Mgt411 Assignment No. 2 solution
Tuesday, May 31, 2011 Posted In MGT Edit This
Semester “Spring 2011”
“Money & Banking (MGT411)”
Assignment No. 02 Marks: 20
Important Tips1. This Assignment can be best attempted from the knowledge acquired after watching video lecture no. 1 to lecture no. 25 and reading handouts as well as recommended text book).
2. Video lectures can be downloaded for free from Online VU Lectures.
ScheduleOpening Date and Time
May 27 , 2010 At 12:01 A.M. (Mid-Night)
Due Date and Time
June 02 , 2010 At 11:59 P.M. (Mid-Night)
Note: Only in the case of Assignment, 24 Hrs extra / grace periodafter the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.
Question # 1 (Marks 8)
A portfolio of Rs. 1,000 entitles the investor to receive dividend of Rs. 150 at the end of year 2011. Expected future sale price at the end of year is Rs. 998. If the investor plans to sell the stock in the market after holding it for one year, what will be the holding period return for one year on this portfolio(in terms of percentage)?
Question # 2 (Marks 8)
Find the variance and standard deviation for the stock of a newly listed public limited company purchased at Rs. 1,000. While making this investment there are 50% chances that the price of investment will fall to Rs. 900 and 50% chances are that it will rise to Rs. 1200 after six months.
Question # 3 (Marks 4)
In stock market XYZ company is offering 16% annual return on bonds, however,Treasury Bills are providing 7% annual return. Calculate the risk premium if an investor invest in XYZ company. Important Instructions:
Please read the following instructions carefully before attempting the assignment solution.
Deadline:
• Make sure that you upload the solution file before the due date. Noassignment will be accepted through e-mail once the solution has beenuploaded by the instructor.
Formatting guidelines:
• Use the font style “Times New Roman” and font size “12”.
• It is advised t compose your document in MS-Word 2003.
• Use black and blue font colors only.
Solution guidelines:
• Every student will work individually and has to write in the form of ananalytical assignment.
• Give the answer according to question, there will be negative markingfor irrelevant material.
• For acquiring the relevant knowledge don’t rely only on handouts butwatch the video lectures and use other reference books also.
• provide all calculation only answer will not be appreciated
Rules for Marking
Please note that your assignment will not be graded or graded as Zero (0) if:
• It has been submitted after due date
• The file you uploaded does not open or is corrupt
• It is in any format other than .doc (MS. Word)
• It is cheated or copied from other students, internet, books, journals etc…
• Please install adobe reader to view the assignment
Solution:
“Money & Banking (MGT411)”
Assignment No. 02 Marks: 20
Important Tips1. This Assignment can be best attempted from the knowledge acquired after watching video lecture no. 1 to lecture no. 25 and reading handouts as well as recommended text book).
2. Video lectures can be downloaded for free from Online VU Lectures.
ScheduleOpening Date and Time
May 27 , 2010 At 12:01 A.M. (Mid-Night)
Due Date and Time
June 02 , 2010 At 11:59 P.M. (Mid-Night)
Note: Only in the case of Assignment, 24 Hrs extra / grace periodafter the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.
Question # 1 (Marks 8)
A portfolio of Rs. 1,000 entitles the investor to receive dividend of Rs. 150 at the end of year 2011. Expected future sale price at the end of year is Rs. 998. If the investor plans to sell the stock in the market after holding it for one year, what will be the holding period return for one year on this portfolio(in terms of percentage)?
Question # 2 (Marks 8)
Find the variance and standard deviation for the stock of a newly listed public limited company purchased at Rs. 1,000. While making this investment there are 50% chances that the price of investment will fall to Rs. 900 and 50% chances are that it will rise to Rs. 1200 after six months.
Question # 3 (Marks 4)
In stock market XYZ company is offering 16% annual return on bonds, however,Treasury Bills are providing 7% annual return. Calculate the risk premium if an investor invest in XYZ company. Important Instructions:
Please read the following instructions carefully before attempting the assignment solution.
