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Student ID : 4140783
Part 1
Date 22-Jul-11 29-Jul-11 5-Aug-11 12-Aug-11 19-Aug-11 26-Aug-11 2-Sep-11 9-Sep-11 15-Sep-11 23-Sep-11 30-Sep-11 7-Oct-11 14-Oct-11 21-Oct-11 28-Oct-11 4-Nov-11 11-Nov-11 18-Nov-11 25-Nov-11 2-Dec-11 9-Dec-11 16-Dec-11 23-Dec-11 30-Dec-11 6-Jan-12 13-Jan-12 20-Jan-12 27-Jan-12 3-Feb-12 10-Feb-12 17-Feb-12 24-Feb-12 2-Mar-12 9-Mar-12 16-Mar-12
SIME Dividend Maybank Dividend CARLSBG Dividend 9.20 8.83 7.60 9.15 8.76 7.35 9.05 8.77 7.24 8.82 8.47 6.88 8.80 8.63 6.81 8.80 8.67 6.68 8.87 8.72 6.85 8.79 8.69 6.89 8.00 8.59 6.80 8.10 7.99 6.60 8.44 8.00 6.45 8.52 8.18 6.51 0.05 8.55 8.29 6.86 8.55 8.25 6.85 8.90 8.35 7.05 8.80 8.23 7.03 8.89 8.24 7.00 8.90 8.25 7.26 8.88 7.95 7.24 9.12 8.30 7.61 8.90 8.15 7.98 9.18 0.22 8.21 8.66 8.99 8.35 8.40 9.20 8.90 0.32 8.54 9.06 8.23 8.70 9.15 8.26 8.63 9.08 8.26 8.63 9.07 8.19 8.93 9.46 8.33 9.05 9.67 8.52 9.69 9.59 8.56 9.43 9.60 8.77 9.45 9.98 8.77 10.42 9.85 8.74 10.52 9.75 8.81 10.44
Weekly Closing Stock Market Index Stock Market Index 1565.06 1548.81 1524.43 1483.67 1483.98 1444.81 1474.09 1469.12 1430.93 1365.94 1387.13 1400.05 1442.43 1438.83 1481.82 1477.51 1468.75 1454.40 1431.55 1489.02 1460.13 1466.22 1496.15 1530.73 1514.13 1523.07 1522.66 1520.90 1538.77 1561.66 1557.15 1558.77 1583.78 1579.00 1571.40
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Student ID : 4140783
23-Mar-12 30-Mar-12 6-Apr-12 13-Apr-12 20-Apr-12 27-Apr-12 4-May-12 11-May-12 18-May-12 25-May-12 1-Jun-12 8-Jun-12 15-Jun-12 22-Jun-12 29-Jun-12 6-Jul-12 13-Jul-12 20-Jul-12
9.73 9.74 9.86 9.89 9.89 9.72 9.79 9.90 9.24 9.51 9.67 9.69 9.80 9.90 9.89 9.93 9.94 9.94
0.10
8.75 8.87 8.88 8.86 8.85 8.64 8.71 8.75 8.46 8.53 8.69 9.06 8.69 8.73 8.70 8.67 8.78 8.74
0.36
10.46 10.30 10.74 10.82 11.50 11.48 11.00 11.00 10.90 10.44 10.30 10.68 12.98 12.04 12.04 12.00 12.00 12.36
0.66
1585.83 1596.33 1598.87 1603.12 1591.85 1567.80 1591.04 1584.32 1532.46 1551.12 1573.59 1570.62 1579.23 1603.07 1599.15 1620.55 1626.38 1643.00
Weekly Holding Period Stock Returns PART 1 (a) DATE 22-Jul-11 29-Jul-11 5-Aug-11 12-Aug-11 19-Aug-11 26-Aug-11 2-Sep-11 9-Sep-11 15-Sep-11 23-Sep-11 30-Sep-11 7-Oct-11 14-Oct-11 21-Oct-11 28-Oct-11 4-Nov-11 SIME -0.0054 -0.0109 -0.0254 -0.0023 0.0000 0.0080 -0.0090 -0.0899 0.0125 0.0420 0.0095 0.0035 0.0000 0.0409 -0.0112 Maybank -0.0079 0.0011 -0.0342 0.0189 0.0046 0.0058 -0.0034 -0.0115 -0.0698 0.0013 0.0225 0.0134 -0.0048 0.0121 -0.0144 CARLSBG -0.0329 -0.0150 -0.0497 -0.0102 -0.0191 0.0254 0.0058 -0.0131 -0.0294 -0.0227 0.0093 0.0538 -0.0015 0.0292 -0.0028
Weekly Holding Period Stock Market Index Return Stock Market Index -0.0104 -0.0157 -0.0267 0.0002 -0.0264 0.0203 -0.0034 -0.0260 -0.0454 0.0155 0.0093 0.0303 -0.0025 0.0299 -0.0029
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Student ID : 4140783
11-Nov-11 18-Nov-11 25-Nov-11 2-Dec-11 9-Dec-11 16-Dec-11 23-Dec-11 30-Dec-11 6-Jan-12 13-Jan-12 20-Jan-12 27-Jan-12 3-Feb-12 10-Feb-12 17-Feb-12 24-Feb-12 2-Mar-12 9-Mar-12 16-Mar-12 23-Mar-12 30-Mar-12 6-Apr-12 13-Apr-12 20-Apr-12 27-Apr-12 4-May-12 11-May-12 18-May-12 25-May-12 1-Jun-12 8-Jun-12 15-Jun-12 22-Jun-12 29-Jun-12 6-Jul-12 13-Jul-12 20-Jul-12
0.0102 0.0011 -0.0022 0.0270 -0.0241 0.0315 -0.0207 0.0234 -0.0152 0.0099 -0.0077 -0.0011 0.0430 0.0222 -0.0083 0.0010 0.0396 -0.0130 -0.0102 -0.0021 0.0010 0.0123 0.0030 0.0000 -0.0172 0.0072 0.0112 -0.0667 0.0292 0.0168 0.0021 0.0114 0.0102 -0.0010 0.0040 0.0010 0.0000
