Q.

01 Demand pi Ki Kipi (Ki-K^)2pi Expected Return

Weak 0.10 (50.00) (5.00) 377.00 K^ = ∑Kipi (-50-11.40)^2 x 0.10
Below 0.20 (5.00) (1.00) 53.79 Variance
Avg 0.40 16.00 6.40 8.46 σ2 = ∑(Ki-K^)2pi (16-11.40)^2 x 0.4
Above 0.20 25.00 5.00 36.99 Standard Deviation
Strong 0.10 60.00 6.00 236.20 σ = √ σ2
11.40 712.44 Coefficient of variation
K^ EXPECTED RETURN 11.40 % CV = σ / K^
σ2 VARIANCE 712.44
σ STND DEVIATION 26.69
CV = 26.69/11.40 2.34

TYPE YOUR IDs IN CHAT FOR ATTENDANCE PURPOSE

Ki pi Kipi
(2.00) 0.25 (0.50)
4.00 0.25 1.00
6.00 0.25 1.50
8.00 0.25 2.00
16.00 1.00 4.00

AVG 16/4
4.00
Q.02 βp = 35/75 x 0.8 + 40/75 x 1.4 = 1.12 βp = Wa x βa + Wb x βb

Q.03 6 = (5 - Km) = 11.00 Rpm = (KM – KRF)

Ki = 5 + 6 x 1.2 = 12.20 Ki = KRF + (Rpm) β

Q.04 P-04 Ki = 6 + (13 - 6) x 0.7 = 10.90 Ki = KRF + (KM – KRF) β

Q.05 P-06 pi Kx Kipi (Ki-K^)2pi Ky Kipi (Ki-K^)2pi

0.1 (10.00) (1.00) 48.40 (35.00) (3.50) 240.10
0.2 2.00 0.40 20.00 - - 39.20
0.4 12.00 4.80 - 20.00 8.00 14.40
0.2 20.00 4.00 12.80 25.00 5.00 24.20
0.1 38.00 3.80 67.60 45.00 4.50 96.10
12.00 148.80 14.00 414.00
a) K^ 12.00 K^ 14.00
b) σ 12.20 σ 20.35
CV 1.02 CV 1.45
If stock Y is less highly correlated with the market than X, then it might have a lower beta than stock X, and hence be
less risky in a portfolio sense.

Q.06 Ki = KRF + (KM – KRF) β

a) 12 = 5 + (10 - 5) x β = 1.40
b) Ki = 5 + (10 - 5) x 2 = 15.00

Q.07 Stock Inv Beta Wi biWi

A 4 1.50 0.10 0.1500 Ki = KRF + (KM – KRF) β
B 6 (0.50) 0.15 (0.0750)
C 10 1.25 0.25 0.3125
D 20 0.75 0.50 0.3750
 40 βp 0.7625
Kp = 6 + (14 - 6) x 0.7625 = 12.10
MARKET RETURN
Q.08 pi Ki piKi
0.10 7.00 0.70
0.20 9.00 1.80
0.40 11.00 4.40
0.20 13.00 2.60
0.10 15.00 1.50
KM = 11.00

a) Kp = 6 + (11 - 6) x βi

Stock Inv Beta Wi biWi

A 16 0.50 0.32 0.16
B 12 2.00 0.24 0.48
C 8 4.00 0.16 0.64
D 8 1.00 0.16 0.16
E 6 3.00 0.12 0.36
50 βp 1.80
b) Kp = 6 + (11 - 6) x 1.8 15.00

c) Ki = 6 + (11 - 6) x 2 16.00
An expected return on 15 percent on the new stock is below the 16 percent required rate of return on an investment with a risk of β = 2.0.
The new stock should not be purchased. The expected rate of return that would make the fund indifferent to purchase the stock is 16 percent.

