Analysis of risk and return, portfolio diversification

Here you will apply what you have learned about portfolio [login to view URL] the monthly-adjusted closing prices for IBM, MSFT, And the S&P500 during the five-year period from January2013– December2017 in the file “Stock Project Stock Prices” attached. Calculate returns for each month for each of these three assets (Stock 1; Stock 2; S&P 500).

Exercise 1:

Calculate the following for each asset (in Excel, using the statistical functions given in parentheses): average return (AVERAGE), standard deviation of returns (STDEV.S), and variance of returns (VAR.S). What is the covariance (COVAR.S) and correlation (CORREL) between the returns of stock 1 and stock 2?

Exercise 2:

Calculate the return and standard deviation of a portfolio that holds these two stocks in the following weights: 0%-100%; 10%-90%; 20%-80%; 30%-70%; 40%-60%; 50%-50%; 60%-40%; 70%-30%; 80%-20%; 90%-10%, 100%-0%. Plot these portfolio return / standard deviation [login to view URL] sure return is on the vertical axis and standard deviation is on the horizontal axis. (Important: use a scatterplot) (You may use excel for this part)

Exercise 3

1. Which specific combination would deliver the least amount of risk? Use the formula for the minimum variance portfolio (show your work by hand) to get the exact weights, calculate its return, standard deviation and Sharpe ratio (show your work by hand), and mark it by hand on your plot printout.

2. Calculate the optimal risky portfolio’s weights (show your work by hand) in the two stocks. For this optimal portfolio, calculate the average return, standard deviation, and Sharpe ratio (show your work). Mark the ORP on the plot printout by [login to view URL] in the CAL (by hand) that gives you the best risk-return combinations, given that the monthly risk free rate is 0.15%.

3. Mark the spot on your return / standard deviation plot where the market index (i.e. S&P 500) falls.

4. For a moment, assume the correlation between the two stocks equals exactly +1. Graph the investment opportunity set. (Hint: This does not require any additional excel work or calculations)

5. Now assume the correlation between the two stocks equals exactly –1. Again, graph the investment opportunity set. If you would like, you can perform steps 4 and 5 on the same graph.

What to turn in: A PDF copy of your plot, results, and detailedanalysis --- this means you should clearly show all of your work! Write out all equations that you use, with the exception of those that are functions in excel such as AVG, COVAR, VAR, etc. For example, you need to write out the equations for portfolio weights, returns, standard deviations, and sharpe ratios for your calculations in determining the MVP and ORP.



Навыки: Economics, Финансовый анализ, Econometrics, Статистика, Финансовые рынки

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