Compute the portfolio returns and risk measures of a portfolio you create.
finance
Description
Part 1: Portfolio Return and Risk
Compute the
portfolio returns and risk measures of a portfolio you create.
You can
pick any two companies to download stock data for (daily or monthly). For the
data you will
need to
attain about 50 observations (prices and returns for each stock).
Task 1: Compute the respective average, standard
deviation, and covariance of monthly or daily stock
returns.
Covariance
table will be in the form:
|
Var(stock1,
stock 1) |
Cov (stock1, stock 2) |
|
Cov(stock1,
stock 2) |
Var(stock2, stock 2) |
Note: Use
STDEV.P in Excel for the standard deviation
Task 2: Using the obtained statistics fromQ1,
calculate an equal weighted portfolio return and portfolio
variance for the first portfolio using the below
equations:
Equal
weighted portfolio return:
E(RP ) = w1 (avg(r1)) + w2 (avg(r2));
where w is
the weight of each stock in the portfolio. And avg(r1) is the mean return for stock 1 and
avg(r2) is the mean return for stock 2.
Portfolio
variance:
σ2p = w12 ( σ
2s1) + w22
( σ2s2)
+ 2*w1 w2 * σs1 σs2
Task 3: Select two different stocks and repeat
task 1 and 2
Again: you
can pick any two companies (except the ones you used for part 1) to download
stock data for
(daily or
monthly). For the data you will need to attain about 50 observations (prices
and returns for
each
stock).
Task 4: Now using a matrix multiplication (i.e.
MMULT in Excel.), compute two portfolio returns and portfolio variances.
Use the
formula: portfolio return: E(RP) = w * rT
portfolio
variance: σP2 =w·Σ·wT
Task 5: With either portfolio, create a table that
shows the benefit of diversification using Data Table in Excel.(Note that the
table shows portfolio returns and portfolio standard deviation with respect to
scenariosof weights on one of the stocks – of your choosing – from the
portfolio)
Task 6: Using the table obtained from task 5, Plot
expected returns against portfolio risk (standard deviations)displaying
efficient portfolios.
Task 7: Using the first portfolio, find out
optimal weights that minimizes the portfolio standard deviation
(Minimum Variance Portfolio).
Use the
formula (from Slides 6 and 7): σp2
=w*Σ*wT subject
to w*rT =E(RP)
