Hall Ticket No Question Paper Code: CMB404
INSTITUTE OF AERONAUTICAL ENGINEERING
(Autonomous)
MBA III Semester End Examinations (Regular) November, 2018
Regulation: IARE-R16
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
Time: 3 Hours Max Marks: 70
Answer ONE Question from each Unit
All Questions Carry Equal Marks
All parts of the question must be answered in one place only
UNIT I
1. Define investment. Explain the attributes that one should consider while evaluating an investment.

Would you expect that fundamental security analysis make security markets more efficient? Why?

2. Define a primary and secondary market for securities and explain how primary market is dependent
on secondary market.
Explain Dow Theory and its three components. Which component is most important? What is
the reason for an intermediate reversal?
UNIT II
3. Why should the expected return for a security be directly related to the security's covariance
with the market portfolio?
Your rate of return expectations for the common stock of Gray Disc Company during the next
year are given in Table 1.
i. Compute the expected return on this investment, the variance of this return, and the standard
deviation.
ii. Under what conditions can the standard deviation be used to measure the relative risk of two
investments?
iii. Under what conditions the coefficient of variation must be used to measure the relative risk
of two investments?
Table 1
Possible Rate of Return Probability
-0.10 0.25
0.00 0.15
0.10 0.35
0.25 0.25
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4. How is beta derived from a security's market model? Why high beta securities are termed
"aggressive"? Why are low beta securities termed "defensive"?
Based on a one-factor model, assume that the risk-free rate is and the expected return on a
portfolio with unit sensitivity to the factor is 8.5%. consider a portfolio of two securities with
the following characteristics given in Table
Table 2
security Factor sensitivity Proportion
A 4.0 0.3
B 2.6 0.7
UNIT III
5. Explain why immunization permits a bond investor to be confident of meeting a given liability
on a predetermined future date.
You are considering investing in one of the following bonds in Table 3. Your income tax rate
is 30% and your capital gain tax is effectively 10%. Capital gains taxes are paid at the time of
maturity on the difference between the purchase price and par value. What is your post-tax yield
to maturity from these bonds?
Table 3
Coupon rate Maturity Price/Rs.100 par value
Bond A 12% 10 yrs Rs.70
Bond B 10% 6 yrs Rs.60
6. How is the price of a bond determined? Why is this process relatively straight forward for a
bond?
A Zero-coupon bond of Rs. 10,000 has a term to maturity of eight years and a market yield of
10 percent at the time of issue.
i. What is the issue price?
ii. What is the duration of the bond?
iii. What is the modified duration of the bond?
iv. What will be the percentage change in the price of the bond, if the yield declines by 0.5
percentage points (50 basis points)?
UNIT IV
7. Explain the option trading strategies in detail.
The commonwealth corporation's earnings and dividends have been growing at the rate of 12%
p.a. This growth rate is expected to continue for 4 years. After that the growth rate would fall to
for the next four years. Beyond that the growth rate is expected to be forever. If the last
dividend was Rs. 1.50 and the investor's required rate of return on the stock of commonwealth
is how much should be the market value per share of commonwealth corporation's equity
stock?
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8. A stock is currently selling for Rs. 60. The call option on the stock exercisable a year from now
at an exercise price of Rs.55 is currently selling for Rs. 15. The risk-free interest rate is 12%.
The stock can either rise or fall after a year. It can fall by 30%. By what percent can it rise?

Straddles have been described as "volatility plays". Explain what this means for both long and
short straddle positions. Given the fact that volatility is a primary factor in how options are
priced, under what conditions might an investor who believes that markets are efficient ever want
to create a straddle?
UNIT V
9. Should you care about how well mutual fund is diversified? Why or why not?
The AMC mutual fund has sold 1,50,000 shares to investors. Currently the fund has accrued
investment management fee obligations of Rs. 50,000. The fund's portfolio is shown in Tbale 4.
Calculate the fund's net asset value
Table 4
Stock Shares Price/share
A 50,000 10
B 20,000 7
C 35,000 30
D 10,000 100
10. There are literally hundreds of mutual funds available for purchase. Describe what criteria you
might use in selecting from among these many funds.
The following portfolios shown in Table 5 are being considered for investment. During the period
under consideration, RFR 0.07. Compute the Sharpe measure for each portfolio and the market
portfolio. Compute the Treynor measure for each portfolio and the market portfolio. Rank the
portfolios using each measure, explaining the cause for any differences you find in the rankings.

Table 5
Portfolio Return Beta p
P 0.15 1.0 0.05
Q 0.20 1.5 0.10
R 0.10 0.6 0.03
S 0.17 1.1 0.06
Market 0.13 1.0 0.04
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