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Description
SESSION |
JUL – AUG 2024 |
PROGRAM |
MASTER OF BUSINESS ADMINISTRATION (MBA) |
SEMESTER |
III |
COURSE CODE & NAME |
DFIN301 SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT |
|
|
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Assignment Set – 1
- Global Energy Corp. provides the following expected returns and probabilities for five states of the economy:
- State P: Probability = 0.15, Return = 5%
- State Q: Probability = 0.25, Return = 15%
- State R: Probability = 0.3, Return = 10%
- State S: Probability = 0.2, Return = 8%
- State T: Probability = 0.1, Return = 20%
Calculate the average expected return and risk.
Ans1.
Calculating Average Expected Return and Risk
Understanding Average Expected Return and Risk
The average expected return and risk are fundamental metrics in portfolio management, aiding in assessing the potential performance and volatility of investments. The expected return represents the weighted average of possible returns based on their probabilities, while risk (standard deviation) quantifies the dispersion of returns around the average.
Expected Return Calculation
To calculate the expected return for
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2a. Consider a bond with a face value of €500, a 9% annual coupon rate, and 8 years to maturity. If the annual interest rate is 8%, calculate the bond’s current value.
- b) Discuss the concept of Moving Average Convergence Divergence (MACD)
Ans2:
Calculating Bond Value and Discussing MACD
(a) Bond Valuation
Bond valuation is essential for determining the fair price of a bond based on its future cash flows, which consist of periodic coupon payments and the face value at maturity. The present value (PV) of these cash flows is calculated using the formula:
Where:
- is the bond price.
- is the annual coupon
3a. Assuming a risk-free rate of 6% and an expected market risk premium of 9%, what is the expected return on a stock with a beta of 1.0?
- Discuss the principles and implications of the Efficient Market Hypothesis.
Ans 3:
Expected Return and Efficient Market Hypothesis
(a) Expected Return Using CAPM
The Capital Asset Pricing Model (CAPM) calculates the expected return of an asset based on its systematic risk (), the risk-free rate, and the market risk premium. The formula is:
Where:
- is the expected return.
- is the risk-free rate (
Assignment Set – 2
4a. Analyze the role of Global Depository Receipts (GDRs) as a global investment avenue.
- b) Nancy invested 60% of her portfolio in Stock X, which has a return of 15%, and the remaining 40% in Stock Y, which has a return of 10%. Calculate the expected return of Nancy’s portfolio.
Ans 4:
(a) Role of Global Depository Receipts (GDRs) as a Global Investment Avenue
Global Depository Receipts (GDRs) are financial instruments that allow companies to raise capital internationally by issuing shares in foreign markets. These receipts are issued by international banks and represent ownership of a company’s shares, which are traded on stock exchanges outside the issuer’s home country. GDRs bridge the gap between global investors and domestic companies, fostering cross-border investments.
Key Features of GDRs:
Cross-Border Accessibility: GDRs
5a. Describe the meaning and benefits of mutual funds.
- Discuss the role of arbitrage in the Arbitrage Pricing Theory (APT).
Ans 5:
- Mutual Funds: Meaning and Benefits
Mutual funds are professionally managed investment vehicles that pool money from multiple investors to purchase a diversified portfolio of securities, such as stocks, bonds, or other assets. Managed by fund managers, mutual funds aim to achieve specific financial objectives, such as growth, income, or capital preservation, based on the fund’s investment strategy. They are an attractive option for individual investors seeking exposure to a broad range of investments without requiring in-
6a) Distinguish between fundamental analysis and technical analysis.
- b) What are the common mistakes made in investment management?
Ans 6:
Fundamental vs. Technical Analysis and Common Investment Mistakes
(a) Fundamental Analysis vs. Technical Analysis
Fundamental and technical analysis are two primary approaches to evaluating securities and making investment decisions. While both methods aim to guide investors in maximizing returns and minimizing risks, they differ significantly in their focus, methodology, and application.
Fundamental Analysis: Fundamental analysis involves assessing a company’s intrinsic value by examining its financial statements, economic conditions, industry trends, and management effectiveness. It seeks to determine