Q.09 STOCK 'A' STOCK B PORTFOLIO Average Return

YR Ka (Ki-Kavg)2 Kb (Ki-Kavg)2 Kp (Ki-Kavg)2 Kavg = ∑Ki/n
2010 (18.00) 858.49 (14.50) 665.64 (16.25) 759.00 Variance
2011 33.00 470.89 21.80 110.25 27.40 259.21 σ2 = ∑(Ki-Kavg)2 / (n-1)
2012 15.00 13.69 30.50 368.64 22.75 131.10 Standard Deviation
2013 (0.50) 139.24 (7.60) 357.21 (4.05) 235.62 σ = √ σ2
 2014 27.00 246.49 26.30 225.00 26.65 235.62
56.50 1,728.80 56.50 1,726.74 56.50 1,620.56
n 5 5 5
a&b) Kavg 11.30 11.30 11.30
n-1 4.00 4.00 4.00
c) σ2 432.20 431.69 405.14
σ 20.79 20.78 20.13
d) CV 1.84 1.84 1.78
e) A risk-averse investor would choose the portfolio over either stock A or stock B alone, since the portfolio offers the same expected return
but with less risk. This result occurs because returns on A and B are not perfectly positively correlated.

Q.10 Km Ka Km Kb
Year 2
X Y XY X X Y XY X2 β = n∑xy - (∑x) (∑y)
2010 12 14 168 144 12 13 156 144 n∑x2 – (∑x)2
2011 10 19 190 100 10 7 70 100
2012 (12) (16) 192 144 (12) (5) 60 144
2013 1 3 3 1 1 1 1 1
2014 15 20 300 225 15 11 165 225
26 40 853 614 26 27 452 614
A) βA = 1.35 βB = 0.65
MKT CO
20 X 1 20
20 X 1.5 30
20 X 0.75 15
Ka= Krf + (Rpm) b
b) Ka = 6 + 5 x 1.35 12.74 Kb = 6 + 5 x 0.65 9.25
Kp = Ka x Wa + Kb x Wb
c) Kp = 0.8 x 12.74 + 0.2 x 9.25 = 12.04
d) Stock X is undervalued, because its expected return exceeds its required rate of return.
DEBT 14% 10 m
P.S. 12% 15 m
CS 10% 25 m
 SAMPLE DATA POPULATION DATA
Average Return Expected Return
Kavg = ∑Ki/n K^ = ∑Kipi

Variance Variance
σ2 = ∑(Ki-Kavg)2 / (n-1) σ2 = ∑(Ki-K^)2pi

Standard Deviation Standard Deviation

σ = √ σ2 σ = √ σ2

Coefficient of variation Coefficient of variation

CV = σ / Kavg CV = σ / K^

Kp = Wa x Ka + Wb x Kb …..
β = n∑xy - (∑x) (∑y)
n∑x2 – (∑x)2

Ki = KRF + (KM – KRF) β

Ki = KRF + (Rpm) β

βp = W a x β a + W b x β b

Kp = KRF + (KM – KRF) βp

Kp = KRF + (Rpm) βp
 x y
AVG RET 12% 12% CO. X
SD 6% 8%

x y
AVG RET 12% 14%
SD 6% 6% CO.Y

x y
AVG RET 12% 14%
SD 6% 8% CO.X
CV 50.0% 57.1%

x y
AVG RET 12% 14%
SD 6% 7% INDIFFERENT
CV 50.0% 50.0%

INV WEIGHTAGE RET %

CO.A 60,000 0.60 12,000 20.00%
CO.B 40,000 0.40 10,000 25.00%
100,000 1.00 22,000 22.00%
Kp = Ka X Wa + Kb x Wb + …. Kz x Wz
Kp = 20 x .6 + 25 x .4
22 %

Company Zee return = 12%

Company Alfa return = 14%
You invest 80% of your investment In Alfa and rest in Zee
What is your portfolio return
Kp = 12 x 0.2 + 14 x 0.8
Kp= 13.60 %

Company Zee return = 10%

Company Alfa return = 12%
You invest 60,000 of your investment In Alfa and 90,000 in Zee
What is your portfolio return
Kp = 10 x 6/15 + 12 x 9/15
Kp = 11.20 %
 Prob Ret
pi Ki Kipi (Ki-K^)^2xpi
0.10 (50.00) (5.00) 377.00
0.20 (5.00) (1.00) 53.79
0.40 16.00 6.40 8.46
0.20 25.00 5.00 36.99
0.10 60.00 6.00 236.20
Sum 11.40 712.44

