QUESTION 4:

Calculate the betas of Lyxor ChinaH, Lyxor MSIndia and Lyxor USDJIA. To calculate the covariance with
rate of 2.5 per cent and a market risk premium of 5.5 per cent, what are the required returns for each o

CALCULATION FOR BETAS OF LYXOR CHINAH, LYXOR MSINDIA AND LYXOR USDJIA

STEP 1: CALCULATE THE COVARIANCE WITH THE MARKET PROXY, USE THE LYXOR WORLD RETURN DAT

Covariance of Lyxor ChinaH and Lyxor World, Covariance of Lyxor MSIndia and Lyxor World,

0.0085332

STEP 2: CALCULATE THE VARIANCE OF LYXOR WORLD

0.05331203
7
0.007616

STEP 3: CALCULATE THE BETAS OF LYXOR CHINAH, LYXOR MSINDIA AND LYXOR USDJIA

Beta of Lyxor ChinaH, Beta of Lyxor MSIndia,

1.1204

CALCULATION FOR THE REQUIRED RETURNS OF LYXOR CHINAH, LYXOR MSINDIA AND LYXOR USDJIA
STEP 1: CALCULATE THE EXPECTED RETURN ON MARKET

0.025 + 0.055
0.08

STEP 2: CALCULATE THE REQUIRED RETURNS OF LYXOR CHINAH, LYXOR MSINDIA AND LYXOR USDJIA

Using the CAPM formula:

Expected Return of Lyxor ChinaH, Expected Return of MSIndia,

0.025 + 1.1204 x (0.08 - 0.025)

0.0866

Calculation using a table:

Deviation Deviation
Lyxor Lyxor Lyxor Lyxor from Mean from Mean
Year
World ChinaH MSIndia USDJIA Return Lyxor Return Lyxor
World (A) ChinaH (B)

Mean Return = Mean Return =

0.0798 -0.0024

2009 0.0769 0.02 0.0586 0.0556 -0.0029 0.0224

2010 0.0579 0.0425 0.224 0.0611 -0.0219 0.0449
2011 -0.0328 -0.294 -0.2707 0.0794 -0.1126 -0.2916
2012 0.2075 0.1323 0.006 0.1829 0.1277 0.1347
2013 0.1414 0.0886 -0.0684 0.1709 0.0616 0.091
2014 0.1506 0.0231 0.3387 0.142 0.0708 0.0255
2015 -0.0428 -0.0296 -0.0928 -0.0471 -0.1226 -0.0272
SUM 0.5587
AVG 0.079814

.
To calculate the covariance with the market proxy, use the Lyxor World return data shown in Exhibit 1 in the case. Assuming
re the required returns for each of the three ETFs? [ 28 marks ]

YXOR USDJIA

THE LYXOR WORLD RETURN DATA

yxor MSIndia and Lyxor World, Covariance of Lyxor USDJIA and Lyxor World,

0.0081875 0.005609

ND LYXOR USDJIA

Beta of Lyxor USDJIA,

1.075 0.7365

R MSINDIA AND LYXOR USDJIA

OR MSINDIA AND LYXOR USDJIA

n of MSIndia, Expected Return of Lyxor USDJIA,

0.025 + 1.075 x (0.08 - 0.025) 0.025 + 0.7364 x (0.08 - 0.025)

0.0841 0.0655

Deviation Deviation Square Value

Product of Product of Product of of Deviation
from Mean from Mean
Deviation (A Deviation (A Deviation (A from Mean
Return Lyxor Return Lyxor Return Lyxor
x B) x C) x D)
MSIndia (C) USDJIA (D) World

Mean Return = Mean Return =

0.02791 0.09211

0.0307 -0.0365 -6.5E-05 -8.9E-05 0.000106 8.41E-06

0.1961 -0.031 -0.000983 -0.004294 0.000677 0.00047961
-0.2986 -0.0127 0.032834 0.0336223 0.001419 0.01267876
-0.0219 0.0908 0.017201 -0.002797 0.011608 0.01630729
-0.0963 0.0788 0.0056056 -0.005932 0.00486 0.00379456
0.3108 0.0499 0.0018054 0.0220046 0.00354 0.00501264
-0.1207 -0.1392 0.00333472 0.0147978 0.017054 0.01503076
SUM 0.05973272 0.0573127 0.039264 0.05331203
COVARIANCE 0.00853325 0.00818753 0.00560914 0.007616004
bit 1 in the case. Assuming a risk-free