Finance Assignment: Portfolio, Insurance, and Tax Analysis

This finance assignment provides a detailed analysis of various financial concepts. It begins with portfolio construction and optimization, including the calculation of expected returns and standard deviations for different investment portfolios, along with an efficient frontier chart to identify the best portfolio. The assignment then evaluates a fund manager's performance, assessing the impact of market conditions on portfolio returns. Further, it analyzes a firm's financial stability, determining the adequacy of equity to cover potential losses. The assignment also covers the pricing of an IPO using a Dutch auction model, determining the optimal price for investors and allocating shares. It includes the calculation of insurance premium amounts based on the probability of death and the present value of money. Additionally, the assignment examines the impact of interest rate changes on a pension plan and explains the capital gains tax implications for dividends and mutual fund units, differentiating between short-term and long-term tax rates. Finally, the assignment analyzes hedge fund returns, illustrating the relationship between investment and returns in a graphical format.

FINANCE

TABLE OF CONTENTS
Q1................................................................................................................................................3
Q2................................................................................................................................................4
Q3................................................................................................................................................4
Q4................................................................................................................................................4
Q5................................................................................................................................................5
Q6................................................................................................................................................5
Q7................................................................................................................................................5
Q8................................................................................................................................................6

Q1
Table 1Statistics
Investment
1 Investment 2
Expected returns 8% 12%
Std. Deviation 14% 20%
Correlation 0.3
Table 2Computed values of portfolios
Portfolio
Weight 1
(w1) Weight (w2)
Expected
return
Std.
deviation
1 0% 100% 12.FINAN00% 0.2000
2 10% 90% 11.60% 0.1847
3 20% 80% 11.20% 0.1705
4 30% 70% 10.80% 0.1578
5 40% 60% 10.40% 0.1469
6 50% 50% 10.00% 0.1382
7 60% 40% 9.60% 0.1322
8 70% 30% 9.20% 0.1294
9 80% 20% 8.80% 0.1297
10 90% 10% 8.40% 0.1334
11 100% 0% 8.00% 0.1400

Varied portolios for two stocks are prepared and charting for same is done in the
effeicient frontier chart. It can be seen that 8th portoflio is best one because its standard deviation
is low 0.1294 and return on the portfolio is 9.20%. Thus, it is recommended that investment must
be made on the 8th portfolio.
Q2
In order to test the claim it is very important to evaluate number of factors. It can be
observed that portfolio beta is 0.2 which is very low and it nearby to 0.0 which reflect that there
is no relationship between index value and share price. Even market decline by -30% in that
situation beta of 0.2 is maintained which reflects that even market goes down there were stocks
in the portfolio which play an important role in maintaining positive return of the portfolio every
time. Thus, it can be said that in inverse market conditions portfolio give slightly negative return
to the investors. It must be noted that market decline by -30% and at same time portfolio return
only declined by -10%. This reflects that fund manager beat the market in terms of negative
return. Thus, claim of the manager that he give good performance is correct.
Q3
Firm earned revenue of 0.6 million and standard deviation value is 2 million. Suppose firm
profit reduced by 2 million then in that situation it will have 5 million of equity. After covering
loss remaining amount is -1.4. Even mentioned amount will be paid from equity there will be

sufficient amount of capital in the balance sheet of the business firm. Thus, firm have sufficient
amount of equity in its business.
Q4
On the basis of evaluation of available data it is identified that 42 USD is the best price that
must be paid by the investors. This is because in the Dutch auction first bid is made at higher
price and then bid value reduced step by step. At lower bid share price under IPO is fixed at 42
USD. Shares that will be received by the investors at specific price level is given below.
Table 3Allocation of shares
Bidder
Number
of
shares
Price
A 60000 42 USD
B 17000 42 USD
C 20000 42 USD
D 23000 42 USD
E 20000 42 USD
F 20000 42 USD
G 25000 42 USD
H 25000 42 USD
Q5
Table 4Insurance premium amount
Amount of insurance 5000000
Probability of death 0.011
PV of 1USD at 6% 0.943396226
Insurance premium amount 51886.79245
Interpretation
Insurance premium amount on insurance contract of 5 million is USD 51886. This is
value is computed by multiplying amount of insurance with PV of 6% and probability of death.
This means that insurance company will charge USD 51886 from the client.

Q6
Pension plan will be positively affected by the decline in the interest rate. As per
information provided interest rate declined by 200 basis points equivalent to 2%. Reduction in
interest rate is reflecting that economy is on growth track and government intends to increase
liquidity in the market. Due to increase in liquidity, investment activity of the business firms will
increase will lead to sharp growth in their revenue. This will lead to plunge in the shares price in
the stock market. Thus, in short duration value of 60% equity that is in the portfolio will increase
at fast pace. Thus, decline in interest rate by 200 basis points will positively affect pension plan.
Q7
There are two sort of capital gain tax rates namely long term and short term tax rates. If
units are hold for less than a year capital gain tax rate is 20%. If investor hold units for more than
a year than in that case according to income tax slab capital gain tax is charged. As per rules, if
individual is in tax slab of 25% to 35% then capital gain tax rate is 15%. On other hand, if one
comes in tax slab of more than 35% then tax rate is 20%. Mutual fund units are hold for more
than a year and due to this reason long term capital gain tax will be levied. On dividend also long
term capital gain tax is charged and tax rate slab is considered to charge specific percentage on
dividend amount. Thus, it can be said that in 2012 short term capital gain tax will be levied on
earned dividend amount at 15% and thereafter long term capital gain tax rate by considering tax
slab of individual will be charged on investor.
Q8

It can be seen from the chart that there are two axis one is x axis and other one is y axis.
On Y axis plotting of return that would be earned by the hedge fund is done. 2 refers to the 2% of
the principal amount that is invested by pension fund on hedge fund. 2% is the intercept value
which hedge fund will earn in every condition even pension fund does not gain any amount of
money on invested amount.