What are the various performance measures used for a mutual fund

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following:

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

On what basis he should choose a mutual fund amongst others

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following:

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

  Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Why should Mr. Rajendra be investing through mutual fund

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following:

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Mr. Rajendra Kumar has been a investing in the stock market purely based on tips

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following:

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Following information regarding the holding period of the stock A is available

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Capital Market and Portfolio Management

13 Sep

Capital Market and Portfolio Management

Q.1 Following information regarding the holding period of the stock A, is available. Based on the data provided in the Table 1 below, calculate and mention the following

i. Return on Investment (ROI) and its Formulae

ii. Steps to calculate ROI

iii. Net Returns from investment (in Rs)

Table 1

  Stock A
Event Date Value (In Rs.)
Stock Purchased 31 March 2012 750.60
Dividend received 31 March 2013 9.00
Dividend received 31 March 2014 9.50
Dividend received 31 March 2015 10.00
Dividend received 31 March 2016 10.50
Dividend received 31 March 2017 11.00
Stock Sold 31 March 2017 1,320.90

 

Q.2 Mr. Ravindra Kumar chooses to invest total amount of Rs. 1,00,000/- in equal proportion in both Stock A and B (data given in Table 2). The correlation coefficient between the stock A and stock B is 0.4. Demonstrate that he has taken a better investment decision as compared to decision of investing all the amount only in stock A and stock B.

Hint: You have to demonstrate the impact of diversification on the portfolio returns and variance in case of two assets

Table 2

Stock A Stock B
Probability Return Probability Return
5% -20% 10% -25%
20% 0% 20% 0%
25% 10% 25% 20%
30% 20% 20% 30%
20% 25% 25% 40%

 

Q.3 Mr. Rajendra Kumar has been a investing in the stock market purely based on tips received from his stock-broker friend, Mr. Ramesh Chandra, and has been generating decent returns till now. Given the low size of his investible surplus, he has not been able to take advantage of all the tips that he received given by Mr. Ramesh, say during a year. As a result his investment has been restricted to investing mostly in a single company through a particular year. So much so that sometimes he has stayed invested in a single scrip even for more than two years. While his returns may have been sometimes good and sometimes great but he has not been overly worried about their levels or adequacy, as he has never lost any money at overall investment level. Actually the yearly returns from his stock market investments have always been higher than the bank fixed deposit returns, where he parks most of his savings. Hence, in nutshell, for him the investment strategy seems to be working for him and he is happy. Thus he never saw any reason to change his investment pattern or strategy. Moreover he continues to significantly rely on the tips received through Mr. Ramesh. Because of Mr. Ramesh’s good track record in suggesting good scrips for investment and the trust Mr. Rajendra has in Ramesh’s integrity, he has never acted on any of the tip related to investments received from any other person.

Last week Mr. Ramesh told him that he plans to retire from his stock broking business. He planned to handover the business over the next six months, to his partner and relocate with his wife, permanently to US to stay with his son and his family. He added that while Mr. Rajendra can continue to avail of the broking services through the broking firm to be run by his partner, he will not be able to provide the good and timely tips that Mr. Rajendra has been solely relying on for investing his money. He also suggested Mr. Rajendra to invest through mutual funds.

Mr. Rajendra got worried and told Mr. Ramesh that he is not convinced that why he should be investing through a mutual fund. Moreover, even if he agrees to invest through the same, how would he ever choose the one that he should give his money to invest, as there are so many of them with each one claiming their performance to be better than the other?

Understanding Mr. Rajendra’s predicament and anxiety, Mr. Ramesh gave reference of one of his professional contact (You), working as a fund manager, in a reputed mutual fund company. He asked Mr. Rajendra to meet you and seek answers to his questions related to mutual funds. Mr. Rajendra has contacted you and sought time to meet with you and discuss the following:

a) Why should Mr. Rajendra be investing through mutual fund?

b) On what basis he should choose a mutual fund amongst others? What are the various performance measures used for a mutual fund?

Describe in detail your answers to Mr. Rajendra’s queries.

Capital Market and Portfolio Management

27 Jun

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?