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Investment Analysis and Portfolio Management
June 2024 Examination
1. When it comes to investment, mutual fund plays a very important role. The money
collected in mutual fund scheme is invested by professional fund managers in stocks and
bonds etc. It is an indirect investment in stock market. MF have different players who
play a different role explain it in your own words. (10 Marks)
Ans 1.
Introduction:
Mutual funds stand as a cornerstone in the realm of investments, providing individuals with a
vehicle to indirectly participate in diverse financial markets such as stocks and bonds.
Managed by professional fund managers, these pooled investments offer investors
opportunities for diversification and access to expertly managed portfolios. Within the mutual
fund landscape, various stakeholders fulfill crucial roles, each contributing to the overall
efficiency and integrity of the industry. Understanding the functions and interactions of these
players is paramount for investors seeking to navigate the complexities of mutual fund
investments and construct portfolios aligned with their financial goals and risk appetites. In
this discussion, we will delve into the roles played by different actors within the mutual fund
ecosystem, shedding light on their contributions and interactions, ultimately providing a
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2. Arbitrage is a process in which investors simultaneously buy & sell of an asset. While
getting into an arbitrage trade, the quantity of the underlying asset bought and sold
should be the same. He makes profit without any risk. Explain how Arbitrage Pricing
Theory works. (10 Marks)
Ans 2.
Introduction:
Arbitrage Pricing Theory (APT) is a significant financial model used to estimate the expected
return of an asset. It operates on the premise that in an efficient market, any deviations from
the expected return should be quickly eliminated by investors seeking arbitrage opportunities.
Unlike the Capital Asset Pricing Model (CAPM), which relies solely on the relationship
between an asset’s return and the market return, APT considers multiple factors that influence
asset prices.
APT assumes that investors are rational and risk-averse, seeking to maximize their returns
while minimizing risk. It suggests that assets’ expected returns are determined by various
3a. Suppose there is an investment in two securities stocks & bonds. Expected return
from bond is 8% & from stocks is 10%. Investment is divided in the proportion of 70%
in stock & 30% in bond. Calculate total expected return or portfolio return. (5 Marks)
Ans 3a.
Introduction:
Portfolio management involves the allocation of investments across different assets to
optimize returns while managing risk. In this scenario, we have an investment portfolio
consisting of two securities: stocks and bonds. Understanding how to calculate the total
expected return of the portfolio is crucial for effective portfolio management.
Concept and application
To calculate the total expected return of the portfolio, we use a weighted average approach
3b. Risk premium is a kind of compensation for investors who bears the extra risk
compared to that of risk free asset in a given investment. If expected return on a
security is 20% risk free rate of return is 8% calculate risk premium. (5 Marks)
Ans 3b.
Introduction:
Understanding the concept of risk premium is crucial in finance as it helps investors evaluate
the additional return they expect to receive for taking on additional risk compared to a riskfree
investment. In this scenario, we have a security with an expected return of 20% and a
risk-free rate of return of 8%. Calculating the risk premium provides insight into the