Why is dividend added to market returns here? A dividend will lead to a drop in index value by a proportionate figure - reducing stock returns too, won't it? http://www.actuariesindia.org/downloads/exampapers/May2009/QP/ST6_IAI_0509_QP_Final.pdf http://www.actuariesindia.org/downloads/exampapers/May2009/sol/ST6_IAI_0509_Sol_Final.pdf This should then be: Rp = Rf + beta*(Rm - Qm - Rf). where Qm = dividend from market. Also, if the objective is to protect the value from dropping by more than 4%, should this not be inclusive of dividend? => Rp + Qp = 4% => Rp = 4.75% -4.75 = 1.25 + 1.25*(Rm - .5 - 1.25) => Rm = -3.05%?
If we were looking at a Total Return Index, then we wouldn't add on the dividend yield, but the NSE Nifty is a Price Index. Have a look at the example on page 63 of Hull (8th edition). This goes through the reason for the dividend adjustments.
Thanks Mike. Please correct me where I'm wrong here: If the objective is to protect the value of fund from dropping 4% - doesn't this mean that the % difference between current value and the then value should not be < -4%? This can then be split as capital gains % + dividends % >= -4% or capital gains >= -4% - dividends % The solution however adds dividends to the right hand side of the equation...
The examiners are assuming that the 4% requirement applies to the capital gains element, so that including dividends, we require a total return of no less than -3.25%. You are assuming that the 4% requirement applies to the total return, taking account of dividends and so you'll get a different answer. I think the question could be interpreted either way and so, provided your answer is explained clearly, you should get equal credit for your interpretation.
