1.) What are the assumptions that are required for the capital asset pricing model?
2.) Explain the three steps of top down investment.
3.) Create a portfolio using Markowitz-style portfolio optimization. To make your life easier, I have provided an excel spreadsheet that gives the framework necessary to solve this problem. Use the following information:
a. Frequency: Daily
b. Tickers: FXE, FXY, FXF, FXA (use yahoo.finance.com)
c. Price measure: adjusted closing price
i. Recall, a return =LN(P_t/P_t-1)*100
d. You may use performance during the calendar year 2012 as proxies for expected values
e. Constraints
i. The portfolio must be fully invested.
ii. The portfolio must have a return greater than or equal to 2% annualized or (2/252) % daily, see spreadsheet.
iii. The portfolio permits only long positions.
a) What are the optimal portfolio weights?
b) What is the expected portfolio variance and return?
c) What if you used those weights to construct a portfolio after the closing of the last trading day of 2012. How would that portfolio have performed (return and variance) during the first month of 2013? Comment on your findings.