0.0012 0.0012 -0.0364 0.0440 -0.0181 0.0074 0.0171 0.0659 -0.0753 0.0036 0.0000 -0.0085 0.0171 0.0228 0.0047 0.0245 0.0000 -0.0034 0.0080 -0.0068 0.0137 0.0011 -0.0023 -0.0011 -0.0237 0.0081 0.0046 -0.0331 0.0083 0.0188 0.0426 -0.0408 0.0046 -0.0034 -0.0034 0.0127 -0.0046
-0.0043 0.0371 -0.0028 0.0511 0.0486 0.0852 -0.0300 0.0167 0.0187 -0.0080 0.0000 0.0348 0.0134 0.0707 -0.0268 0.0021 0.1026 0.0096 -0.0076 0.0019 -0.0153 0.0427 0.0074 0.0628 -0.0017 -0.0418 0.0000 -0.0095 -0.0418 -0.0134 0.0369 0.2154 -0.0724 0.0000 -0.0033 0.0000 0.0300
-0.0059 -0.0098 -0.0157 0.0401 -0.0194 0.0042 0.0204 0.0231 -0.0108 0.0059 -0.0003 -0.0012 0.0117 0.0149 -0.0029 0.0010 0.0160 -0.0030 -0.0048 0.0092 0.0066 0.0016 0.0027 -0.0070 -0.0151 0.0148 -0.0042 -0.0327 0.0122 0.0145 -0.0019 0.0055 0.0151 -0.0024 0.0134 0.0036 0.0102
Student ID : 4140783
Part 1 (b) Stock Market CARLSBG Index 0.0103138 0.0011 0.001991278 0.00027083 0.044192577 4.284811053 0.0162979 15.25690104
Mean of weekly returns Variance of weekly returns Standard deviation of weekly returns Coefficient of Variation of weekly returns
investor need to bear a risk of 267.0875373 calculated by the coefficient of variation. Besides that, for each 1% of expected return fr CARLSBG stock, the investor needs to bear a risk of 4.284811053 calculated by the coefficient of variation. Lastly for SIME stock the Stock Market Index need to bear a risk of 13.02480248and 15.25690104 respectively, calculated by the Coefficient of variation each 1% of expected return from the two stocks
Part 1 (C) Covariance Stock Market SIME Maybank CARLSBG Index 0.000522866 0.000203318 0.000255758 0.000227635 0.000203318 0.000565194 -1.1633E-05 0.000252421 0.000255758 -1.1633E-05 0.001952984 0.000167421
Part 1 (C) Correlation Coefficients SIME 1 0.374008109 0.253095344 0.610819506 Maybank 0.374008109 1 -0.011072423 0.651471464 CARLSBG 0.253095344 -0.011072423 1 0.232449769 Stock Market Index 0.610819506 0.651471464 0.232449769 1
Student ID : 4140783
Part 1 (D) Compare your results obtained from part (a) to (c) for each stock and the market index and comment on the riskreturn profile for each of the stock and index. Basically, the risk and return have a linear relationship, which is the higher the risk of a stock, the stock will be compensated with higher returns from an investment. The risk premium is calculated by the difference between the rate of return of a risky asset and a
free rate asset, which serve as compensation for investors to hold riskier securities (Smith 2012). As the result of Part1 (B), we can s
that the mean weekly return of CARLSBG stock (0.0103138) is higher than the other two stocks and also the Stock Market Index, a the standard deviation of the stock of CARLSBG (0.044192577) is also the highest compare to the other two stocks and the stock
market index. From the SIMEs mean of weekly return (0.0017556) shows that the stock had performed slightly better than the stoc market index (0.0011) and the risk of SIME (0.022866263) shown from the standard deviation is also higher than the stock market
indexs risk (0.0162979). This had proven the theory of the higher the risk, the higher the return. But, there are some exceptions whi occur from the Maybank stock. It shows higher risk but lower return compare to SIME stock. The possible reason could be lack of
market interest on the Maybank stock during this period despite being the largest bank in Malaysia. Besides that, all the three stocks
a higher standard deviation compare to the stock market index. This shows that, diversification of your portfolio brings down the ov systematic risk. Our stock market index consists of 30 selected stocks. The coefficient of variation for Maybank stock is the highest
