Posts tagged ‘CAPM’

AlphaAlpha (a.k.a. Jensen’s Alpha) is a risk-adjusted performance measure on an actual portfolio return (Rp) relative to its expected return (benchmark RB). Positive Alpha means the portfolio outperformed its benchmark and vice versa. In other words, Alpha tells us how much a portfolio beats its benchmark, and thus it’s often used to measure how well a mutual fund manager performs. Simply speaking,

 

Alpha = RpRB   ……………………………….(1)

 

Usually, we’d take market as our benchmark. The most popular way to estimate the benchmark return is through the use of Capital Asset Pricing Model (CAPM):

 

RB = Rf + Beta * (Rmkt – Rf)  ……………………………….(2)

 

where Rf = Risk-free Rate, Rmkt = Expected Market Return, and Beta = Systematic Risk (a.k.a. market risk or undiversifiable risk). (Rmkt – Rf) is known as Market Risk Premium.

CAPM assumes the portfolio is well-diversified eliminating any unsystematic risk (i.e. company-specific risk) and leaving only systematic risk. Systematic risk, Beta, is the sensitivity of the expected portfolio return (RB) to the expected market return (Rmkt). One way to estimate Beta is to regress historical portfolio returns against historical market (e.g. Hang Seng Index) returns. The slope of such regressed line is Beta. The greater the correlation coefficient between the two returns indicates a stronger linear relationship and a more reliable Beta.

A positive return with high Beta means a return following a positive market return. Beta that is greater than one is simply a leverage on market return. If there was a downturn in the market, a high Beta could cause severe loss to the portfolio. That’s why Beta is called market risk.

Combining equations (1) and (2),Watch Full Movie Online Streaming Online and Download

 

Alpha = Rp – [Rf + Beta * (Rmkt – Rf)]  ……………………(3)

 

As we can see, Alpha is actually the return in excess of the reward for the market risk. A positive return with high Alpha implies a high fund manager’s stock screening ability as the actual portfolio return depends less on the market.

Let’s take an example. Suppose our stock portfolio has an actual annual return of 15%. With reference to the Hong Kong 10-year government bond’s average rate, risk-free rate is equal to about 1% per annum. If market risk premium (Rmkt – Rf) and Beta equal 9% and 1 respectively. By applying equation (3), Alpha is 15% – (1% + 1*9%) = 5%, which has outperformed the market by 5%. However, if Beta equals 2, Alpha becomes -4%. In this case the portfolio has underperformed the market by 4%, even though the actual annual return is positive.

With the aid of Alpha Investments* Statistics Webpage, it’s very easy to determine the portfolio Beta of stocks that are traded in Hong Kong market. Stock Beta is computed as stock returns are regressed against HSI returns. For instance, suppose our portfolio consists of stocks shown in the following table. After retrieving each stock Beta from Alpha Investments Stats page, we can calculate the portfolio Beta as the weighted sum of stock Beta. With the actual portfolio return and the value of portfolio Beta on hand, we can estimate Alpha performance of our portfolio and see how well we actively manage our portfolio from time to time.

 

Stock Beta# Weight Beta * Weight
CHEUNG KONG 長江實業 (00001.HK) 1.07 30% 0.321
YUEXIU PROPERTY 越秀地產 (00123.HK) 1.46 15% 0.219
CCB 建設銀行 (00939.HK) 1.09 20% 0.218
CHINA MOBILE 中國移動 (00941.HK) 0.88 15% 0.132
CHINA LIFE 中國人壽 (02628.HK) 1.18 20% 0.236
#Beta values were taken as at 18Oct2012 Portfolio Beta 1.126

 

-Mr. Alpha

*Alpha Investments (English: http://alphainvestments.hk/en/ ;Chinese: http://alphainvestments.hk) is a website dedicated to analyze historical investment data for the Hong Kong market. It provides an intuitive platform for market participants to use to identify potential trends from pricing and volume history, and therefore, to seek Alpha.

HK282HK282 has requested the exchange to suspend trading in shares to annouce price sensitive information!  Ming Pao daily and many other sources have reported that the potential price sensitive information is that Next Media has finalized to sell its Taiwan publishing busines for HKD 4.64 bn.

 

This is equivalent to about HKD 1.92 per share!

 

From the previous post, we have noted that Mr. Lai Chee Ying holds 74.05% of Next Media.  On May 30th, 2008, HK282 traded at HKD 3.4 per share. 

 

So on that day, Mr Lai’s stake in Next Media translates to about HKD 6bn.  His stake as at Oct 25th 2012 is worth about 2bn.

 

So if you were to step into Mr. Lai’s shoes, would you sell your golden goose cheaply given that you own the majority stake to very profitable publishing businesses?

As per latest financial statements for March 2012 year end, HK282 earns about 43% revenues from its Taiwan operations, the remaining 57% translates to offshore profits at about HKD 342m (about 0.14 per share).

If factor in the HKD 1.92 per share sale of Taiwan business, plus valuing offshore profits using a 10 times multiple assuming zero growth, (This is a some what generous rough estimate, with has basis in CAPM from the HK282 returns stats page)

 

We get a value of HKD 3.32 per share!

 

That’s a potential 196% price increase from the Oct 15th HKD 1.12 per share closing!

And this time, I want to see how long it will take to reach this price without applying any discount.

 

– Mr. Alpha