Question $1(30$ marks$)$

David works as a junior analyst in WSTBS Ltd$.,$ a Singapore boutique hedge fund, after

graduating from JCU. David is a team member of equity trading team. Team leader asks David

to apply capital asset pricing model $($CAPM$)$ to analyse the following stocks traded on

Singapore Stock Exchange $($SGX$).$

Table $1$: Stock Information

Stock Weight $(\%)$ Stock Return $(\%)$ Beta $(\backslash$beta $)$

A $2080\mathrm{.}8$

B $25101\mathrm{.}2$

C $35152\mathrm{.}0$

D $10121\mathrm{.}5$

E $1050\mathrm{.}6$

The yield of $3-$month Treasury bill is $2\mathrm{.}5$ percent per annum, and the market portfolio return of

SGX is $9$ percent per annum. Assume no market friction.

Required:

$($a$)$ Rank the stocks from high to low risk$-$adjusted return using Capital Asset Pricing Model

$($CAPM$)$

$(10$ marks$)$

$($b$)$ Identify undervalued or overvalued stocks your team shortlisted in Table $1.$ Form an

investment strategy to generate abnormal return.

$(8$ marks$)$

$($c$)$ Compute the risk$-$adjusted portfolio return and portfolio beta with five stocks

shortlisted in Table $1.$ Does the portfolio have a higher or lower risk as compared to

the portfolio expected return in the stock market. Should David invest in the portfolio.

$(7$ marks$)$

$($d$)$ Form a passive portfolio using the stocks in Table $1$ with beta more than $1$ to mimic the

market return.