Question

Agenda Item #4 Portfolio Returns

With the impacts of COVID-19 still weighing on the portfolio manager’s mind. You have been tasked with evaluating its effects on two contrasting portfolios. In addition to understanding the relationship between risk and return, you should be able to calculate the standard deviation of a two-asset portfolio with different weighting combinations.  You are aware that the current risk-free rate is 1.08%, and the expected return on the market is 6.49%.

	Qantas			Village Roadshow
Date	Price	Dividend		Price	Dividend
1/06/2019	5.42			3.41
1/07/2019	5.43			2.71
1/08/2019	5.78			2.61
1/09/2019	6.10	.13		2.85	0.05
1/10/2019	6.44			2.81
1/11/2019	6.45			3.22
1/12/2019	7.32			3.21
1/01/2020	7.16			3.81
1/02/2020	6.41			3.99
1/03/2020	5.31	.135		3.46
1/04/2020	3.38			1.77
1/05/2020	3.62			2.02
1/06/2020	4.01			2.07
	Beta	1.06		Beta	2

Answer 1

Using CAPM formula, we find that the expected return of Stock B is higher than Stock A. Hence, if a single security needs to be held, it should be stock B. CAPM formula is as below: Expected Return = Rf + Beta (Rm - Rf)

We can also see that the Std deviation in Stock B is lower than that in Stock A. With expected return higher and the variation lower, we can suggest to hold Stock B (if the investor is ok with high Beta stock. I.e. every change in the market is reflected 200% in this stock).

When we combine the 2 stocks, we see that the returns vary from 10.88% to 7.83% and the std deviation also ranges from 0.81 to 1.16.

The Std Deviation of the portfolio is calculated as Portfolio Std Dev = sqrt (w1^2*Var1+w2^2*Var2+ 2*w1*w2*cov(1,2)

where 1 = Quantas, 2 = Village RoadShow

W1 = weight of Quantas W2 = Weight of VillageRoadShow

Var 1 = Variance of Quantas Var2 = Variance of Village

Quantas	Village Roadshow
Date	Price	Dividend	Price	Dividend
01/06/19	5.42		3.41		Portfolio Returns	Quantas Weights
01/07/19	5.43		2.71		20%	40%	60%	80%
01/08/19	5.78		2.61		80%	10.88%				Village Returns
01/09/19	6.1	0.13	2.85	0.05	60%		9.87%
01/10/19	6.44		2.81		40%			8.85%
01/11/19	6.45		3.22		20%				7.83%
01/12/19	7.32		3.21
01/01/20	7.16		3.81		Portfolio Std Dev	Quantas Weights
01/02/20	6.41		3.99		20%	40%	60%	80%
01/03/20	5.31	0.135	3.46		80%	0.81				Village Returns
01/04/20	3.38		1.77		60%		0.93
01/05/20	3.62		2.02		40%			1.05
01/06/20	4.01		2.07		20%				1.16
Beta	1.06		2
Rf	1.08%		1.08%
Rm	6.49%		6.49%
Expected return	6.81%		11.90%
Assuming we brought the stock on 1st June 2019 and Sold it in 1st June 2020
Capital Appreciation	-1.41		-1.34
Dividend Income	0.265		0.05
Total Returns	-1.145		-1.29
Total Returns %	-21.13%		-37.83%
Std. Deviation	1.27		0.69
Variation	1.61		0.47
Covariance		0.69