Name : Lee Jian Ping Student ID : 4140783 Subject Code : FIN222 Part 1

Weekly Closing Stock PricesWeekly Closing Stock Market Index

DateSIME DividendMaybank DividendCARLSBGDividendStock Market Index

22-Jul-119.208.837.601565.06

29-Jul-119.158.767.351548.81

5-Aug-119.058.777.241524.43

12-Aug-118.828.476.881483.67

19-Aug-118.808.636.811483.98

26-Aug-118.808.676.681444.81

2-Sep-118.878.726.851474.09

9-Sep-118.798.696.891469.12

15-Sep-118.008.596.801430.93

23-Sep-118.107.996.601365.94

30-Sep-118.448.006.451387.13

7-Oct-118.528.186.510.051400.05

14-Oct-118.558.296.861442.43

21-Oct-118.558.256.851438.83

28-Oct-118.908.357.051481.82

4-Nov-118.808.237.031477.51

11-Nov-118.898.247.001468.75

18-Nov-118.908.257.261454.40

25-Nov-118.887.957.241431.55

2-Dec-119.128.307.611489.02

9-Dec-118.908.157.981460.13

16-Dec-119.180.228.218.661466.22

23-Dec-118.998.358.401496.15

30-Dec-119.208.900.328.541530.73

6-Jan-129.068.238.701514.13

13-Jan-129.158.268.631523.07

20-Jan-129.088.268.631522.66

27-Jan-129.078.198.931520.90

3-Feb-129.468.339.051538.77

10-Feb-129.678.529.691561.66

17-Feb-129.598.569.431557.15

24-Feb-129.608.779.451558.77

2-Mar-129.988.7710.421583.78

9-Mar-129.858.7410.521579.00

16-Mar-129.758.8110.441571.40

23-Mar-129.738.7510.461585.83

30-Mar-129.748.8710.301596.33

6-Apr-129.868.8810.741598.87

13-Apr-129.898.8610.821603.12

20-Apr-129.898.8511.501591.85

27-Apr-129.728.6411.481567.80

4-May-129.798.7111.001591.04

11-May-129.900.108.7511.001584.32

18-May-129.248.4610.900.661532.46

25-May-129.518.5310.441551.12

1-Jun-129.678.6910.301573.59

8-Jun-129.699.060.3610.681570.62

15-Jun-129.808.6912.981579.23

22-Jun-129.908.7312.041603.07

29-Jun-129.898.7012.041599.15

6-Jul-129.938.6712.001620.55

13-Jul-129.948.7812.001626.38

20-Jul-129.948.7412.361643.00

PART 1 (a)Weekly Holding Period Stock ReturnsWeekly Holding Period Stock Market Index Return

