M.Sc Portfolio Management – II Dec 2023

Description

Portfolio Management II

December 2023 Examination

 

 

 

1. The following table gives an analyst’s expected return on two stocks for particular market returns.

 

Market Return            Aggressive Stock             Defensive Stock

 

 

6 %                        – 4 %                                 7 %

 

 

30 %                        50 %                            15 %

 

 

1. What is the ratio of the beta of the aggressive stock to the beta of the defensive stock? Interpret the result. (3 Marks)

 

1. If the risk-free rate is 8 % and the probability that the market return is likely to be 6 % and 30 % is 6:4, what is the market risk premium? Interpret the result. (3 Marks)

 

1. What is the alpha of the aggressive stock? Interpret the result. (4 Marks) (10 Marks)

 

Ans 1.

Introduction

 

The expected return is the loss or profit an investor anticipates on an investment with the historical prices of going back (RoR). It’s determined by multiplying ability outcomes through the chances of them occurring and then totaling these results.

• The expected return is the income or loss an investor or trader can anticipate receiving on an investment.
• An expected go-back is determined by multiplying potential outcomes by using the odds of them taking place and then totaling these results.
• expected returns can not be expected.
• The anticipated return for a portfolio containing various investments is the weighted

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2. Assuming the role of a risk seeking investor, identify 5 Stocks from NIFTY50 and create a portfolio. Substantiate the rationale for the choice of  5  assets  and  asset  weight allocations along with risk and return measures.  (10 Marks)

 

Ans 2.

Introduction 

Risk-seeking is accepting vast danger in finance, regularly related to uncertainty and price volatility in trading or funding, in exchange for the capacity for maximum returns. Danger seekers are more inclined toward earning capital profits from property than capital upkeep from lower-risk assets.

Risk-seeking may be contrasted with chance-averse.

• Chance-seeking refers to a person inclined to accept extra great economic uncertainty in alternate for higher returns.
• Danger-seeking confers the most chance tolerance or the amount of potential losses an

 

 

3. a. The table below presents information on four securities whose active returns are uncorrelated, and forecasts are independent from year to year. Assuming the benchmark portfolio to be equally weighted across these four securities and forecasted benchmark return at 15%, compute the portfolio weights and total expected returns for each of the four securities. Also, compute the active return and total expected return of the managed portfolio and assess the active risk of the managed portfolio. (5 Marks)

Security	Expected Active Return	Active Return Volatility	Active Weight
A	5%	20%	25.00%
B	10%	40%	12.50%
C	-5%	20%	-25.00%
D	-10%	40%	-12.50%

 

Ans 3a.

Introduction

Active return is the extra return that results from an investment manager’s trying to pick suitable investments. It equals the difference between the portfolio return and the benchmark return. Benchmark return is the go-back that could be earned by passive funding. The go-back on an index represents the investment universe that corresponds to the selected investment method, i.e., a broad market index such as the S&P 500 or an index representing

 

3. b. Using the information from the above question (3.a.) verify the basic fundamental law of active management of portfolio and compute the information ratio. Assume IC = 25% and BR = 4. (5 Marks)

Ans 3b.

Introduction

The information ratio (IR) measures an investment supervisor’s skill in generating returns above a benchmark or an index while considering the volatility of the returns. It compares the return on investment or portfolio to the returns of a version or an index.

The primary motive of the facts ratio (IR) parameter is to evaluate the investment manager’s