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Risk and
Return
Assignment
Submitted to: Mr. Fazal Jawad

Section B – DR 3
 Maham Hafeez - 0019
 Ali Ammar - 0092
 Sana Saeed - 0068
 Mohammed Bilal Afzal - 0082
 Saad Ali Shah - 0017
 Risk and Return Assignment

1. What is your estimate of the firm's beta and its significance? How precise is your estimate in
a statistical sense? What does it tell you about the risk of the stock?

The regression model is significant with an F test value of less than 0.05 at 95% confidence. The
firm’s beta is 1.3 (standard error of 0.061) with a p-value of less than 0.05. This means that our
coefficient is significant at 95% confidence and we can reject the null hypothesis that H o = 0. As our
beta is more than 1, we can conclude that our stock is volatile w.r.t the market and swings more
than market returns. It is 30% more volatile than the market. For each 1% increase or decrease in
market returns, the stock return increases or decreases by 1.3% respectively. Although it is a riskier
stock, it provides a higher return potential.

Table 1:

    Stock KSE-100
  Description Daily Annualized* Daily Annualized*
1 Average Return -0.039% -10.13% 0.003% 0.88%
2 Standard 2.67% 43.13% 1.27% 20.52%
Deviation
3 Correlation of 0.619
stock with KSE
100
4 Estimated Beta Beta = 1.299 ~ 1.3 T-value= 21.4
and t-value
5 R-Square 38.25%
*Assume 260 working-days in a year. Annualized Standard Deviation = Daily SD *√260

To calculate the estimated daily return for the stock, we can use the following equation:

Estimated Stock return = -0.0004 + 1.3 (Market Daily Return)

Kindly refer to the below chart for a graphical view of the returns.

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2. What portion of the risk can be attributed to market factors and to firm-specific factors?
What is its significance of this partitioning of risk for a diversified versus a non-diversified
investor?

38.25% of the volatility is the stock return can be attributed to the market return volatility
(systematic). This is the risk addressed by the market factors which have an effect on the market
(KSE 100) returns. 61.75% of the volatility (risk) can be attributed to firm specific risk
(unsystematic risk).

Owing to diversification, only the diversifiable risk / unsystematic risk can be minimized. This
means that by holding a larger pool of stock, the investor can reduce the risk by 61.75% as
compared to an undiversified investor. Please refer to the below table. As visible, 61.75% of the
risk can be eliminated via diversification. Thus, an undiversified investor is more susceptible to
unpredictable returns as compared to a diversified investor.

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 Annexure

1. Regression Output

2. Data Source (1st Page only)

Date KSE100 FAUJI FERTILIZER KSE100 Index FAUJI FERTILIZER BIN QASIM
Index BIN QASIM Return Return
30/09/2020 -1.54% -3.96%
40,571.48 20.15
29/09/2020 1.14% 2.29%
41,204.36 20.98
28/09/2020 -2.30% -6.39%
40,740.95 20.51
25/09/2020 -0.25% -2.88%
41,701.23 21.91
24/09/2020 -0.17% -3.34%
41,806.37 22.56
23/09/2020 0.11% 3.83%
41,876.26 23.34
22/09/2020 -0.82% 0.27%
41,828.91 22.48
21/09/2020 -0.78% -2.65%
42,174.13 22.42
18/09/2020 0.40% 1.95%
42,504.76 23.03
17/09/2020 0.12% -2.21%
42,334.76 22.59
16/09/2020 -0.15% 4.81%
42,282.28 23.10
15/09/2020 -0.43% 0.36%
42,346.42 22.04
14/09/2020 0.00% 7.23%

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 42,531.31 21.96
11/09/2020 -0.27% 0.69%
42,530.67 20.48
10/09/2020 1.49% -2.35%
42,647.35 20.34
09/09/2020 0.09% -0.33%
42,022.25 20.83
08/09/2020 -0.73% -6.82%
41,985.19 20.90
07/09/2020 0.65% 5.75%
42,295.75 22.43
04/09/2020 -0.39% 1.58%
42,023.00 21.21
03/09/2020 0.84% 7.46%
42,188.11 20.88
02/09/2020 1.11% 4.13%
41,834.85 19.43
01/09/2020 0.65% 0.32%
41,377.26 18.66
31/08/2020 0.13% -0.11%
41,110.93 18.60
28/08/2020 -0.06% 0.70%
41,056.22 18.62
27/08/2020 0.54% -1.60%
41,081.94 18.49
26/08/2020 1.41% 1.79%
40,862.59 18.79
25/08/2020 1.23% 0.44%
40,292.82 18.46
24/08/2020 0.46% 0.22%
39,802.60 18.38
21/08/2020 -0.62% -0.43%
39,621.59 18.34
20/08/2020 -0.71% 0.60%
39,868.55 18.42
19/08/2020 -0.07% -0.97%
40,154.11 18.31
18/08/2020 0.15% -2.53%
40,184.01 18.49
17/08/2020 -0.42% -5.86%
40,122.50 18.97
13/08/2020 -0.45% -7.48%
40,290.74 20.15
12/08/2020 -0.21% 3.32%
40,473.18 21.78
11/08/2020 1.61% 5.08%
40,559.15 21.08
10/08/2020 -0.29% 3.14%
39,914.76 20.06
07/08/2020 -0.34% -0.15%

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 40,029.69 19.45
06/08/2020 0.71% 1.99%
40,166.12 19.48
05/08/2020 0.77% 1.49%
39,882.78 19.10
04/08/2020 -0.74% -0.16%
39,577.62 18.82
03/08/2020 1.56% 0.11%
39,871.61 18.85
30/07/2020 1.09% -0.74%
39,258.44 18.83
29/07/2020 0.54% -7.46%
38,836.27 18.97
28/07/2020 1.06% -0.97%
38,627.27 20.50
27/07/2020 1.63% 6.10%
38,221.16 20.70
24/07/2020 0.08% 4.33%
37,607.62 19.51
23/07/2020 -0.60% 4.41%
37,578.21 18.70
22/07/2020 0.28% -1.92%
37,804.61 17.91
21/07/2020 0.13% -1.83%
37,700.31 18.26
20/07/2020 0.86% 4.97%
37,650.57 18.60
17/07/2020 0.89% 0.45%
37,330.85 17.72
16/07/2020 0.88% -1.12%
37,001.44 17.64
15/07/2020 -0.18% -3.41%
36,679.03 17.84