Portfolio Management

[June 2013 CFA Level 1 Group]

Use this discussion thread to ask and discuss queries related to Portfolio Management Topic.

[haidriqbal]

An analyst has collected the following data for three possible investments.

Stock	Price Today	Forecasted Price*	Dividend	Beta
Alpha	25	31	2	1.6
Omega	105	110	1	1.2
Lambda	10	10.80	0	0.5
*Forecasted Price = expected price one year from today.

The expected return on the market is 12% and the risk-free rate is 4%.

Based on the forecast price and dividend estimate, what is the forecasted return for Alpha?

A) 32.0%.

B) 12.0%.

C) 24.0%.

Your answer: A was correct!

The holding period (or expected) return is calculated as: (ending price – beginning price + any cash flows/dividends) / beginning price. Here, ER_Alpha = (31 − 25 + 2) / 25 = 32%.

Why am I getting 16%? Does this have to doubled?

[Arif Irfanullah]

The question asks you to calculate expected return based on forecasted price and dividend.  The expected  capital  gain is 6 and expected dividend is 2. Total  expected benefit is 8.  Cost base is 25.  Hence expected return is 32%.

[haider iqbal]

Got the answer. I guess I was doing the number punching wrong. Thank you.

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[ARIHANT TATER]

Dear Arif Sir, 

Thank you  for your last minute advice. Your Alt I and Derivatives questions were very helpful to gauge our progress.

However FRA questions that you uploaded cannot be downloaded due to some technical problems. 

a) Could you upload the same in PDF Format ?

b) Could you upload questions on other important ch. too. ?

Thanks!

[Arif Irfanullah]

We placed a couple of FRA quizzes and solutions here.

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Regards,

Arif Irfanullah

www.arifirfanullah.com