question archive QUESTION 4 Throughout the lockdown due to the Covid-19 pandemic outbreak in Malaysia, the government announced moratoriums for six months
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QUESTION 4 Throughout the lockdown due to the Covid-19 pandemic outbreak in Malaysia, 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 Stock October 1" 2020 Price per share Beta Up Glove $10 Rubber Ria $5 0.5 December 31st 2020 (expected data) Price per share Dividend per share Beta $0.50 1.3 $6 $0.15 0.4 1.5 $8 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 31" December 2020. (10 marks) b) Calculate Tony's portfolio beta in: i) October ii) December (5 marks) [TOTAL: 15 MARKS]
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