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Assignment Applicable for April 2018 Examination
Capital Market and Portfolio Management
Q.1 Mr. Mahendra Kumar
would like to invest in mutual funds. He has been suggested by his friend to
choose a fund from any of the three mutual funds, as given in the table below. Mr.
Mahendra learns that he can use Sharpe’s ratio, Treynor’s ratio and Jensen’s
Alpha to measure the performance of a mutual fund. Help Mr. Mahendra to rank
the three funds on each of the measures.
Fund A Fund B Fund C
Portfolio Return 12% 15%
18%
Standard Deviation 0.15
0.25 0.4
Beta of the portfolio 0.6
0.8 1.4
Return from the market 12%
Risk free rate of return
6%
Q.2 Mr. Virendra Kumar
invests Rs. 10,000 in a stock that gives him dividend of Rs. 100, Rs. 200 and
Rs. 300 at the end of the first, second and third year respectively. He sells
his holdings at Rs. 13,500 at the end of the third year. How much returns did
he earn, as per Money weighted rate of return method? Further, instructions-
students can directly calculate the IRR either using in-built formula in MS
Excel or create calculations of Present Values (PVs) in MS Excel. Find sum of
PVs and set the sum to zero by changing the value of the discounting rate. (you
may use Goal Seek function of MS Excel to accurately calculate the IRR). The
rate at which the sum is zero is IRR. (10 Marks)
Q.3 Mr. Dhirendra Kumar is
a 24 years old professional, working as a programmer for the largest software
company in India. He has earned his bachelor degree of engineering in Computer
Science from IIT Mumbai and has been working for the company for last three years.
He belongs to Pathankot and his parents live there. For last three years, he
has been staying in Bengaluru along with his other colleagues in a rented
accommodation. He plans to get married not before the age of 28 and would like
to have his own house before he gets married. His father is working currently
at Pathankot and is due to retire in another ten years. He plans to convince to
his parents to shift to Bengaluru from Pathankot to stay with him post his
father’s retirement. Mr. Dhirendra is the star performer of his company. He
currently enjoys a package of Rs. 18 lakhs per annum. After accounting for his
expenditure, he has been able to save close to Rs. 30 lakhs over the last three
years. Till date he has been putting his savings in either Fixed deposits (FDs)
of his bank or some of the tax savings instruments such as Public Provident
Fund etc. However, now he would like to see his investments grow much faster so
that he can meet his marriage related expenditure four years later and also
make the down payment for his new house before marriage. He has been getting
various investment advices from different people telling him where to put his
money. His parents are advising him to buy some gold every year and put rest of
the money in FD. His boss tells him to buy the house right away, even though it
could be smaller than he would need later. According to his boss, value of his
small house would appreciate in four years and that the sale proceeds would
partially fund the new purchase. Some of his friends have told him that
investing in high safety corporate bonds will give him better returns than
putting money in PPF. Amongst all this, he is getting the constant feed through
newspapers of Sensex and Nifty scaling new heights every other day and a few
one-off stories of rags to riches. Mr. Dhirendra is thoroughly confused between
the choices and he now approaches a professional (you) to advice him on the
right investment strategy. Some questions that you need to answer for Mr.
Dhirendra:
a) Where should he put his
money, in gold, in FD, in PPF, in real estate, in corporate bonds or in stocks?
Or do you have some other strategy in mind? Provide your answer with the
rationale.
b) Should he invest in any
of these assets directly or should he choose the mutual fund route or create a
portfolio of mutual funds? How will choosing the mutual fund route (single
mutual fund or a portfolio of mutual funds) will prove beneficial to Mr.
Dhirendra? Explain your recommendation with reasons for the same.
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