K^ = 11.40 %
VAR = 712.44 %
SD = 26.69 %
CV = 2.34 %
(-50 - 11.40)^2 X 0.1
 STOCK 'A' STOCK B PORTFOLIO
YR Ki (Ki-Kavg)2 Ki (Ki-Kavg)2 Ki (Ki-Kavg)2
2010 (10.00) 835.21 (3.00) 479.70 (6.50) 645.21
2011 18.50 0.16 21.29 5.70 19.90 0.99
2012 38.67 390.85 44.25 642.52 41.46 508.91
2013 14.33 20.88 3.67 232.01 9.00 98.03
2014 33.00 198.81 28.30 88.32 30.65 138.04
SUM 94.50 1,445.92 94.51 1,448.26 94.51 1,391.18
n 5 5 5
Kavg 18.90 18.90 18.90
n-1 4.00 4.00 4.00
σ2 361.48 362.06 347.79
σ 19.01 19.03 18.65
CV 1.01 1.01 0.99

INV IN PARTICULAR STK / TOTAL INVESTMENT

STOCK A
Sock A’s Sock B’s
Year Returns, KA Returns, KB Market X

2010 14% 13% 12% 12

2011 19 7 10 10
2012 -16 -5 -12 (12)
2013 3 1 1 1
2014 20 11 15 15
26

b(A)=

5 (853) - (26)x(40)
5 x 614 - (26)^2

MARKET BETA IS ALWAYS EQ

GOVT. SECURITIES BETA IS A
 MARKET
X
12
10
(12)
1
15
26

b(A)=

Percentag
e of Beta
Business
Wi Bi Wibi
E 0.60 0.7 0.42 bp = 0.6 x .7 + 0.25 x .9 + .1 x
C 0.25 0.9 0.23
R 0.10 1.3 0.13
I 0.05 1.5 0.08
a) bp = 0.85

b) Kp = 6 + 5 x 0.85 10.25

c) E 0.50 0.7 0.35

C 0.25 0.9 0.23
R 0.10 1.3 0.13
I 0.15 1.5 0.23
bp = 0.93
Kp = 6 + 5 x 0.93 10.65
 Average Return
Kavg = ∑Ki/n
Variance
σ2 = ∑(Ki-Kavg)2 / (n-1)
Standard Deviation
σ = √ σ2
Coefficient of variation
CV = σ / Kavg

STOCK A STOCK B

Y XY X^2 X Y XY X^2

14 168 144 12 13 156 144

19 190 100 10 7 70 100
(16) 192 144 (12) (5) 60 144
3 3 1 1 1 1 1
20 300 225 15 11 165 225
40 853 614 26 27 452 614

1.35 b(B)= 0.651

(853) - (26)x(40)
5 x 614 - (26)^2

RKET BETA IS ALWAYS EQUAL TO "1"

VT. SECURITIES BETA IS ALWAYS EQUAL TO "0"
 MARKET GOVT SEC
Y XY X^2 X Y XY X^2
12 144 144 12 8 96 144
10 100 100 10 8 80 100
(12) 144 144 (12) 8 (96) 144
1 1 1 1 8 8 1
15 225 225 15 8 120 225
26 614 614 26 40 208 614

1.000 b(B)= -

= 0.6 x .7 + 0.25 x .9 + .1 x 1.3 + 0.05 x 1.5

K^ = ∑Kipi
βp = W a x β a + W b x β b
Kp = KRF + (KM – KRF) βp
Po =

Vb = INT x {1 - (1+Kd)-n} + M (1 + Kd)-n for semi annual: Rates/2, n x 2

Kd Vb means price or value of bond

CY = ANNUAL COUPON PAYMENT / Vb

CGY = YTM - CY
KdAT = KdBT (1 - T)
Kps = Dps / (Pps -Fps)
WACC = KdAT x Wd + Kps x Ws + Ks x Ws