Assignment Assessment Report

Campus: Level: Module Name: Students Name: e-mail id & Mob No Stream Pune PCL - II - FIN Financial Services Vitthal Gite Vitthal.gite@gmail.com BUSINESS Year/semester Assignment Type Assessors Name Reqd Submission Date Actual Submission Date Submitted to : 2010 - 2012 A

Certificate by the Student: Plagiarism is a serious College offence. I certify that this is my own work. I have referenced all relevant materials. (Stu dents Name/Signatures) Expected Outcomes General Parameters Clarity Analytical Thinking Research approach and innovative Assessment Criteria Grade based D,M,P,R system on k Feedbac

Formatting & PresentationSubject Specific Parameters

Clear understanding of the concept Ability to analyze the problem realistically and take required actions Research carried out to reach the outcome and innovative methods used Concise & clear thinking along with presentation Ability to use the correct formula and take required actions. No. of exact answers established.

Correct Followed Alignment Outcome

Methodology

to

Desired

Grades P M D

Grade Descriptors A Pass grade is achieved by meeting all the requirements defined. Identify & apply strategies/techniques to find appropriate solutions Demonstrate convergent, lateral and creative thinking.

Achieved Yes/No (Y / N)

Assignment Grading Summary (To be filled by the Assessor) OVERALL ASSESSMENT GRADE: TUTORS COMMENTS ON ASSIGNMENT: SUGGESTED MAKE UP PLAN (applicable in case student is asked to re-do the assignment) REVISED ASSESSMENT GRADE TUTORS COMMENT ON REVISED WORK (IF ANY) Date: Assessors Name / Signatures:

Assignment A Questions
Q1. LG, Appliances Company has the following dividend per share and the market price per share for the period 1995-2000: Year 1995 1996 1997 1998 1999 2000 Dividend per share 1.53 1.53 1.53 2.00 2.00 3.00 Market price 31.25 20.75 30.88 67.00 100.00 154.00

Calculate the annual rates of return for last 5 years. Also calculate the risk of share. Decision criteria for selecting one out of various seurities (a) if expected returns from various securities are same but their standard deviations are different then security with lower standard deviation should be performed.

(b) if standard deviations from various securities are same but their expected returns are different then security with higher expected returns should be preferred. (c) if expected returns and standard deviations of various securities are different then security with lower coefficient of variation should be preferred.

Answer :(i) Rate of return (%) = year end price + dividend year beginning price/year beginning price * 100 year 1996 Yr. end price 20.75 dividend 1.53 Yr. beg. Price 31.25 Rate of return 20.75 + 1.53 - 31.25 x 100 = 28.70% 31.25

1997

30.88

1.53

20.75

30.88 + 1.53 - 20.75 x 100 = 56.19% 20.75

1998

67.00

2.00

30.88

67.00 + 2.00 - 30.88 x 100 = 123.45% 30.88

1999

100.00

2.00

67

100 + 12 67 x 100 = 52.24% 67

2000

154.00

3.00

100

154 + 3 100 x 100 = 57% 100

( ii )

Year 1996 1997 1998 1999 2000

R -28.70 56.19 123.45 52.24 57

(R-R) -80.74 4.15 71.41 0.20 4.96

(R-R)2 6518.95 17.22 5099.39 0.04 24.60

260.18

11660.20

Average return Average variance Standard Deviation

= 260.18/5 = 11660.20/5 = 2332.04

= 52.04 =2332.40 = 48.29

Q2. The historical rates of return of two securities over the past ten years are given. Calculate the Covariance coefficient of the two securities:

