PORTFOLIO MANAGEMENT
Assignment No 2 Marks = 8 Instructions:
A. The following assignment must be done in group of 2. B. The due date is Feb 20, 2012. Try to submit the assignment on due date otherwise 0.5 mark will be deducted per day. C. You are advised to comprehend each step thoroughly so that you answer any question at the time of submission. Those who fail to answer the questions will face penalty of 2 marks. D. The assignment must submitted to my email ims.assign@gmail.com . Remember the subject of the email should follow the following format:
MBABF Semester and then group member names and the file name should be the names of the group members
Students groups and Assigned Companies [ MBA B&F and MSC Econ: ]
Assignment You are required to calculate 5 years return for the two companies assigned to you by including capital gains and dividends in the returns. Then do the following:  Calculate average return on each stock
 Calculate standard deviation for each one
 Make different portfolios of the stocks with weights ranging from 0 to 100% with gaps of 10% i.e
Stock A Stock B Portfolio
 0 100% A
 10% 90% B
 20% 80% C
 30% 70 D
 40% 60 E
 50% 50 F
 60% 40 G
 70% 30 H
 80% 20 I
 90 10 J
 100 0 K
 Calculate Average Return AND Standard Deviation for each portfolio
 Make efficient frontier and discuss which portfolio (s) is superior to others
 After making efficient frontier, you are supposed to invest Rs.100,0000 in a one of the portfolio on the efficient frontier. Suppose you are an aggressive investor, so you will select a portfolio on the upper right hand of the efficient frontier. After selecting a given porftolio, you need to tell how much are you going to invest in one security and how much in the other security based on the weights of the securities in the selected portfolio
l Video 1 l Capital Gain, and Dividend per share
l Video 2 l Arithmetic mean, geometric mean, standard deviation, covariance, correlations
l Video 3 l Portfolio Risk, Return and Efficient Frontier
Part 2 of the Assignment:
Required: 1. Calculating Required Rate of Return (Expected Return) with CAPM 2. Testing the validity of the CAPM
Calculating Expected return with CAPM
The Beta formula under CAPM is given by:
A. (RiRf) is your dependent variable and (RmRf) is your independent variable
B. Use regression technique to find the coefficient of (RmRf), this coefficient is your beta
C. After finding beta, use the CAPM equation to find out the required rate of return on your stock
D.
Compare this required rate of return with actual rate of return of the
stock to find out whether the stock is overvalued, undervalued or fairly
valued
To operationalize the above equation, follow these steps: A.
Obtain end of month share prices of the two
companies assigned to your group for a period of 12 months for your assigned
yearB.
Calculate Ri = (P1Po)/Po, for both companies
individually C.
Take interestfree rate in your assigned year
and divided that rate by 12 to make it a monthly rate D.
Deduct the monthly interest free rate (Rf) from
the Ri and you will obtain RiRf
A.
Obtain end of month index points for KSE 100
index for a period of 12 months for your assigned yearB.
Calculate Rm = (Index1Indexo)/IndexoC.
Take interestfree rate (Tbill rates) of your
assigned year and divide that rate by 12 to make it a monthly rateD.
Deduct the monthly interest free rates (Rf) from
the Rm values and you will obtain RmRf E. Now apply regression equation to find the Beta
B. How to Check the Validity of CAPM
Applying CAPM to the data, we might get the following regression
output:
The intercept has a value of
.007 which suggests that CAPM gives expected risk premium above the
actual risk premium by a value of .7%. But this value is insignificant as the
Pvalue is 0.76 which is above 0.1. The beta is highly significant as the Pvalue
is 0.000001.
In the regression
outputs of CAPM, the intercept values is insignificant,
suggesting that the model correctly predict the risk premium on the given
security.
[You do not need to find HML and SMB because you are not required to estimate Fama and French Model] Data Sources 
Updating...
Ĉ Attaullah Shah, Apr 20, 2010, 9:43 PM
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