Deadline:
• Make sure that you upload the solution file before the due date. Noassignment will be accepted through e-mail once the solution has beenuploaded by the instructor.
Formatting guidelines:
• Use the font style “Times New Roman” and font size “12”.
• It is advised t compose your document in MS-Word 2003.
• Use black and blue font colors only.
Solution guidelines:
• Every student will work individually and has to write in the form of ananalytical assignment.
• Give the answer according to question, there will be negative markingfor irrelevant material.
• For acquiring the relevant knowledge don’t rely only on handouts butwatch the video lectures and use other reference books also.
• provide all calculation only answer will not be appreciated
Rules for Marking
Please note that your assignment will not be graded or graded as Zero (0) if:
• It has been submitted after due date
• The file you uploaded does not open or is corrupt
• It is in any format other than .doc (MS. Word)
• It is cheated or copied from other students, internet, books, journals etc…
• Please install adobe reader to view the assignment
Solution:
Question # 1 (Marks 8) A portfolio of Rs. 1,000 entitles the investor to
receive dividend of Rs. 150 at the end of year 2011. Expected future sale
price at the end of year is Rs. 998. If the investor plans to sell the stock
in the market after holding it for one year, what will be the holding
period return for one year on this portfolio(in terms of percentage)?
Holding 1year return= yearly coupon payment / price paid + change in
price of the bond / price of bond
=$150 / $1000 + ($998-$1000) / $100
=.15+ (-.002)
=0.148=14.8 %
Holding period return=14.8%
Question # 2 (Marks 8) Find the variance and standard deviation for the
stock of a newly listed public limited company purchased at Rs. 1,000.
While making this investment there are 50% chances that the price of
investment will fall to Rs. 900 and 50% chances are that it will rise to
Rs. 1200 after six months.
Following step involve calculating Variance
1. Expected Value
2. Subtract expected Value form each possible pay offs
3. Square each of results
4. Multiply each result time ties probability and adds up the result
First we calculate the Expected value
(900 * 1/2) + (1200 * 1/2) = 1050
Subtract expected value from each possible pay off
900-1050 = -150
1200-1050 = 150
Square each of result
(-150)2 = 22500
(150)2 = 22500
Multiply each result time its probability and adds up the result
½ * 22500 + ½ * 22500
22500
Variance = 22,500
Standard deviation=square rout of variance
S.D=150
Question # 3 (Marks 4) In stock market XYZ company is offering 16%
annual return on bonds, however, Treasury Bills are providing 7%
annual return. Calculate the risk premium if an investor invest in XYZ
company
Risk premium = Risky return – Risk free return
Risk premium= 16% - 7%
Risk premium= 9%
::::::::::::::::::::::::::::::::::::::::::::
Question # 1:-
Holding 1 year return =
= 0.13
=13%
Question # 2:-
Expected Value
(900*1/2) + (1200 * 1/2) = 1050
Subtract expected Value form each possible pay offs
900-1050 = -150
1200-1050 = 150
Square each of results
(-150)^2 = 22500
(150)^2 = 22500
Multiply each result time ties probability and adds up the result
= ½ * 22500 + ½ * 22500
= 22500
Variance = 22,500
Standard deviation = square rout of variance
=
S.D=150
Question # 3:-
Risk premium = Risky return – Risk free return
Risk premium= 16% - 7%
Risk premium= 9%
::::::::::::::::::::::::::::::::::::::::::::
Question # 1:-
Holding 1 year return =
= 0.13
=13%
Question # 2:-
Expected Value
(900*1/2) + (1200 * 1/2) = 1050
Subtract expected Value form each possible pay offs
900-1050 = -150
1200-1050 = 150
Square each of results
(-150)^2 = 22500
(150)^2 = 22500
Multiply each result time ties probability and adds up the result
= ½ * 22500 + ½ * 22500
= 22500
Variance = 22,500
Standard deviation = square rout of variance
=
S.D=150
Question # 3:-
Risk premium = Risky return – Risk free return
Risk premium= 16% - 7%
Risk premium= 9%
