CAPM

1.Following information is avilable in respect of a security:

IRF= 8 %
Rm =16 %
= 0.7
i) Find out the expected return of the security, and
ii) If the other security has an expected return of 24 %.what must be its beta?comment on the
security.
2.. The risk free rate ,is 4 % and the market risk premium is 8.6 % and beta of the security is 1.3.
(i)What is the required return of the security under CAPM?
(ii)What would be the expected return if the beta were to double ?
3.The std.dev of market return is 0.4 and expected return is 14 %.The risk free rate of interest is 7
%.the co variance of returns for the market and returns on shares of Sam Ltd.over the same period
has been 20 %.calculate the cost of equity(expected rate of return) for sam Ltd.
4.(i)calculate the market sensitivity index and the expected return on the investment from the
following data:
Sstd. Dev. Of an asset
2.5 %
Market std. Dev
2.0 %
Risk-free rate of return
13.0 %
Expected rate of return
15.0 %
Correlation coefficient of portfolio with the market
0.8
(ii)What will be the expected return on the portfolio if portfolio beta is 0.5 and the risk-free return
is 10 %
5.The expected return on a market portfolio is 8 % and the risk premium is 5 %.Find out the
expected return of the portfolio if its historical beta is 0.85 or its expected beta is 1.05
6..Calculate the beta factor for the following investments.Is acceptance of the investmentment
worthwhile,baesd upon its level of risk?The Risk-Free rate may be taken as 6 %.
Returns on
probability

Market (M)

Investment (S)

1/3

9%

6%

1/3

12%

30%

1/3
18%
18%
7.following information is available in respect of two securities:
Security A
Security B
Expected Return

22 %

17 %

Beta Factor ( )

1.5

0.7

Assume :risk -free rate =10 % and Rm =18 %

Find out whether the securities,A and B are correctly priced?Also swhow the graphic presentation
of the above situation.
8.XYZ Ltd.has investment in 3 companies A Ltd,B Ltd,C Ltd.Following information is available in
repect of these investments:
Company
Investment

A Ltd

Rs.6,00,000

1.3

B Ltd

Rs.3,00,000

1.4

C Ltd
Rs.1,00,000
0.9
Expected return on the market portfolio is 15 % and the risk -free rate of interest is 6 %.Find out the

expected and return of the portfolio.

9.The following are the annual return for shares of New Bite Ltd.and for the representative equity
price index :
New Bite Ltd.(R s) % I ndex(R M) %
YEAR

-2

14

16

19

13

-8

-7

-12

-13

17

10

14

15

10
14
16
Find out the for the equity shares of New Bite Ltd.If the risk-free rate is 6 % and the market rate
of return is 12 %.what would be the expected return on equity shares of New Bite Ltd.
10.The rates of return on the security of company X and market portfolio for 5 periods are given
below:
period
Return of
Return of mkt
sec.X (%)
portfolio (%)
1

20

22

22

20

25

18

21

16

5
18
20
Calculate the Beta of Security X
11.Mr Z is interested in constructing a portfolio with the beta of 0.8.However the beta of the market
portfolio is 1.6.How he should construct a portfolio consisting of risk-free securities and market
portfolio to achieve the target beta
12.you are presented with the following information concerning the returns on the shares of C
Ltd.and on the market portfolio,according to the various conditions of the economy
Condition of economy

Probability of condition Return on C Ltd. (%)

Return on Market (%)

0.2

15

10

0.4

14

16

0.4

26

24

The current risk-free interest rate is 9 %..

Calculate the following:
(a)Calculate the coefficient of correlation between the returns on C Ltd. And the market portfolio.
(b)Calculate the total risk of C Ltd.and discuss why this is not the most appropriate measure of risk
to be used in making investment decisions.
(c)Calculate the beta factor for C Ltd. And briefly discuss its significance .Is C Ltd. Efficiently
priced according to the CAPM and the information given above?

13.case study( univ . exam Nov 2014)

The following data are available to you as portfolio manager:
security
estimated return (%)
Beta

std. deviation in %

30

2.0

50

25

1.5

40

20

1.0

30

11.5

0.8

25

10

0.5

20

MARKET

15

1.0

18

Government securities

(a) Draw a graph showing the Security market line and in terms of the security market line , which
of the securities listed above are bunderpriced or overpriced?
(b)Present your buy /hold/sell decisions of these stocks with justifications.