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Question 1: Index model; CAPM You are provided with the following regression outputs generated by estimating the index model for stocks A and B



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Question 1: Index model; CAPM You are provided with the following regression outputs generated by estimating the index model for stocks A and B using monthly return data for the period from January 2016 to December 2018: Regression Statistics for Stock A Multiple R 0.1713 R Square 0.0293 Adjusted R Square 0.0008 Standard Error 0.1613 Observations 36.0000 ANOVA df SS MS F Regression 1.0000 0.0267 0.0267 1.0278 Residual 34.0000 0.8846 0.0260 Total 35.0000 0.9113 Standard P- Coefficients Error t Stat value Intercept 0.0015 0.0269 0.0552 0.9563 X Variable 1 (Rm) 0.7727 0.7621 1.0138 0.3178 Regression Statistics for Stock B Multiple R 0.4981 R Square 0.2481 Adjusted R Square 0.2260 Standard Error 0.0405 Observations 36.0000 Question 5: Portfolio Performance Evaluation; International Diversification I. Your uncle invested $1,000,000 in a portfolio consisting of both equity shares and bonds at the end of 2013. He did not buy nor sell any securities thereafter. The following table provides end of the year market values of the portfolio together with the dividend income and coupon income generated by it for the five years ending in 2018: Year Market value of the portfolio 2013 $1,000,000 2014 $1,200,000 2015 $1,100,000 2016 $1,350,000 2017 $1,150,000 2018 $1,200,000 (i) Dividend income Coupon income $110,000 $50,000 $90,000 $50,000 $120,000 $50,000 $80,000 $50,000 $90,000 $50,000 (ii) Calculate the annual rates of return for the five years ending in 2018. Calculate the arithmetic average return and the geometric average return for the portfolio for the five-year period ending in 2018. (iii) Given your answer to (ii) above, which measure of average return is more useful in predicting the future performance of your uncle's portfolio? Explain why. II. You are evaluating the performance of two fund managers to help a client understand their strengths and weaknesses in security selection and asset allocation. The data relevant to the performance of these two fund managers and those of a benchmark portfolio are given in the following table: Manager/Benchmark Manager A Manager B Benchmark portfolio Total return Return attributable to security selection Return attributable to asset allocation 6% -2% 8% 4% 5% -1% 5% -0.2% 5.2% III. Assume that the data for managers A and B reflect average performance over the most recent five years and both managers actively manage their portfolios. Briefly describe one strength and one weakness for each manager. A globally diversified portfolio faces a lower market risk than a domestically diversified portfolio. Examine the above statement with reference to possible benefits of international diversification. Use an appropriate graph to illustrate. Question 2: Market efficiency; Behavioural finance I. II. Referring to the relevant form of efficient market hypothesis, briefly explain the following: (i) (ii) Technical analysis and Fundamental analysis. The following table shows end of week share price for a retail company and the price index for the retail industry for the most recent three weeks: Week -3 -2 -1 Share price of the company ($) 129.12 134.25 138.54 Index value of the retail industry 605.56 610.29 612.53 III. Providing necessary calculations, explain what has happened to the relative strength of the retail company. Explain whether technicians who use relative strength technique would recommend buying, selling or holding this company's shares? Nicholas Manufacturing announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter earnings. Nevertheless, Nicholas reported an abnormal return of -1.2% yesterday. Assuming that the market is semi-strong form efficient, explain the possible reason for the negative market response to the earnings announcement made by Nicholas Manufacturing. Briefly explain the following two behavioural biases referring to particular market anomalies implicated in them: IV. (i) Conservatism and (ii) Regret avoidance.

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