Yea rs 1 2 3 4 5 6 7 8 9 10

Security 1 (return percent) 12 8 7 14 16 15 18 20 16 22

Security 2 (return percent) 20 22 24 18 15 20 24 25 22 20

Answer :-

Year 1 2 3 4 5 6 7 8 9 10

R1 12 8 7 14 16 15 18 20 16 22 148

R2 20 22 24 18 15 20 24 25 22 20 210

R1 R1 -2.8 -6.8 -7.8 -0.8 1.2 0.2 3.2 5.2 1.2 7.2

R2 R2 -1 1 3 -3 -6 -1 3 4 1 -1

(R1 R1)2 =7.84 46.24 60.84 0.64 1.44 0.04 10.24 27.04 1.44 51.84 207.60

(R2 R2)
2

(R1 R1) (R2 R2) 2.8 -6.8 -23.4 2.4 -7.2 -0.2 9.6 20.8 1.2 -7.2 -8.00

1 1 9 9 36 1 9 36 1 1 184

R1 = R1/ No. of years = 148/10 = 14.8 R2 = R2/ No. of years = 210/10 = 21 Variance R1 = 207.60/9 = 23.07 Std. Dev1 = 23.07 = 4.803 Variance R2 = 84/9 = 9.33 Std. Dev2 = 9.33 = 3.055 Co-variance S1S2 = -8/9 = -0.889 Co-relation S1S2 = Co-variance S1S2/ ( std devS1) (std dev S2) = -0.889/4.803*3.055 = -0.061 = - 0.061

Q3. An investor wants to build a portfolio with the following four stocks. With the given details, find ut his portfolio return and portfolio variance. The investment is equally spread over the four stocks. Market return = 10, Market variance= 27 Securit y Residual value Alpha Beta

A B C D

45.00 130.00 199.00 53.00

0.50 2.50 1.50 2.50

0.90 1.30 1.40 2.10

Answer :(i) All securities are invested in equal value (0.25) weight for each security Overall Alpha = 0.50 + 2.50 + 1.50 + 2.50/4 = 1.75 Overall Beta = 0.90 + 1.30 +1.40 + 2.10/ = 1.425

Overall return portfolio = alpha value + beta portfolio * RM (ii) Portfolio Variance = (beta portfolio) 2 * Variance market + (wages)2 * unsystematic risk = (1.425) 2 * 27 + (0.25) 2 * [45+130+199+53] = 54.53 (approx) + 26.69 = 81.52(%)

Q4. An investor is considering the purchase of the following Bond: Face value Coupon rate Maturity Rs. 100 11% 3 years

(i) If he wants a yield of 13% what is the maximum price he should be ready to pay for? (ii) If the Bonds is seliing fir Rs. 97.60, what would be his yield?

Answer :-

Current price = (Annual interest * Sun of p.v.@ 13% for 3year )+(R.V * P.V) = 11*( 100/113+100*100/113*113+100*100*100/113*113*113 ) + 100 * ( 100*100*100 / 113*113*113 )

= 25.971 + 100 * 1000000 / 1442897 = 25.971 + 69.31 = 95.28 YTM = 11 + ( 100 97.6 )/3 * 100 = 100 + 97.6 / 2 YTM = 12% approx Using Discount rate = 12% P.V of inflows = 11* 2.4 + 100 * 0.712 = 26.4 + 71.2 = 97.60

Q5. Sarman Ltd. has issued convertible debentures, with coupon rate 12%. Each debenture has an option to convert to 20 equity shares at any time until date of maturity. Debentures will be redeemed at Rs.100 on maturity of 5 years. An investor generally requires a rate of return of 8% p.a. on a 5 year security. As an investor when will you exercise conversion for given market prices of the equity share of (i) Rs. 4, (ii) Rs. 5 and (iii)Rs. 6 Cumulative PV factor for 8% for 5 years PV factor for 8% for year 5 : 3.993 : 0.681

Answer :1 ) Bond is redeemable :

Annual interest INR 90 Required return ( Current yield ) = 10%

Annual interest Current Value of a Bond = -----------------------------------% required return = 90 / 10% = 900

2 ) If the required return is 5% :

90 Current Value = --------------- = 11.25 81 If required return is 12% than 90 Current Value = ---------------- = 750 12% = 750