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23 views3 pages

Class Activity

Uploaded by

arshadabdullah212
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Class Activity

Question 1.

You are an analyst for a large public pension fund and you have been assigned the task of evaluating two
different external portfolios managers (Stinky and Creep). You consider the following historical average
return, standard deviation and CAPM beta estimates for these two mangers over past five years.

Portfolio Actual. Avg return Standard Deviation Beta


Manager Stinky 10.28 % 12.00 % 1.20
Manager Creep 8.80 % 9.90% 0.80
Additionally, your estimate for risk premium for the market portfolio is 5 % and risk free rate is 4.50 %.

Requirement: -

a) For both portfolio managers calculate the expected return using CAPM.
b) Calculate each manager’s alpha (actual returns-expected returns) over the five year holding
period.
c) Explain whether you can conclude from the information in part b if: (1) either manager
outperformed the other on risk adjusted basis, and (2) either manager outperformed the
other on market expectations in general.
Question 2.

Market Rally Nestle Beta Engro Beta Investment Decision


Bear Market 1.102 .870
Bullish Market 1.786 1.502

Reason 1:-

Reason 2:-

Requirement: - Decide to invest in one stock based on the given BETAs for each of the two cases
(market Rally) separately. Decision is only relevant with the reasoning.

Question 3.
Consider the following multifactor (APT) model of security returns for a particular stock.

Factor Factor Beta Factor Risk Premium (%)


Inflation 1.2 6
Oil Prices 0.5 8
Industrial Production 0.3 3

Factor Expected Rate of Change (%) Actual Rate of Change


Inflation 5 4
Oil Prices 3 6
Industrial Production 2 0

Requirements:
a. If T-bills currently offer a 6% yield, find the expected rate of return on this stock if the
market views the stock as fairly priced.
b. Suppose that the market expected the values for the three macro factors given in column 1
below, but that the actual values turn out as given in column 2. Calculate the revised
expectations for the rate of return on the stock once the “surprises” become known,
Explain.

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