which is 267.0875373 and the CARLSBG stock is the lowest which is 4.284811053. This shows that for each 1% of expected return
from Maybank stock, the investor need to bear a risk of 267.0875373 calculated by the Coefficient of variation. Besides that, for eac
1% of expected return from CARLSBG stock, the investor needs to bear a risk of only 4.284811053 calculated by the Coefficient of variation. Lastly for SIME stock and the Stock Market Index need to bear a risk of 13.02480248and 15.25690104 respectively calculated by the Coefficient of variation for each 1% of expected return from the two stocks. Covariance is a measure of how two
variables move together. If two stocks returns move in the same direction the covariance will be positive, if two stocks returns mo
opposite directions the covariance will be negative (Investopedia 2012). The 3 stocks and Stock Market Indexs covariance from pa Maybank and CARLSBG have negative result (-1.1633E-05) because the two stocks returns move in opposite directions and there this portfolio. Correlation coefficients is the measure of strength of relationship between two assets returns or the strength of Indexs correlation coefficients from part 1(c) answer shows that most of the 3 stocks and the Share Market Index have a positive
1(c) answer shows that most of the 3 stocks and the Stock Market Index covariance between each other have a positive result but on
lack of market interest. This can conclude that the portfolio has positive and negative correlated stocks, therefore diversification exis
covariance relationship (Parrino, Kidwell, Au Yong, Morkel-Kingsbury, Dempsey & Murray 2011). The 3 stocks and Stock Marke
correlation or relationship which is when for example, CARLSBG return is higher, SIMEs return will also be higher. The exceptio the Maybank and CARLSBG negative relationship, because they gain a negative answer from correlation coefficient calculation.
CARLSBGs return did increased but Maybanks return went down during that period. This shows that the two stocks have a negati correlation.
Student ID : 4140783
Part 2 (a)
DATE 22-Jul-11 29-Jul-11 5-Aug-11 12-Aug-11 19-Aug-11 26-Aug-11 2-Sep-11 9-Sep-11 15-Sep-11 23-Sep-11 30-Sep-11 7-Oct-11 14-Oct-11 21-Oct-11 28-Oct-11 4-Nov-11 11-Nov-11 18-Nov-11 25-Nov-11 2-Dec-11 9-Dec-11 16-Dec-11 23-Dec-11 30-Dec-11 6-Jan-12 13-Jan-12 20-Jan-12 27-Jan-12 3-Feb-12 10-Feb-12
Equally Weighted Portfolio of 3 Stocks -0.0153 -0.0082 -0.0361 0.0021 -0.0048 0.0129 -0.0022 -0.0378 -0.0286 0.0068 0.0136 0.0233 -0.0021 0.0271 -0.0094 0.0024 0.013 -0.0137 0.0403 0.0021 0.0409 -0.0111 0.0349 -0.0237 0.0018 -0.0025 0.0083 0.0243 0.0382
DATE 17-Feb-12 24-Feb-12 2-Mar-12 9-Mar-12 16-Mar-12 23-Mar-12 30-Mar-12 6-Apr-12 13-Apr-12 20-Apr-12 27-Apr-12 4-May-12 11-May-12 18-May-12 25-May-12 1-Jun-12 8-Jun-12 15-Jun-12 22-Jun-12 29-Jun-12 6-Jul-12 13-Jul-12 20-Jul-12
Equally Weighted Portfolio of 3 Stocks -0.01 0.0091 0.0469 -0.0023 -0.0032 -0.0023 -0.0002 0.0185 0.0027 0.0204 -0.0141 -0.0087 0.0052 -0.0361 -0.0014 0.0073 0.0269 0.0613 -0.019 -0.0015 -0.0009 0.0045 0.0084
0.33
0.33
0.33
1
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Student ID : 4140783
Part 2 (a)
Mean Weekly rate of return of an equally weighted portfolio = 0.0040 Standard deviation of an equally weighted portfolio = 0.020703202
Part 2 (B) Examine and compare the pattern of returns of your portfolio with those of the individual stocks and the stock market index. Compare the corresponding standard deviations.
