Portfolio Anaylsis
Mini Case 1: Portfolio Construction Exercise
Download the spreadsheet minicase1_data.xls from the class website. In it you will find the time series of monthly returns for Microsoft (MSFT), General Motors (GM) from January 1990 to December 2002.
Answer the following questions based on the data in the spreadsheet. Note that you do not need to turn in your entire spreadsheet; Simply summarize your answers (show all formulae where appropriate) on a few sheets of paper. Please highlight your answers so we can find them easily.
1. Compute and report the mean returns, variances, and standard deviations for the two stocks. In addition, compute the covariance and the correlation between the two stock returns. Report all numbers as annualized. (Hint: annualized variance is equal to 12*monthly variance. Also, please do not report variances and covariances in %, which would not make sense.)
2. Plot the mean-standard deviation graph for a portfolio constructed from investments in MSFT and GM. (Hint: first compute the portfolio returns and standard deviation for portfolios with X% in MSFT and (1-X)% in GM; then do a scatter plot with portfolio returns on the y-axis and portfolio standard deviation on the x-axis.)
3. Compute the expected return, standard deviation, and weights in the minimum variance portfolio. (Please show the formula for the portfolio weights. You can use Excel Solver to check your answer).
4. Compute the expected return, standard deviation, and weights in the tangency portfolio if the risk-free rate is 2%. Also, compute the Sharpe Ratio for the tangency portfolio.
5. Suppose you require that your portfolio yield an expected return of 25%, and that it be efficient on the best feasible CAL (tangency line).
a. What is the standard deviation of your portfolio?
b. What is the portion invested in the risk-free and in each of the 2 stocks?
6. If you were to use only the 2 stocks (no risk-free asset) and still require an expected
Download the spreadsheet minicase1_data.xls from the class website. In it you will find the time series of monthly returns for Microsoft (MSFT), General Motors (GM) from January 1990 to December 2002.
Answer the following questions based on the data in the spreadsheet. Note that you do not need to turn in your entire spreadsheet; Simply summarize your answers (show all formulae where appropriate) on a few sheets of paper. Please highlight your answers so we can find them easily.
1. Compute and report the mean returns, variances, and standard deviations for the two stocks. In addition, compute the covariance and the correlation between the two stock returns. Report all numbers as annualized. (Hint: annualized variance is equal to 12*monthly variance. Also, please do not report variances and covariances in %, which would not make sense.)
2. Plot the mean-standard deviation graph for a portfolio constructed from investments in MSFT and GM. (Hint: first compute the portfolio returns and standard deviation for portfolios with X% in MSFT and (1-X)% in GM; then do a scatter plot with portfolio returns on the y-axis and portfolio standard deviation on the x-axis.)
3. Compute the expected return, standard deviation, and weights in the minimum variance portfolio. (Please show the formula for the portfolio weights. You can use Excel Solver to check your answer).
4. Compute the expected return, standard deviation, and weights in the tangency portfolio if the risk-free rate is 2%. Also, compute the Sharpe Ratio for the tangency portfolio.
5. Suppose you require that your portfolio yield an expected return of 25%, and that it be efficient on the best feasible CAL (tangency line).
a. What is the standard deviation of your portfolio?
b. What is the portion invested in the risk-free and in each of the 2 stocks?
6. If you were to use only the 2 stocks (no risk-free asset) and still require an expected