Question

Given below is hypothetical data on two stocks on the LUSE and the market data (All Lusaka Share Index). The market data already includes dividends paid during the year.

 

Stock 1                            Stock 2                            Market Index

Year   Stock Price  Dividend      Stock Price  Dividend      (Includes Dividends)

2013:  K25.88          K1.73           K73.13          K4.50           17,495.97

2012:  22.13            1.59              78.45            4.35              13,178.55

2011:  24.75            1.50              73.13            4.13              13,019.97

2010:  16.13            1.43              85.88            3.75              9,651.05

2009:  17.06            1.35              90.00            3.38              8,403.42

2008:  11.44            1.28              83.63            3.00              7,058.96

 

Required:

Question text

Determine the systematic risk for Stock 1.

Answer 1

Answer 1)

Average Annula Return of Stock 1

Stock 1
Stock price	Dividend	Returns (Price at end + Div. of previous year - Price at beg.) / Price at Beginning
25.88	1.73	24.13%
22.13	1.59	-4.53%
24.75	1.5	62.31%
16.13	1.43	2.46%
17.06	1.35	60.31%
11.44	1.28

Average Annual Return = Sum of all returns/ No. of Years

=28.94%

Answer 2)

Systematic Risk is the Beta of stock which cannot be mitigated by diversification. Also known as the undiversifiable risk.

Stock price	Returns on Stock Expect Dividend
25.88
22.13	16.95%
24.75	-10.59%
16.13	53.44%
17.06	-5.45%
11.44	49.13%

Market Index	Returns
17495.97
13178.55	32.8%
13019.97	1.2%
9651.05	34.9%
8403.42	14.8%
7058.96	19.0%

We calculate the returns for both Stock 1 and Market Index . Return = (Price at end - Price at Beginning) / Price at beginning

We then run a regression analysis on the returns.

Using Excel, Select Data , Select Data Analysis, Select Regression.

Y variable will be returns on stock and X variable will be returns on market index.

Systematic Risk of Stock 1 = 1.49

Answer 3)

Systematic Risk is the Beta of stock which cannot be mitigated by diversification. Also known as the undiversifiable risk.

Stock price	Returns on Stock Price (Not considering Dividend)
73.13
78.45	-6.78%
73.13	7.27%
85.88	-14.85%
90	-4.58%
83.63	7.62%

Market Index	Returns
17495.97
13178.55	32.8%
13019.97	1.2%
9651.05	34.9%
8403.42	14.8%
7058.96	19.0%

We calculate the returns for both Stock 2 and Market Index . Return = (Price at end - Price at Beginning) / Price at beginning

We then run a regression analysis on the returns.

Using Excel, Select Data , Select Data Analysis, Select Regression.

Y variable will be returns on stock and X variable will be returns on market index.

Systematic Risk of Stock 2= -0.55

Answer 4)

Average annual return of Stock 2

Stock 2
Stock price	Dividend	Returns (Price at end + Div. of previous year - Price at beg.) / Price at Beginning
73.13	4.5	-1.24%
78.45	4.35	12.92%
73.13	4.13	-10.48%
85.88	3.75	-.82%
90	3.38	11.2%
83.63	3

Average Annual Return = Sum of all returns/ No. of Years

= 2.32%