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Q2. Risk is the likelihood that your investment will either earn money or
lose money. Explain the factors that affect risk. Mr. Rahul invests in equity
shares of Wipro. Its anticipated returns and associated probabilities are
given below:
Return
-15
-10
5
10
15
20
30
Probabilit
y
0.05 0.10 0.15 0.25 0.30 0.10 0.05
You are required to calculate the expected ROR and risk in terms of
standard deviation.
(Explanation of all the 4 factors that affect risk, Calculation of expected ROR
and risk in terms of standard deviation)
Answer. Factors that affect risk
Business risk: This is the possibility that the company holding your money will not
pay the interest or dividend due, or the principal amount, when your bond matures.
This may be caused by a variety of factors like heightened competition, emergence of
new technologies, development of substitute products, shifts in consumer preference,
inadequate supply of essential inputs, changes in governmental policies and so on.
The poor business performance definitely affects the interest of equity shareholders,
who have a residual claim on the income and wealth of the firm.
Q3. Explain the business cycle and leading coincidental & lagging indicators.
Analyse the issues in fundamental analysis.
Answer. Business cycle and leading coincidental and lagging indicators
All economies experience recurrent periods of expansion and contraction. This
recurring pattern of recession and recovery is called the business cycle. The business
cycle consists of expansionary and recessionary periods. When business activity
reaches a high point, it peaks; a low point on the cycle is a trough. Troughs represent
the end of a recession and the beginning of an expansion. Peaks represent the end of
an expansion and the beginning of a recession. In the expansion phase, business
activity is growing, production and demand are increasing, and employment is
expanding. Businesses and consumers normally borrow more money for investment
and
Q4. Discuss the implications of EMH for security analysis and portfolio
management.
Answer. Implications for active and passive investment
Proponents of the efficient market hypothesis often advocate passive as opposed to
active investment strategies. Active management is the art of stock-picking and
market-timing. The policy of passive investors is to buy and hold a broad-based
market index. Passive investors spend neither on market research nor on frequent
purchase and sale of shares. However, passive strategies may be tailored to meet
individual investor requirements. The efficient market debate plays an important role
in the decision between active and passive investing.
Q5. Explain about the interest rate risk and the two components in it. An
investor is considering the purchase of a share of XYZ Ltd. If his required
rate of return is 10%, the year-end expected dividend is Rs. 5 and year-end
price is expected to be Rs. 24, Compute the value of the share.
Answer. Interest Rate Risk: With the passage of time, interest rate changes in the
market. The cash flows from a bond (coupon payments and principal repayment)
however, remain fixed. As a result, the value of a bond fluctuates. Thus interest rate
risk arises because the changes in the market interest rates affect the value of the
bond. The return on a bond comes from coupons payments, the interest earned from
re-investing coupons (interest on interest), and capital gains. Since coupon payments
are fixed, a change in the interest rates affects interest on interest and capital gains
or losses. An increase in interest rates decreases the price of a bond (capital loss) but
increases the interest received on reinvested coupon payments (interest on interest).
Q6. Elucidate the risk and returns of foreign investing. Analyze international
listing.
Answer. Risks and Returns from Foreign Investing
International investing provides superior returns adjusted for risk. Allocating some
portion of one's portfolio to foreign assets provides better risk adjusted reruns than a
portfolio of domestic assets alone. International equities also offer access to a broader
spectrum of economies and opportunities that can provide for further diversification
benefits. Some of the best performing companies in the world like General Electric,
Exxon Mobil and Microsoft have shares that are listed on overseas stock markets. If an
investor wants to profit from the growth
Winter-2015
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