Your client is holding the following securities: Particulars of Securities Cost ₹ Dividends/ Interest ₹ Market price at the end of holding period ₹…

CA Final · Advanced Financial Management · MTP · May 2024
Your client is holding the following securities: Particulars of Securities Cost ₹ Dividends/ Interest ₹ Market price at the end of holding period ₹ Beta Equity Shares: G Ltd. 20,000 1,450 19,600 0.6 S Ltd. 30,000 1,000 30,400 0.8 B Ltd. 28,000 1,400 32,000 0.6 GOI Bonds 72,000 5,060 71,980 0.01 Evaluate: (i) Risk free rate of return. (ii) Expected rate of return of each security (except GOI Bond), using the Capital Asset Pricing Model (CAPM). Note: (1) Use weighted average Beta in calculations. (2) Round off calculations upto 3 decimal points.

Suggested Answer and Working Notes:

Particulars of Securities Cost ₹ Market Price ₹ Capital gain ₹ Dividend/ Interest ₹ G Ltd. 20,000 19,600 -400 1,450 S Ltd. 30,000 30,400 400 1,000 B Ltd. 28,000 32,000 4,000 1,400 GOI Bonds 72,000 71,980 -20 5,060 Total 1,50,000 1,53,980 3,980 8,910 (i) Risk free return [Return on Govt. Security (GOI Bond)] = (5,060 + (72,000 – 71,980)) / 72,000 = 7% (ii) Weighted Average of Beta = 0.6 x (19,600/1,53,980) + 0.8 x (30,400/1,53,980) + 0.60 x (32,000/1,53,980) + 0.01 x (71,980/1,53,980) = 0.076 + 0.158 + 0.125 + 0.005 = 0.364 Average Return on Portfolio (8,910+3,980) / 1,50,000 x 100% = 8.593% Market Return 8.593% = 7% + (Rm -7%) x 0.364 Rm = 11.376% Expected Rate of Return for each security is Rate of Return = Rf + β (Rm – Rf) G Ltd. = 7.000% + 0.6 (11.376% – 7.000%) = 9.626% S Ltd. = 7.000% + 0.8 (11.376% – 7.000%) = 10.501% B Ltd. = 7.000% + 0.6 (11.376% – 7.000%) = 9.626%

Topics: Portfolio Management

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