13. The following table provides the information pertaining to 2 securities and the market index. If the risk-free rate is
4% p.a., answer the following (show all the steps).
Expected return of security A
Excess return of security B
Excess market return
Day 1
12%
7%
14%
Day 2
10%
5%
12%
Day 3
15%
8%
13%
Day 4
16%
10%
15%
Day 5
13%
8%
16%
A. Find single index model equations for Security A and Security B.
[3]
B. Find the return covariance between Security A and Security B.
[2]
C. Suppose an investor wants to create a portfolio comprising of Security A and Security B such that the
portfolio beta is 0.755. Find the portfolio alpha and interpret it.
[2]
D. Find also systematic variance of the portfolio created in part C.
[1]
E. Suppose now the security beta is adjusted using the below relationship.
[2]
Adjusted beta= (2/3) SIM beta+(1/3) Market beta
Following the adjustment, comment on the systematic variance of the portfolio also comparing with the result
obtained in part C.
