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Subject: Portfolio Management

Instructions:

Answer all the questions.

Marks allotted 100. Each Question carries equal marks.

General Instructions:

The Student should submit this assignment in the handwritten form (not in the typed

format)

The Student should submit this assignment within the time specified by the exam dept

Each Question mentioned in this assignment should be answered within the word limit

specified

The student should only use the Rule sheet papers for answering the questions.

The student should attach this assignment paper with the answered papers.

Failure to comply with the above Five instructions would lead to rejection of assignment

Question.1

(a) Higher the Return, higher will be the Risk. Explain and discuss the various Risks in Portfolio

Planning.

(b) Explain in detail Hedge Funds with graph.

Question.2

(a) The beta coefficient of Target Ltd. is 1.4. The company has been maintaining 8% rate of

growth in dividends and earnings. The last dividend paid was Rs. 4 per share. Return on

government securities is 10%. Return on market portfolio is 15%. The current market price of

one share of Target ltd. is Rs. 36.

i. What will be the equilibrium price per share of Target Ltd.?

ii. Would you advise purchasing the share?

(b) Two companies are identical in all respects except capital structure. One company AB ltd.

has a debt equity ratio of 1:4 and its equity has a beta value of 1.1. The other company XY ltd.

has a debt equity ratio of 3:4. Income tax is 30%. Estimate beta of XY ltd.

Question.3

(a) Following information concerning the return on the shares of C Ltd. and on the market

portfolio.

Probability Return C Ltd. Return Market

0.2 15% 10%

0.4 14% 16%

0.4 26% 24%

Calculate the beta. Is C Ltd. efficiently priced according to the CAPM, if the current risk free

interest is 9%? Also calculate the systematic and unsystematic risk.

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(b) Explain in detail CAPM.

Question.4

Midland industries has three operating divisions

Division Percentage of firm value

Food 50

Chemicals 30

Machine tools 20

The director wishes to estimate divisional costs of capital and has identified three companies

carrying out similar activities:

Equity Beta Debt/Equity

Amalgamated Foods 0.9 0.40

Studge Chemicals 1.2 0.25

Chunky Tools 1.4 0.5

You are required to:

a) Estimate assets betas for each of Midland’s assumptions that debt can be regarded as risk

free.

b) If Midland’s debt to equity ratio is 0.25 what is its equity data?