question archive Read and understand the following question and answer carefully step by step Throughout the lockdown due to the Covid-19 pandemic outbreak in United Kingdom, the government announced moratoriums for six months

Read and understand the following question and answer carefully step by step Throughout the lockdown due to the Covid-19 pandemic outbreak in United Kingdom, the government announced moratoriums for six months

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Read and understand the following question and answer carefully step by step

Throughout the lockdown due to the Covid-19 pandemic outbreak in United Kingdom, the government announced moratoriums for six months. By October, Tony manage to save a total of $8000 from the moratoriums. He is currently thinking of using the money for investment in stock market. The following are some information of his shortlisted stock he obtained from his broker

 

October 1st 2020                                       December 31st 2020 (expected data)

Stock

Price per share

Beta

Price per share

Beta

Up glove

$10

1.5

$0.50

1.3

Rubber Ria

$5

0.5

$0.15

0.4
         
           

 

a) Calculate Tony's holding period return if he spend all his money equally into the two stocks on 1 October 2020 with intention to sell it back on 31st December 2020.

b) Calculate Tony's portfolio beta in:

i) October

ii) December

 

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a)

If he spends his money equally, he will buy $4000 worth of Up Glove and $4000 worth of Rubber Ria

Number of shares of Up Glove bought = Total Investment / Share price = 4000 / 10 = 400 shares

Number of shares of Rubber Ria bought = 4000 / 5 = 800 shares

On Decemeber 31st, if he sells,

Proceeds from selling Up Glove = Number of Shares x Share Price = 400 x 8 = $3200

Dividends from Up Glove = Number of Shares x Dividend per share = 400 x 0.5 = $200

Proceeds from Selling Rubber Ria = 800 x 6 = $4800

Dividends from Rubber Ria = 800 x 0.15 = $120

Total Proceeds = 3200 + 200 + 4800 + 120 = $8320

Holding Period Return = (Total Proceeds - Initial Investment) / Initial Investment = (8320 - 8000) / 8000 = 0.04 or 4%

b)

i) Value of Up Glove in portfolio = 400 x 10 = $4000

Value of Rubber Ria in portfolio = 800 x 5 = $4000

Weight of Up Glove = 4000 / (4000 + 4000) = 50%

Weight of Rubber Ria = 4000 / (4000 + 4000) = 50%

Portfolio beta = Weight of Up Glove x Up Glove Beta + Weight of Rubber Ria x Rubber Ria Beta = 0.5 x 1.5 + 0.5 x 0.5 = 1

ii)

Value of Up Glove in portfolio = 400 x 8 = $3200

Value of Rubber Ria in portfolio = 800 x 6 = $4800

Weight of Up Glove = 3200 / (3200 + 4800) = 40%

Weight of Rubber Ria = 4800 / (3200 + 4800) = 60%

Portfolio beta = Weight of Up Glove x Up Glove Beta + Weight of Rubber Ria x Rubber Ria Beta = 0.4 x 1.3 + 0.6 x 0.4 = 0.76

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