Description

SESSION JUL – AUG 2024
PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER III
COURSE CODE & NAME DFIN301 SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT

Assignment Set – 1

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 Global Energy Corp., we use the formula:
E(R) = Σ(Pi × Ri)
Where:
 Pi is the probability of each state.
for portfolio optimization and risk management strategies in security analysis.
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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:
P =
nΣ
t = 1
C
(1 + r)t +
F
(1 + r)n
Where:
 P is the bond price.
 C is the annual coupon payment (F × Coupon Rate).
 F is the face value of the bond.
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?
b. 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 (β), the risk-free rate, and the market risk premium. The formula is:
E(R) = Rf + β × (Rm ― Rf)
Where:
 E(R) is the expected return.
 Rf is the risk-free rate (6%).
 β is the stock’s beta (1.0).
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 enable investors to invest in foreign companies without the
(b) Calculating Portfolio Return
Portfolio return is the weighted average return of the assets in a portfolio, determined by the
proportion of investment in each asset and its respective return. Nancy’s portfolio consists of
Stock X (60% weight, 15% return) and Stock Y (40% weight, 10% return).
Formula for Portfolio Return:
Rp = (wX × RX) + (wY × RY)
5a. Describe the meaning and benefits of mutual funds.
b. Discuss the role of arbitrage in the Arbitrage Pricing Theory (APT).
Ans 5:
a. 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-depth knowledge of the financial markets.
b. Arbitrage in Arbitrage Pricing Theory (APT)
Arbitrage Pricing Theory (APT) is an alternative to the Capital Asset Pricing Model (CAPM)
that explains the relationship between the expected return of an asset and its risk factors. APT is
based on the principle of arbitrage, where investors exploit price discrepancies in the market to
earn risk-free profits. The theory assumes that an asset’s return is influenced by multiple
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
(b) Common Mistakes in Investment Management
Investment management involves making decisions about asset allocation, security selection, and
portfolio monitoring. However, investors often make mistakes that undermine their financial
goals.
1. Lack of Diversification: Failing to diversify investments across asset classes, industries, or
regions increases exposure to specific risks. Diversification spreads risk and minimizes the
impact of poor performance in one area.
2. Emotional Decision-Making: Investors often let emotions like fear or greed drive decisions,