1. Determine the average returns and standard deviation of returns per annum based on the historical data for the stocks and NZX50 index.

 

	Spark	RBD	NZX50
Average Expected Return Monthly	3.04	7.21	9746.28
Annualised Expected Return	36.48	86.46	116955.30
Standard Deviation Monthly	0.88	5.30	4138.97
Annualised Standard Deviation	3.04	18.35	14337.82

1. Conduct single index model analysis to evaluate the risk of the two stocks and explain the findings from the analysis, particularly the estimated alpha values of the two stocks and their implications on stock price. 

 

Spark

Ri = -1.7122 + -0.0003(9746.275 – 1%) + 58

     = 56.29%

 

Restaurant Brands 

Ri = -6.2155 + -0.0013(9746.275 – 1%) + 58

     = 51.78%

 

Suppose that the three average returns per annum obtained in  (a) are used as the estimates of the expected returns for the two stocks and the NZ stock market portfolio respectively. Suppose that the risk-free rate is currently at 1% per annum. 

Draw a risk-return graph on the x-axis and returns on the y-axis, which shows the Security Market Line (SML), the market portfolio and the two stocks