Corporate Finance

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Corporate Finance

EXERCISE

1. Refer to the following data:

ACC Indian Hotels

Mean weekly returns 0.52 0.08

Standard deviation 6.98 3.78

If the correlation coefficient = 0.31 and covariance = 8.30, calculate portfolio return and standard deviation for various

compositions and plot a graph. Identify the minimum risk portfolio.

2. Calculate the expected return for a stock whose beta is 0.8. The T-Bond rate is 12 percent. The monthly return on the
   market index is 1.7 percent.


3. You are holding stocks of Ashok Leyland, TELCO, and Grasim. Their individual betas are 0.8, 0.96, and 0.81 respectively.
   Assuming equal investment, calculate the portfolio beta.


4. List five stocks that you think are highly correlated.


5. What factors do you think will affect the beta of a stock? Why do different stocks have different betas?


6. Suppose that the government defaults on sovereign borrowings. So T-Bond rate cannot be considered risk-free. How
   would you come up with a risk-free asset?


7. Suppose in a country only 3–4 stocks (in the index) account for 75 percent of market capitalization. What would be its
   effect on beta estimate?


8. What factors do you think will affect market returns?


9. Many stocks have yielded negative returns in the recent past (1994–98). Do you think it is correct to extrapolate them into
   the future? How would you alter your estimate?


10. Given here is the correlation matrix for three stocks:

AB C

A 1.0 0.37 0.49

B 0.37 1.0 0.66

C 0.49 0.66 1.0

Other information:

E(R) 0.04 0.10 0.09

Variance 0.02 0.03 0.008

Standard deviation 0.14 0.17 0.089

Calculate expected portfolio return and variance for various compositions.

11. Given here are stock and market returns. Calculate mean and standard deviation of returns, correlation and covariance.

Year Stock return (percent) Market return (percent)

1987 7.64 14.31

1988 16.98 –8.50

1989 –11.36 4.01

1990 21.12 18.98

1991 –30.01 –26.48

1992 –22.14 –14.66

1993 37.68 37.20

1994 28.27 23.84