The returns of the 3 stocks portfolio (0.0040) which is higher than the individual stocks return of SIME (0.0017556) and Maybank(0.0000890) but lower than CARLSBG(0.0103138). The return of the 3 stocks portfolio (0.0040) is also higher than the Stock Market Indexs return (0.0011). The standard deviation of an equally weighted portfolio (0.020703202) is lower than SIMEs (0.022866263), Maybanks (0.023773804), and CARLSBGs (0.044192577) standard deviation because of the diversification effects. The stock market indexs standard deviation (0.0162979) is lower than the standard deviation of the 3 stocks portfolio because the stock market index has a bigger portfolio of 30 stocks. The choice of the stock is very important in putting in a portfolio, for example, picking each stock from a different sector and combination of bonds. If all your money is invested in only one stock the risk is very high therefore diversifications of stocks are very important to ensure investors to have a safe investment.
Part 2 (C) Are there advantages in diversifying across stocks? Yes, with a combination of assets portfolio and assets with negative correlations investors can diversify and lower down unsystematic risks which are the firms specific risks. When stock prices in the portfolio move in opposite directions, stock prices that have a gain will offsets some of the stocks prices that made a loss. The systematic risk which is the market risk cannot be eliminated using diversification and systematic risk is calculated using Beta but not standard deviation. By diversifying, the investors can better protect their investments rather than putting all eggs in one basket.
Student ID : 4140783
-0.1000
0.0000 -0.1000 -0.0800 -0.0600 -0.0400 -0.0200 0.0000 -0.0500 Stock Market Index
0.0200
0.0400
0.0600
0.0800
Stock Market Index Linear (Stock Market Index) Linear (Stock Market Index) Linear (Stock Market Index)
-0.1000
Student ID : 4140783
Part 2(D) (II) Comment on these beta values and explain what these values mean.
CARLSBG had a lowest beta value among the 3 stocks, this shows that the stock has the lowest systematic risk which is also known
as market risk and CARLSBG return is the highest among the 3 stocks and the stock market indexs return. With low systematic
risk and high expected return, investors are willing to put in more money to invest in CARLSBG. Maybank had a highest beta value
among the 3 stocks, this shows that the stock has the highest systematic risk. Investors think that Maybank is overpriced because o
the expected return (0.0000890) is the lowest among the 3 stocks and the stock market index. SIME had a beta value of (0.4354
which is slightly lower than the beta value of Maybank (0.4466) and having a lower systematic risk as well. This had led SIME to
gain higher market interest compare to Maybank because of SIME having a lower systematic risk and higher expected return
(Manish 2011). CARLSBG linear equation : y (CARLSBG) = 0.0857x (Stock Market Index) + 0.0002. This equation shows tha
for any one unit change in x (Stock Market Index), holding other variable constant, y (CARLSBG) will changes by 0.0859
Maybank linear equation : y (Maybank) = 0.4466x(Stock Market Index) + 0.001. This equation shows that for any one unit change
in x (Stock Market Index), holding other variable constant, y (Maybank) will changes by 0.4476. SIME linear equation : y (SIME) =
0.4354x (Stock Market Index) + 0.0003. This equation shows that for any one unit change in x (Stock Market Index), holding othe variable constant, y (SIME) will change by 0.4357.
