NMIMS - Capital Market and Portfolio Management

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NMIMS

Master of Business Administration - MBA Semester 3

Capital Market and Portfolio Management

Q1. Calculate the standard deviation and return of portfolio consisting of 60% of Security A and 40% of Security B.

Year	Security A return %	Security B return
2015	10	18
2016	12	15
2017	9	11
2018	10	9
2019	5	7

Answer. Expected return of Portfolio (Ep): W1E1 + W3E3 + ………….WnEn

Q2. Calculate the return as per CAPM for each of the company’s stock, identify whether they are underpriced, overpriced or correctly priced and advise accordingly. Returns of T- Bill are 9%.

Stock	Expected Return %	Beta
Titan	24	1.8
Nestle	30	1.5
Eicher Motors	12	1.2
HDFC	25.9	1.3
Sensex	22

Answer. Calculation of CAPM

CAPM = Rf + β(Rm – Rf)

Where,

Rf = Risk free rate

β = Beta

Rm = Market rate of return

Q3. An investor was tracking SBI and HDFC mutual funds whose return and beta are as given below:

	Observed Return %	Beta
Portfolio SBI	18	0.75
Portfolio HDFC	25	1.25

Return on the market portfolio is 11%, while the risk-free return is 8%. Assume standard Deviation of the market to be 7%.

a. Compute the Jensen index for each of the funds and comment which one is better.

b. Compute the Treynor index for each of the funds and comment which one is better.

Answer. Jensen’s Alpha

Jensen’s Alpha = Portfolio return – Risk free rate - [Beta of the portfolio * (Expected market return – Risk free rate)]

Portfolio SBI	Portfolio HDFC
= 18 – 8 – [0.75(11-8)] = 10 – [0.75(3)] = 10 – 2.25	= 25 – 8 – [1.25(11-8)] = 17 – [1.25(3)] = 17 – 3.75
= 7.75	= 13.25

Conclusion: A positive alpha means the fund has outperformed its benchmark index.

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