Test Paper

PORTFOLIO MANAGEMENT

CA FINAL AFM
TEST PAPER (Revision May 2025)
PORTFOLIO MANAGEMENT
Time Allowed – 2 Hours Maximum Marks – 60

1. The question paper comprises two parts, Part I and Part II.

2. Part I comprises Case Scenario based Multiple Choice Questions

(MCQs)

3. Part II comprises questions which require descriptive type answers.

4. Working note should form part of the answer. Wherever necessary,

suitable assumptions may be made by the candidates and disclosed
by way of note. However, in answers to Questions in Division A,
working notes are not required.

PART I – Case Scenario based MCQs (18 Marks)

Write the most appropriate answer to each of the following multiple

choice questions by choosing one of the four options given. All
questions are compulsory.

1. 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:

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MFX MFY Mix

MFX 4.800 4.300 3.370

MFY 4.300 4.250 2.800

Mix 3.370 2.800 3.100

I. Variance of Market

(A) 4.800

(B) 3.370

(C) 4.250

(D) 3.100

II. Portfolio standard Deviation

(A) 2.115

(B) 3.100

(C) 2.800

(D) 1.725

III. Systematic Risk of Portfolio

(A) 3.663

(B) 2.528

(C) 2.800

(D) 3.181

IV. Based on standard deviation, the optimum investment for Mr A

would be……

(A) Portfolio

(B) All investment in MFX

(C) All investment in MFY

(D) Both MFY and mix are indifference

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V. Standard Deviation of MFX

(A) 2.191

(B) 2.071

(C) 1.761

(D) 1.433

VI. Portfolio Return would be

(A) 13.50%

(B) 14.60%

(C) 15.50%

(D) 18.60%

(6 × 2 = 12 Marks)

2.
Stock ER Beta Specific Risk TR
A 18% 1.2 5% ?
B 10% 0.5 4% ?
C ? 1.4 7% 22%

Assuming CAPM holding good.

I. Total Risk (SD) of Stock A

(A) 55.25

(B) 15.25

(C) 18.56

(D) 9.45

II. Total Risk (SD) of Stock B

(A) 8.45

(B) 76.24

(C) 8.45

(D) 14.35

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III. Expected Return of Stock C

(A) 15

(B) 14.90

(C) 8.45

(D) 20.28

(3 × 2 = 6 Marks)

PART II – Descriptive Questions (42 Marks)

Question No. 1 is compulsory.

Attempt any two questions out of the remaining three questions.

Question – 01

(a) Europium Ltd has been specially formed to undertake two Investment
Opportunities. The Risk and Return characteristics of the two projects
are shown below:

Particulars A B
Expected Return 12% 20%
Risk 3% 7%

Europium plans to Invest 80% of its available funds in Project A and

20% in Project B. The directors believe that the correlation co-efficient
between the returns of the Projects is +1.0.

Required –

1. Calculate the Returns from the proposed Portfolio of Projects A

and B.

2. Calculate the Risk of the Portfolio,

3. Suppose the correlation co-efficient between A and B was -1,

how should the Company Invest its Funds in order to obtain
zero Risk Portfolio.

(6 Marks)

(b) An investor holds two equity shares A and B in equal proportion with
the following risk and return characteristics:

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e (RA) 28%
σA 30%
e (RB) 24%
σB 26%

The returns of these securities have a positive correlation of 0.7. You

are required to calculate the portfolio return and risk. Further,
suppose that the investor wants to reduce the portfolio risk (σp) to 17
per cent. How much should the correlation coefficient be to bring the
portfolio risk to the desired level?

(4 Marks)

(c) The following information is available in respect of security A:

Equilibrium return 12%

Market return 12%

6% Treasury bond trading at ₹ 120

Co-variance of market return and security return 196%

Coefficient of correlation 0.80

You are required to determine the standard deviation of:

(i) Market return

(ii) Security return

(4 Marks)

Question – 02

(a) Shiva has a fund of ₹ 5 lacs which he wants to invest in share market
with rebalancing target after every 15 days to start with for a period of
one month from now. The present NIFTY is 17025. The minimum
NIFTY within a month can at most be 15,322.50. He wants to know as
to how he should rebalance his portfolio under the following
situations, according to the theory of Constant Proportion Portfolio
Insurance Policy, using "2" as the multiplier:

(1) Immediately to start with.

(2) 15 days later-being the 1st day of rebalancing if NIFTY falls to

16,321.89.

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(3) 15 days further from the above date if the NIFTY touches
17,512.14. Note: Assume that the value of his equity component
will change in tandem with that of the NIFTY.

(8 Marks)

(b) The following are estimates for the stocks.

Stocks Expected Return Beta Unsystematic

(%) Risk (%)
X 13 0.8 30
Y 18 1.2 40

The market index has a standard deviation of 22% and the risk free
rate is 8%

(a) What are the standard deviation of stocks A and B?

(b) Suppose that we were to construct a portfolio with proportion:

Stock X: 0.30; stock Y: 0.45 and T-Bill 0.25, compute the
expected return, standard deviation, beta and nonsystematic
risk of the portfolio.

(6 Marks)

Question – 03

(a) An investor has the following constituent holdings in his portfolio:

Security No. of shares Price per share (₹) Share 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.

(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?

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(8 Marks)

(b) Following is the data regarding six securities:

U V W X Y Z
Return (%) 10 10 15 5 11 10
Risk (%) (Standard Deviation) 5 6 13 5 6 7

(i) Recommend at least three securities which shall be selected among

the six securities mentioned above.

(ii) Assuming perfect correlation, evaluate whether it is preferable to

invest 80% in security U and 20% in security W or to invest 100% in
Y.

(6 Marks)

Question – 04

(a) The expected returns on two stocks for particular market returns are
given is the following table:

Market Return Stock A Stock B

7% 4% 9%
25% 40% 18%

You are required to calculate:

(i) The beta of the two stocks.

(ii) The expected return of each stock, if the market return is 60%
likely to be 7% and 40% likely to be 25%.

(iii) The security market line (SML), if risk free rate is 7.5% and
market return is with likelihood as per (ii).

(iv) The Alpha of the two stocks.

(6 Marks)

(b) Calculate the Systematic and Unsystematic Risk for the Companies
Stock. If equal amount of money is allocated for the stocks what
would

Company A Company B Sensex

Average Return 0.15 0.25 0.66
Variance of Return 6.30 5.86 2.25

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Beta 0.71 0.685

Co efficient determination 0.18

(4Marks)

(c) The estimated factor sensitivities of ITC to the five macroeconomic

factors are given below along with market risk premium to each of
these factors.

Factor Sensitivity Risk Premium (%)

Default risk 0.25 2.60
Inflation risk 0.32 -0.70
Business cycle risk 1.60 1.80
Time horizon risk 0.40 -0.75
Market-timing risk 0.90 3.17

Use the APT model to calculate the required rate of return for ITC
assuming that treasury bill rate is 4.5%.

(4 Marks)

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