Part 2(D) (III) Calculate the beta of the equally weighted portfolio derived from the three stocks
Equally Weighted Portfolio of 3 Stocks Linear (Equally Weighted Portfolio of 3 Stocks) 0.0200 0.0400 0.0600 Linear (Equally Weighted Portfolio of 3 Stocks)
Student ID : 4140783
Part 2(D) (IV) Based on all your earlier calculations, which stock has the most stand- alone risk? Stand- alone risk is defined as the total risk or the standard deviation of the stock (Parrino, Kidwell, Au Yong, Morkel-Kingsbury, Dempsey & Murray 2011). Based on all my earlier calculations, CARLSBG stock has the most stand- alone risk, which had the highest standard deviation of 0.044192577. Part 2(E) Why are returns on the market risk premium used as a benchmark in measuring systematic risk? Market risk premium is the compensation for holding market risk or systematic risk. Market risk premium is the differences between the market rate of return and the risk free rate of return and is the compensation gain for bearing market risk (Fernandez 2004). The returns on the market risk premium is used as a benchmark in measuring systematic risk because market risk premium is the compensation needed from an investor to move out of the risk free assets and also a compensation for bearing systematic risk which is also known as the market risk that cannot be eliminate by diversifying in a portfolio. According to the Capital Asset Pricing Model (CAPM), the investor can make investment decision by finding out the expected return that included the return on risk free asset and return or compensation on market risk in bearing systematic risk. If the expected return result gain from the CAPM model is lower than the investors required return, investors are unlikely to invest on the share because the investors will find alternative investment that pay them better expected return that sufficiently compensate them on bearing systematic risk (Parrino, Kidwell, Au Yong, Morkel-Kingsbury, Dempsey & Murray 2011).
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Student ID : 4140783
Reference List Davis 2009, EXCEL 2007: Two-Variable Correlation, Dept. of Economics, University of California, viewed 18 October 2012< http://cameron.econ.ucdavis.edu/excel/ex51correlation.html> Fernandez, P. 2004, Market Risk Premium: required, historical and expected, IESE Business School, University of Navarra, Pearson, viewed 18 October 2012< http://www.iese.edu/research/pdfs/DI-0574-E.pdf>.
Investopedia 2011, Calculating Covariance for Stocks, viewed 18 October 2012<http://www.investopedia.com/articles/financial-theory/11/calculatingcovariance.asp#axzz29dbk8tnj>. Investopedia 2012, Definition of Covariance, viewed 18 October 2012<http://www.investopedia.com/terms/c/covariance.asp#axzz29dbk8tnj>. Investopedia 2012, Definition of correlation Coefficient, viewed 18 October 2012<http://www.investopedia.com/terms/c/correlation.asp#axzz29dbk8tnj>. Manish 2011, How to Calculate Stock Beta in Excel, Finance Train, viewed 18 October 2012<http://financetrain.com/how-to-calculate-stock-beta-in-excel/>. Parrino, R., Kidwell, D.S., Au Yong, H.H., Morkel-Kingsbury, N., Dempsey, M. & Murray, J. 2011, Fundamentals of Corporate Finance, John Wiley & Sons, 1st edition, Queensland. Smith, G.N 2012, Excel Applications for Accounting and Finance Principles, South-Western, Cengage Learning, USA.
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Student ID : 4140783
APPENDIX (EXCEL FORMULA) Part 1 (A)(B) (Example) Weekly Holding Period Stock Returns : =(C9/C8)-1
: =STDEVP(G9:G60)
Part 1 (C) (Example) Covariance = STEP 1 CLICK (DATA ANALYSIS) STEP 2 CHOOSE (COVARIENCE)
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Student ID : 4140783
STEP 3 TYPE IN- Input range ( F5:I56) STEP 4 CLICK OK TO GENERATE ANSWER (TABLE) Part 1 (C) (Example) Correlation Coefficients = STEP 1 CLICK (DATA ANALYSIS) STEP 2 CHOOSE (CORRELATION COEFFICIENTS) STEP 3 TYPE INInput range ( F5:I56) STEP 4 CLICK OK TO GENERATE ANSWER (TABLE)
Part 2 (a) Weights for Equally Weighted Portfolio of 3 stocks (Example) =(G9*0.33)+(H9*0.33)+(I9*0.33) 0.33 0.33 0.33 1
=AVERAGE(K9:K60)
=STDEVP(K9:K60)
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Student ID : 4140783
Step 1 :Highlight each stock with the stock market index Step 2 : Click INSERT and Click Scatter, Choose Scatter with only markers Step 3 : Click LAYOUT and CLICK TRENDLINE Step 4 : Click Linear Trendline and CLICK more Trendline options Step 5 : Click to Tick Display Equation on Chart and Display R square value on chart
Part 2 (D) (III) Step 1 :Highlight all 3 stock portfolio with the stock market index Step 2 : Click INSERT and Click Scatter, Choose Scatter with only markers Step 3 : Click LAYOUT and CLICK TRENDLINE Step 4 : Click Linear Trendline and CLICK more Trendline options Step 5 : Click to Tick Display Equation on Chart and Display R square value on chart
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