include inflation rates, interest rates, GDP growth, or even industry-specific trends. APT operates on the principle of arbitrage, where investors can earn risk-free profits by

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Q2. Analyze how the communication between different players in a mutual fund contributes to the decision-making process for individual investors. What benefits arise from this interaction?   (10 Marks)

Ans 2.

Introduction

The communication between various stakeholders in a mutual fund ecosystem plays a crucial role in shaping the decision-making process for individual investors. Mutual funds bring together various players, including fund managers, investors, brokers, analysts, and regulatory bodies, each contributing to the fund’s operations and performance. The information flow between these parties significantly impacts the transparency and trust required for sound investment decisions. Effective communication ensures that investors are well-informed about the fund’s performance, risk factors, and strategic direction, enabling them to make decisions that align with their financial goals. Moreover, mutual fund investors rely heavily on the expertise of fund managers, who, in turn, depend on data and insights from analysts and market

 

Q3a. Suppose you are a portfolio manager & there is an investment in two securities A & B. Expected return from A is 10% & from B is 20%. Investment is divided in the proportion of 40% & 60%. Calculate Portfolio Return. 

Ans 3a.

Introduction

As a portfolio manager, one of the key responsibilities is to assess the overall return on a portfolio composed of different assets. In this scenario, we are dealing with two securities, A and B, with expected returns of 10% and 20%, respectively. The investments are distributed in proportions of 40% for A and 60% for B. Calculating the portfolio return involves combining the weighted returns of each security to understand the overall expected performance of the portfolio.

Concept and Application

Portfolio Return

 

b.) On the basis of given values of covariance = 1.7, standard deviation of X = 1.2, and standard deviation of Y = 2.1, how would you express the formula for calculating the correlation coefficient?     (5 Marks)

Ans 3b.

Introduction

The correlation coefficient is a statistical measure that quantifies the strength and direction of the linear relationship between two variables. In finance, understanding the correlation between two securities helps in portfolio diversification and risk management. The formula for calculating the correlation coefficient (rrr) involves the covariance between the two variables and their respective standard deviations. In this case, the given values include a covariance of 1.7, standard deviation of X (1.2), and standard deviation of Y (2.1), allowing us to compute the