DATESIME Maybank CARLSBGStock Market Index

22-Jul-11

29-Jul-11-0.0054-0.0079-0.0329-0.0104

5-Aug-11-0.01090.0011-0.0150-0.0157

12-Aug-11-0.0254-0.0342-0.0497-0.0267

19-Aug-11-0.00230.0189-0.01020.0002

26-Aug-110.00000.0046-0.0191-0.0264

2-Sep-110.00800.00580.02540.0203

9-Sep-11-0.0090-0.00340.0058-0.0034

15-Sep-11-0.0899-0.0115-0.0131-0.0260

23-Sep-110.0125-0.0698-0.0294-0.0454

30-Sep-110.04200.0013-0.02270.0155

7-Oct-110.00950.02250.00930.0093

14-Oct-110.00350.01340.05380.0303

21-Oct-110.0000-0.0048-0.0015-0.0025

28-Oct-110.04090.01210.02920.0299

4-Nov-11-0.0112-0.0144-0.0028-0.0029

11-Nov-110.01020.0012-0.0043-0.0059

18-Nov-110.00110.00120.0371-0.0098

25-Nov-11-0.0022-0.0364-0.0028-0.0157

2-Dec-110.02700.04400.05110.0401

9-Dec-11-0.0241-0.01810.0486-0.0194

16-Dec-110.03150.00740.08520.0042

23-Dec-11-0.02070.0171-0.03000.0204

30-Dec-110.02340.06590.01670.0231

6-Jan-12-0.0152-0.07530.0187-0.0108

13-Jan-120.00990.0036-0.00800.0059

20-Jan-12-0.00770.00000.0000-0.0003

27-Jan-12-0.0011-0.00850.0348-0.0012

3-Feb-120.04300.01710.01340.0117

10-Feb-120.02220.02280.07070.0149

17-Feb-12-0.00830.0047-0.0268-0.0029

24-Feb-120.00100.02450.00210.0010

2-Mar-120.03960.00000.10260.0160

9-Mar-12-0.0130-0.00340.0096-0.0030

16-Mar-12-0.01020.0080-0.0076-0.0048

23-Mar-12-0.0021-0.00680.00190.0092

30-Mar-120.00100.0137-0.01530.0066

6-Apr-120.01230.00110.04270.0016

13-Apr-120.0030-0.00230.00740.0027

20-Apr-120.0000-0.00110.0628-0.0070

27-Apr-12-0.0172-0.0237-0.0017-0.0151

4-May-120.00720.0081-0.04180.0148

11-May-120.01120.00460.0000-0.0042

18-May-12-0.0667-0.0331-0.0095-0.0327

25-May-120.02920.0083-0.04180.0122

1-Jun-120.01680.0188-0.01340.0145

8-Jun-120.00210.04260.0369-0.0019

15-Jun-120.0114-0.04080.21540.0055

22-Jun-120.01020.0046-0.07240.0151

29-Jun-12-0.0010-0.00340.0000-0.0024

6-Jul-120.0040-0.0034-0.00330.0134

13-Jul-120.00100.01270.00000.0036

20-Jul-120.0000-0.00460.03000.0102

Part 1 (b)SIMEMaybankCARLSBGStock Market Index

Mean of weekly returns0.00175560.00008900.01031380.0011

Variance of weekly returns0.0005331180.0005762760.0019912780.00027083

Standard deviation of weekly returns0.0228662630.0237738040.0441925770.0162979

Coefficient of Variation of weekly returns13.02480248267.08753734.28481105315.25690104

Part 1 (b) Comment on the result of Coefficient of Variation

Coefficient of variation is a measure of risk associated with an investment for 1% of expected return (Parrino, Kidwell, Au Yong, Morkel-Kingsbury, Dempsey & Murray 2011). 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 each 1% of expected return from CARLSBG stock, the investor needs to bear a risk of 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 Part 1 (C) CovarianceSIMEMaybankCARLSBGStock Market Index

SIME0.0005228660.0002033180.0002557580.000227635

Maybank0.0002033180.000565194-1.1633E-050.000252421

CARLSBG0.000255758-1.1633E-050.0019529840.000167421

Stock Market Index0.0002276350.0002524210.0001674210.000265622

Part 1 (C) Correlation Coefficients

SIMEMaybankCARLSBGStock Market Index

SIME10.3740081090.2530953440.610819506

Maybank0.3740081091-0.0110724230.651471464

CARLSBG0.253095344-0.01107242310.232449769

Stock Market Index0.6108195060.6514714640.2324497691

Part 1 (D) Compare your results obtained from part (a) to (c) for each stock and the market index and comment on the risk-return 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 risk free rate asset, which serve as compensation for investors to hold riskier securities (Smith 2012). As the result of Part1 (B), we can see that the mean weekly return of CARLSBG stock (0.0103138) is higher than the other two stocks and also the Stock Market Index, and 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 stock 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 which 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 had a higher standard deviation compare to the stock market index. This shows that, diversification of your portfolio brings down the overall 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 each 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 move in opposite directions the covariance will be negative (Investopedia 2012). The 3 stocks and Stock Market Indexs covariance from part 1(c) answer shows that most of the 3 stocks and the Stock Market Index covariance between each other have a positive result but only Maybank and CARLSBG have negative result (-1.1633E-05) because the two stocks returns move in opposite directions and there was lack of market interest. This can conclude that the portfolio has positive and negative correlated stocks, therefore diversification exist in this portfolio. Correlation coefficients is the measure of strength of relationship between two assets returns or the strength of covariance relationship (Parrino, Kidwell, Au Yong, Morkel-Kingsbury, Dempsey & Murray 2011). The 3 stocks and Stock Market Indexs correlation coefficients from part 1(c) answer shows that most of the 3 stocks and the Share Market Index have a positive correlation or relationship which is when for example, CARLSBG return is higher, SIMEs return will also be higher. The exception is 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 negative correlation.

