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Capital Market and Portfolio
Management
Jun 2025 Examination
Q1. David and Sarah, have different
perspectives on how to measure risk and construct portfolios. David follows the
Capital Market Line (CML) approach, believing that a well-diversified portfolio
should be assessed based on total risk (standard deviation). He argues that the
CML represents the best possible combination of risk and return, achievable
only through a mix of the risk-free asset and the market portfolio. Sarah,
however, trusts the Security Market Line (SML), insisting that risk should be
measured by beta, which only considers systematic risk. How would you help
David and Sarah resolve their debate? How does the Capital Market Line (CML)
differ from the Security Market Line (SML) in terms of risk measurement and
portfolio representation? (10 Marks)
Q2. Explain how the combination of
risky and risk-free assets can be used to construct an optimal portfolio. What
role does the CML play in this process? (10 Marks)
Q3A. The Investor has
Rs.30,000/—and decides to invest equally in mutual funds and shares. The
expected return from mutual funds is 5% p.a., and from shares is 10% p.a.
Calculate the total expected return for one year. (5 Marks)
Q3B. John is a young investor eager
to build his stock portfolio. Mr. Davis, introduces him to the concept of beta.
One day, John analyzes two stocks: Stock A has a beta of 1.5, while Stock B has
a beta of 0.7. Mr. Davis asks him:
"John, if the market rises by
10%, how much would you expect each stock to move? And if the market crashes by
10%, which stock would be riskier? More importantly, based on your risk
tolerance, which stock should you choose?"
How should John use beta to make
his decision? What does beta tell him about the risk and expected return of
each stock? Evaluate the significance of beta in the context of CAPM. How does
beta influence investment decisions? (5 Marks)
Dear Students,
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over 10,000+ students!
100%
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