Hall Ticket No Question Paper Code: CMB404
INSTITUTE OF AERONAUTICAL ENGINEERING
(Autonomous)
MBA III Semester End Examinations (Supplementary) May, 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. Explain the five fundamental factors that influence the risk premium of an investment.
What are the five steps in the investment process? What is the importance of each step to the
entire process?
2. In a world of efficient capital markets, what do you have to do to be a superior analyst? How
would you test whether an analyst was superior?
Explain the reason behind a support level and a resistance level.
UNIT II
3. The market model specifies a very simple relationship between a security's return and the return
on the market index. Explain some "real world" complexities that might diminish the predictive
power of the market model.
Dhananjay owns a portfolio of two securities with the expected returns standard deviations,
and weights as shown in Table 1. What correlation between the two securities produces the
maximum portfolio standard deviation? What correlation between the two securities produces
the minimum portfolio standard deviation? Show your calculations.
Table 1
Security Expected Return Standard deviation Weight
A 10 20 0.35
B 15 25 0.65
4. Why is the concept of arbitrage central to the asset pricing mechanism of APT?
Swathi owns a portfolio composed of three securities with the characteristics shown in Table 2.
If the standard deviation of the market index is what is the total risk of Swathi's portfolio?

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Table 2
Security Beta Standard Deviation Random error term Proportion
A 1.20 5 0.30
B 1.05 8 0.50
C 0.90 2 0.20
UNIT III
5. Identify the three most important determinants of the price of a bond. Describe the effect of
each.
Calculate the duration of an 8 percent, Rs. 1,000 par bond that matures in 3 years if the bond's
YTM is 10 per cent and interest is paid semiannually.
i. Calculate this bond's modified duration.
ii. Assuming the bond's YTM goes from 10 per cent to 9.5 per cent, calculate an estimate of the
price change.
6. What is meant by term structure of interest rates? Explain the theoretical basis of an upward
sloping yield curve.
Aishwarya's portfolio manager advises her to buy a 7 year, Rs. 5,000 face value bond that gives
8 per cent annual coupon payments. The appropriate discount rate is 9 per cent. The bond is
currently selling at Rs. 4,700. Should Aishwarya adhere to the manager's advice?
UNIT IV
7. Specify the major components for the calculation of economic value added and describe what a
positive EVA signifies.
The current dividend on an equity share of Pioneer Technologyis Rs.3.00. Pioneer is expected
to enjoy an above normal growth rate of 40% for 5 years. Thereafter, the growth rate will fall
and stabilize at 12%. Equity investors require a return of 15% from Pioneer Technology's stock.
What is the intrinsic value of the equity share of Pioneer Technology?
8. Define an interest rate swap and briefly describe the obligation of each party involved.
The following information is available for the equity stock of Prakash Limited. S0 Rs. 120, E
Rs. 110, r 0.12, 0.40. Calculate the price of a 6-month call option as per the Black-Scholes
model.
UNIT V
9. Explain the two major factors that a portfolio manager should consider before designing an
investment strategy. What types of decisions can a manager make to achieve these goals?
During the past three years, the Magnum Fund produced per share financial results as shown in
Table 3 . Calculate the annual returns on an investment in the Magnum Fund during this period.

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Table 3
Year 1 Year 2 Year 3
NAV at beginning of year 13.89 14.40 15.95
NAV at end of year 14.40 15.95 15.20
Income distribution 0.29 0.33 0.36
Capital gains distribution 0.12 0.25 0.05
10. As an investigator evaluating how well mutual fund managers select undervalued stocks or project
market returns, discuss whether net or gross returns are more relevant.
An Analyst want to evaluate Portfolio consisting entirely of equity stocks, using both the
Treynor and Sharpe measures of portfolio performance. The Table 4 provides the average annual
rate of return for portfolio the market portfolio (as measured by the BSE Sensex index), and
Treasury bills during the past eight years.
Calculate both the Treynor and the Sharpe measure for both portfolio X and the BSE Sensex.
Briefly explain whether portfolio X underperformed, equaled or outperformed the market. Explain
the reason for the conflicting results when using the Treynor measure versus the Sharpe
measure in the above calculation.
Table 4
Annual average rate of return Standard deviation of return Beta
Portfolio X 10 18 0.60
BSE Sensex 12 13 1.00
T-bills 6 NA NA