Friday 4 August 2017

Mr Saran Kumar, aged 35, is employed with Mumbai University as a Lectur...









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Capital Market and Portfolio Management

1. Mr. Shabd Kumar has to make a choice of investment between the two stocks, namely A and B. The possible returns with the associated probabilities of their occurrence for both stock A and B have been provided in the Table given below. Based on the data provided in Table which stock he should choose to invest in?

Stock
A

Stock
B

Probability

Return

Probability

Return

10%

-10%

35%

15%

15%

0%

25%

10%

20%

5%

20%

20%

25%

25%

10%

-10%

30%

15%

10%

25%


2. Mr. Saran Kumar, aged 35, is employed with Mumbai University as a Lecturer in the English Department. He is the sole earning member of his family. He stays in a joint family with his parents, his wife and two children aged 5 years and 2 years. He has been deploying his savings in primarily in bank fixed deposits and other tax savings instruments such as Public Provident Fund (PPF) etc. However, he is not sure that whether his savings would be adequate to meet future financial needs of his family or not. His friends have been suggesting him to invest in stock market and have been giving him tips also for specific stocks. Mr. Saran is reluctant to follow his friends’ advice as his uncle had lost significant amount of money in the stock market around 10 years back. Not only his uncle had to sell off his house and his wife’s jewelry to compensate for the loss incurred but the whole family had also faced loss of reputation with relatives and friends. Torn between the choice of losing money in the stock market or ending up with insufficient savings to meet his future needs and exigencies, he decides to seek professional help to solve his problem. He approaches his bank manager for his advice. The bank manager directs him to you for further discussions. You are employed in the Wealth Management Department of the bank. The department’ role is to advise the bank’s client and offer tailor -made solutions with respect to the client’s investment needs.
Discuss how should I go about investing my savings? Is there a way that I make enough money without losing may savings? If yes, how? Provide your rationale for the same.

3. Historical price of Stock A and the closing level of a Market Index is provided in the Table given below.

As on December 31

Price of Stock A

Closing level of the market index

2000

23

1264

2001

22

1059

2002

40

1094

2003

114

1880

2004

128

2081

2005

139

2837

2006

113

3966

2007

199

6139

2008

106

2959

2009

153

5201

2010

171

6135

2011

127

4624

2012

135

5905

2013

107

6304

2014

166

8283

2015

214

7946

2016

325

8186

a) Calculate Beta of the stock A.
b) The Table given below gives the expected market index values for 31 December 2017 and the associated probabilities of occurrence for the same.


Probability

Closing level of the market index

10%

7500

15%

8000

20%

8500

25%

10000

30%

9000

If the 10 Year Government of India Bond (G-Sec) yield is 7%. What is the expected prices of the stock A as on 31 December 2017?


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