Question # 1 (Marks A portfolio of Rs. 1,000 entitles the investor to Receive dividend of Rs. 150 at the end of year 2011. Expected future sale price at the end of year is Rs. 998. If the investor plans to sell the stock in the market after holding it for one year, what will be the holding period return for one year on this portfolio(in terms of percentage)?
Holding 1year return= yearly coupon payment / price paid + change in
price of the bond / price of bond
=$150 / $1000 + ($998-$1000) / $100
=.15+ (-.002)
=0.148=14.8 %
Holding period return=14.8%
Question # 2 (Marks Find the variance and standard deviation for the stock of a newly listed public limited company purchased at Rs. 1,000. While making this investment there are 50% chances that the price of investment will fall to Rs. 900 and 50% chances are that it will rise to Rs. 1200 after six months.
Following step involve calculating Variance
1. Expected Value
2. Subtract expected Value form each possible pay offs
3. Square each of results
4. Multiply each result time ties probability and adds up the result
First we calculate the Expected value
(900 * 1/2) + (1200 * 1/2) = 1050
Subtract expected value from each possible pay off
900-1050 = -150
1200-1050 = 150
Square each of result
(-150)2 = 22500
(150)2 = 22500
Multiply each result time its probability and adds up the result
½ * 22500 + ½ * 22500
22500
Variance = 22,500
Standard deviation=square rout of variance
S.D=150
Question # 3 (Marks 4) In stock market XYZ company is offering 16% annual return on bonds, however, Treasury Bills are providing 7% annual return. Calculate the risk premium if an investor invest in XYZ company.
Risk premium = Risky return – Risk free return
Risk premium= 16% – 7%
Risk premium= 9%
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