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Portfolio Risk: Payal Roy’s Dilemmas

CASELET, FINANCIAL MANAGEMENT
ET Cases, 4 pages

Case Preview

Portfolio Risk: Payal Roy’s Dilemmas

 

On Thursday October 30th 2014, Payal Roy (Payal), the Founder of Roy Institute of Interior Designing was featured in a reputed publication as one of the most successful women entrepreneurs in India. She received a number of calls from friends and relatives congratulating her on the special occasion. Nevertheless, her journey to success was not a cake walk. She had to fight against all the odds to reach this stage of her life and live her dreams. A creative and innovative individual by nature, Payal was not allowed to choose a career of her choice as her parents were of the opinion that the job options in the creative field were very minimal.

Immediately after graduating in electronics and communications engineering, Payal was married and in due course of time, gave birth to a baby girl. As her daughter turned two, she took up a career in teaching which enabled her to give time to her daughter as well. However, even after gaining experience for over 10 years in teaching, she did not have the job satisfaction that she was looking for. In the meanwhile, she got in touch with her childhood friend Aashritha Sharma (Aashritha) on a social media platform...................

Teaching Note Preview

Portfolio Risk: Payal Roy’s Dilemmas

 

Synopsis

The life of Payal Roy (Payal), the Founder of Roy Institute of Interior Designing, had been a roller-coaster ride. She stepped into the field of interior designing from a teaching background. Though she has emerged as one of the few most popular interior designers in India in a short span of time, she was not content with that success. She started Roy Institute of Interior Designing to cater to the dearth of skilled professionals in the field of interior designing. Although an expert in interior designing, she was a novice and had very little idea about investments.

Being a risk-averse investor, Payal had been investing passively in index funds since few years. However, as she gained experience and confidence, Payal wanted to shift her investment strategy from being passive to an active. She wanted to diversify her portfolio by gradually including few more stable and reliable stocks. To start with, she wanted to add one stock to her portfolio to increase the equity exposure. Though she could narrow down her search to two stocks with the help of the forecasts, she was in a dilemma as to which one to opt among the two. The caselet through the dilemmas of the protagonist (Payal) derives the relationship between the risk and return of a portfolio of financial assets. Applying various statistical tools and techniques, the caselet suggests the optimal portfolio for Payal depending on the level of her risk tolerance.

Prerequisite Conceptual Understanding

The participants should read the following chapter and article for an effective classroom discussion:

  • •M Y Khan and P K Jain, “Risk and Return”, Financial Management, 6th Edition, McGraw Hill Education (India) Private Limited, 2013 – To get a glimpse of fundamentals of risk and return
  • •“Modern Portfolio Theory”, http://www.economywatch.com/investment/modern-portfoliotheory.html, November 23rd 2010 (accessed date: February 9th 2015) – To understand about various types of risks and how to build optimal portfolios

 

Case Positioning and Setting

This caselet can be used for any of the following modules/courses:

  • • Risk and Return chapter in Financial Management course – To understand the fundamentals of risk and return and their relationship.
  • • Portfolio Risk module in Financial Management course – To analyze the Modern Portfolio Theory (MPT) and understand how to build efficient portfolios.

 

Assignment Questions

  • I. What is the significance of MPT?
  • II. Estimate and compare the returns and riskiness of the two stocks Idea Cellular and HDFC Bank with that of Tata index fund.
  • III. When portfolios are formed by investing 99% in Tata index fund and investing the remaining 1% either in Idea stock or HDFC stock, how do you calculate and compare the riskiness of the portfolios with that of individual stocks?
  • IV. .......................

 

Suggested Discussion Dashboard

The caselet entails an interesting discussion on the concept of portfolio risk and return. This discussion can be carried out under the following three segments. It should also be noted that each of the section’s discussion was centred around an anchor point [Exhibit (TN)-I]...............

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Product code: FIN-2-0006, FIN-2-0006A

Abstract


This caselet enables an interesting discussion on portfolio risk which can be minimized using Modern Portfolio Theory (MPT). The degree and direction of correlation between asset returns have far-reaching effects on reduction of portfolio risk through diversification. The caselet through the dilemmas of the protagonist Payal Roy (Payal) presents a comprehensive analysis of risk and return associated with portfolio investments. The protagonist of the caselet, Payal was facing a dilemma when she resorted to forming an effective portfolio which could minimize the risk levels. Different statistical and financial tools such as standard deviation, R-squared and beta have been used in this caselet, to analyze the combination of stocks that can form an optimal portfolio based on Payal's risk tolerance.



Pedagogical Objectives

  • To assess and measure the risks associated with individual stocks and portfolios
  • To calculate beta by applying regression techniques
  • To understand the relationship between risk and return and concept of Capital Asset Pricing Model (CAPM)

Case Positioning and Setting
This caselet can be used for any/both of the following modules/courses:

  • Risk and Return chapter in Financial Management course – To understand the fundamentals of risk and return and their relationship.
  • Portfolio Risk module in Financial Management course – To analyze the significance of MPT and understand how to build efficient portfolios.



This Case Pack Includes:
 - Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
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