USING CAPM METHOD TO PICK A FUND



If you are thinking which Unit Trust fund to choose from, you should be the

one who is reading this article now. Do you know what method to use?

Although there are other ways you can choose a fund, i prefer the CAPM method.

Here is how i choose funds for my clients:-

STEP ONE

Prepare a table that list out all the funds. In the case above, i have listed only 6

equity funds which is of the aggressive category type.

STEP TWO

Prepare columns that shows Market return, fund returns and Beta. All these

informations can been plucked out from the Public Mutual's Market wrap

report.

STEP THREE

Prepare the column that shows Risk Free return. I have taken the Public Bank's

One Year Fixed Deposit rate as the Risk free rate i.e., 3.10%

STEP FOUR

Find the Market risk premium. Market risk premium = Market return-Risk free rate.

STEP FIVE

Finally, find the Expected return of the fund, given all the data above.

Expected return of the fund= Risk free rate + Beta[Market return-Risk free rate]

Replacing all the data into this formula, you will get the expected return

(as shown on the last column of the table above)

STEP SIX

Now, based on the expected return of each of the 6 funds, do the comparison

against the actual return in the 4th column (fund returns).

You will find that fund PAGF has the widest variance. I deduce this as

PAGF is undervalued and i will pick this fund because of the potential

to make big return if the Expected return in column 8 is matched.

However, if you are the conservative investor(highly risk averse), i would

suggest to pick the lowest variance between the Expected return in column 8

and the actual return in column 4, and that fund will be PGF!

Happy Investing!