Question

Write short notes on the following.

(a) Role of indifference curves in portfolio selection

(b) Industry classification adopted by the Stock Exchange

(c) Fixed income securities

(d) Initial wealth and terminal wealth in portfolio analysis               (05 Marks each)

(b) Given the following Variance-Covariance Matrix for three securities as well as the percentage of the portfolio that each security comprises, Calculate the portfolios standard deviation?

                                                     Security A                Security B                   Security C

Security A                                        146                           187                                145

Security B                                        187                            854                               104

Security C                                        145                            104                               289

Consider the portfolio given in above table that had proportions XA = 0.2325, XB = 0.4070, XC = 0.3605 respectively (Hint: calculating the standard deviation for a portfolio consisting of N securities involves performing the double sum).                                       

Answer 1

a)Indifference curves represent the wealth holder's preference for expected return on a portfolio and the risk associated with that portfolio.It is the method used in selecting the most desirable portfolio.

b)Following are the industry adopted by the stock exchange;

i)Financials

ii)Utilities

iii)Consumer Discretionery

iv)Consumer staples

v)Energy

vi)Healthcare

vii)Industrials

viii)Technology

ix)Telecom

x)Materials

xi)Real Estate

c)Fixed income securities are a type of debt instrument that provides returns in the form of regular,or fixed,interest payments and repayments of the principal when the security reaches maturity.The instruments are issued by governments,corporation and other entities to finance their operations.