Blackrock Investments LLC appoints you as their international market quantitative analyst.You are provided with the single index model result for TMart LLC stock. The S&P500 market index is used as the market proxy.The returns data, with some missing values, and the single index model results are provided as follows:

Tmart S&P 500 market index

Returns Returns

1-Jul-19 3% 14%

1-Aug-19 8% 15%

1-Sep-19 18%

1-Oct-1 15% 20%

Alpha-0.1971

Beta1.7143

Non-systematic variance0.0238%

(a) Would you recommend the single index model or the Markowitz model when constructing a client's portfolio made up of 25 stocks? Explain your answer.

(b) Estimate TMart's total risk using the Single Index Model.

(c) Evaluate the impact of TMart's firm-specific risk relative to the total risk of the stock.

(d) You are looking into the construction of a portfolio, which will be made up of two stocks, namely TMart and Billabong (Ticker: BBG).Given the beta of BBG is 1.2, and the standard deviation of BBG's returns is 15%, estimate the correlation coefficient between the two stocks.

(e) If you must decide between creating a portfolio made up of TMart and BBG based on the results in (d), and a portfolio made up of TMart and Yahoo which has a correlation coefficient of -0.19, which one would you recommend? Explain your answer.

Answer rating: 100% (QA)

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