Part 2 (a) DATEEqually Weighted Portfolio of 3 StocksDATEEqually Weighted Portfolio of 3 Stocks

22-Jul-1117-Feb-12-0.01

29-Jul-11-0.015324-Feb-120.0091

5-Aug-11-0.00822-Mar-120.0469

12-Aug-11-0.03619-Mar-12-0.0023

19-Aug-110.002116-Mar-12-0.0032

26-Aug-11-0.004823-Mar-12-0.0023

2-Sep-110.012930-Mar-12-0.0002

9-Sep-11-0.00226-Apr-120.0185

15-Sep-11-0.037813-Apr-120.0027

23-Sep-11-0.028620-Apr-120.0204

30-Sep-110.006827-Apr-12-0.0141

7-Oct-110.01364-May-12-0.0087

14-Oct-110.023311-May-120.0052

21-Oct-11-0.002118-May-12-0.0361

28-Oct-110.027125-May-12-0.0014

4-Nov-11-0.00941-Jun-120.0073

11-Nov-110.00248-Jun-120.0269

18-Nov-110.01315-Jun-120.0613

25-Nov-11-0.013722-Jun-12-0.019

2-Dec-110.040329-Jun-12-0.0015

9-Dec-110.00216-Jul-12-0.0009

16-Dec-110.040913-Jul-120.0045

23-Dec-11-0.011120-Jul-120.0084

30-Dec-110.0349

6-Jan-12-0.0237

13-Jan-120.0018

20-Jan-12-0.0025

27-Jan-120.0083

3-Feb-120.0243

10-Feb-120.0382

Weights for Equally Weighted Portfolio of 3 stocks0.330.330.331

Part 2 (a)Mean Weekly rate of return of an equally weighted portfolio = 0.0040Standard 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.

Part 2(D) (I) Find an estimate of beta of each stock

SIME stock beta = 0.4354

Maybank stock beta = 0.4466

CARLSBG stock beta =0.0857

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 of 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 that 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 other 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

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).

Reference ListDavis 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.Investopedia 2012, Definition of Covariance, viewed 18 October 2012.

Investopedia 2012, Definition of correlation Coefficient, viewed 18 October 2012.Manish 2011, How to Calculate Stock Beta in Excel, Finance Train, viewed 18 October 2012.

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.

APPENDIX (EXCEL FORMULA)Part 1 (A)(B)(Example)Weekly Holding Period Stock Returns : =(C9/C8)-1

Mean of Weekly Returns : =AVERAGE(G9:G60)

Variance of Weekly Returns : =VAR(G9:G60)

Standard Deviation : =STDEVP(G9:G60)of Weekly Returns

Coefficient of Variation : =G64/G62

Part 1 (C)(Example)Covariance = STEP 1 CLICK (DATA ANALYSIS) STEP 2 CHOOSE (COVARIENCE) 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 IN- Input range ( F5:I56) STEP 4 CLICK OK TO GENERATE ANSWER (TABLE)

Part 2 (a)

Weights for Equally Weighted Portfolio of 3 stocks0.330.330.331

(Example)=(G9*0.33)+(H9*0.33)+(I9*0.33)

=AVERAGE(K9:K60)

=STDEVP(K9:K60) Part 2 (D)(Example)

Step 1 :Highlight each stock with the stock market index Step 2 : Click INSERT and Click Scatter, Choose Scatter with only markersStep 3 : Click LAYOUT and CLICK TRENDLINEStep 4 : Click Linear Trendline and CLICK more Trendline optionsStep 5 : Click to Tick Display Equation on Chart and Display R square value on chart

y (SIME) = 0.4354x (Stock Market Index) + 0.0003

Beta Value = 0.43554

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 markersStep 3 : Click LAYOUT and CLICK TRENDLINEStep 4 : Click Linear Trendline and CLICK more Trendline optionsStep 5 : Click to Tick Display Equation on Chart and Display R square value on chart

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