2022 April NMIMS assignments A portfolio is constructed wi

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Portfolio Management I

1. A portfolio is constructed with 40% in stock A, whose standard deviation is 20% and 60% in bonds, whose standard deviation is 12%. The correlation between the returns of the stock and the bond is 0.45. What will be the standard deviation of portfolio returns?

How would the standard deviation change, if the correlation coefficient would be -1 or 0 or 1? (10 Marks)

2. As a portfolio manager, you will be dealing with multiple kinds of clients, each of whom come with unique preferences. In this context, explain the different types of investors and their characteristics. Wherever possible, provide a real life example. (10 Marks)

3. An analyst collated the below data:

Stock
Current Market Price Expected Price after a year Expected Dividend during the year Beta
SAI
100
115 10 1.0

CICIC
10
12 0.50
0.75
FDHC
60
72 0
1.25
ICFD
1110
1190 50 1.10
MKB 457 501
10 1.65

The risk free rate can be taken as 5.5% and the market risk premium according literature can be taken as 10%.

a. Draw the Security Market Line & suggest an appropriate trading advise for each of the three stocks (5 Marks)

b. What are the assumptions made while applying CAPM (5 Marks)

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