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Tutorial 4 Sim

This document contains 3 questions about measuring risk and return using the single index model. Question 1 provides monthly return data for 3 stocks (A, B, C) and the market index (KLCI) and asks to calculate average returns, variances, alphas, and betas. Question 2 provides information on 4 securities and asks to calculate expected returns, variances, covariances, and portfolio returns and risks under different investment weights. Question 3 similarly provides information on 4 stocks and asks to calculate expected returns, variances, covariances, and portfolio metrics for equal investment.

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Akyla
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28 views

Tutorial 4 Sim

This document contains 3 questions about measuring risk and return using the single index model. Question 1 provides monthly return data for 3 stocks (A, B, C) and the market index (KLCI) and asks to calculate average returns, variances, alphas, and betas. Question 2 provides information on 4 securities and asks to calculate expected returns, variances, covariances, and portfolio returns and risks under different investment weights. Question 3 similarly provides information on 4 stocks and asks to calculate expected returns, variances, covariances, and portfolio metrics for equal investment.

Uploaded by

Akyla
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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4

TUTORIAL 4
MEASUREMENT OF RISK AND RETURN- SINGLE INDEX MODEL.

QUESTION 1

Monthly return data are presented below for each three stocks and the FBM KLCI for a 12-month period. Calculate
the following:

a) The average return for each stock and market


b) The variance of all.
c) Alpha for each stock
d) Beta for each stock

Month Security
A B C KLCI
1 12.05 25.20 31.67 12.28
2 15.27 2.86 15.82 5.99
3 -4.12 5.45 10.58 2.41
4 1.57 4.56 -14.43 4.48
5 3.16 3.72 31.98 4.41
6 -2.79 10.79 -0.72 4.43
7 -8.97 5.38 -19.64 -6.77
8 -1.18 -2.97 -10.00 -2.11
9 1.07 1.52 -11.51 3.46
10 12.75 10.75 5.63 6.16
11 7.48 3.79 -4.67 2.47
12 -0.94 1.32 7.94 -1.15
QUESTION 2

a) Assume that you are given the following information from IQ Group Berhad.

Security
J K L M
αi 0.5 1 2 1.5
Β 1.2 1.5 0.8 0.6
σ2ie 6 10 8 4
Where σM =6 and Rm = 5

Calculate the following:

i) The expected return for each security


ii) The variance of each security’s return
iii) The covariance of return between each security
iv) The return and the standard deviation of the portfolio if
a) equally invested
b) WJ = 30% and the rest in security M
c) WK = 75%, WL = 5% and the rest in security M

b) State the advantage of Single Index Model

QUESTION 3

The following information is available:

Stock
A B C D
Alpha (α) 1.1 2.5 1.3 1.5
Beta (β) 0.5 1.5 0.6 1.2
Residual Variance (σ2ie) 7.0 9.0 11.0 12.0
Note: E(rm) = 6%, σm = 9

Calculate:

i. The expected return on each stock


ii. The variance of each stock’s return
iii. The covariance of returns between all stocks
iv. The return and the standard deviation of the portfolio if equally invested

ACTIVITY
 The index of market represents the performance of overall
stock market of a country. Discuss the various index
available in Malaysia.

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