Investment Management — DU B.Com. (Hons.) Previous Year Question Papers

(b) The returns on two securities, A and B, under different possible states of nature are given below: State of Nature Probabilities Return A (%) Return B (%) You are required to find: (i) Expected return on Security A and Security B. (ii) Risk (Standard Deviation) of Securities A and B. (iii) Covariance between returns of securities A and B (iv) Coefficient of correlation between the returns on securities A and B. (12) (c) Discuss the risk-return trade-off with the help of examples. (6) (d) An investor purchased an equity share at a price of R1,250. During the holding period, he received a dividend of 7110 and later sold the share for 21,380. The prevailing inflation rate was 6%, and the applicable tax rate on investment return was 10%. You are required to: (i) Calculate the Holding Period Return (HPR). (ii) Compute the return after tax. (iii) Determine the real rate of return after adjusting for inflation. Also, explain briefly the impact of taxation and inflation on investment returns. (12) Q. 2 (a) What is meant by credit rating? Explain its significance for investors and issuing companies. (6) (b) A company plans to issue a bond having face value of < 10,000, which will be redeemed over a period of 5 years in five equal annual instalments. The bond carries a coupon interest rate of 9%. Find the price at which the bond should be issued to the investors having an expected rate of return of 10%. (12) (c) Write a short note on deep discount bonds and floating rate bonds. (6) (d) A 12% bond with a face value of * 1,000 and maturity of 8 years is currently selling at 7950. The bond is callable after 5 years at Rs. 1,120. i) Calculate the YTC. ii) Should the investor buy this bond if the investor's required rate of return is 14%? (12) Q. 3 (a) Explain the Dow theory of technical analysis and illustrate it with a diagram. (6) (b) STR Ltd. is currently paying a dividend of * 3 per share and is expected to grow at 11% infinitely. What is the value of the share if i) Equity capitalisation rate is 15% ii) Equity capitalisation rate is 13% iii) Growth rate is 8% and equity capitalisation rate is 14% iv) Equity capitalisation rate is 12%, and growth rate is 6%. (12) (c) Explain the efficient market hypothesis and three forms of market efficiency. (6) (d) The dividend on equity shares of XYZ Co Ltd. is expected to grow at 12% per annum for the first 6 year and 10% thereafter indefinitely. The most recent dividend received is R 8 per share. If the required rate of return is 14%, determine the intrinsic value of the share. If the current market price is & 240, advise whether the investor should purchase the share? (12) Q.4. (a) Differentiate between the Security Market Line and the Capital Market Line. (6) (b) The expected returns and standard deviations of two securities, A and B, are given below: The correlation coefficient between the returns of Securities A and B is 0.8. An investor is considering the following alternative portfolios: