ASSIGNMENT
Diversification is an important part of a good investment strategy. The assignment is to analyze how adding real estate investments to a stock portfolio would affect the portfolio's returns and risk. Your submission should be two pages:
1. The first page should be a printout of an Excel worksheet formatted as shown on the reverse side.
You should develop and populate an Excel spreadsheet which summarizes returns for stocks and real estate and for a portfolio invested 80% in stocks and 20% in real estate.
For returns, we'll use the returns on the following Vanguard index funds:
Stocks: Vanguard Total Stock Market Index Admiral Shares fund
Real Estate: Vanguard Real Estate Index Admiral Shares fund
If you go to Vanguard's home page, choose the "Personal Investors" option, click on the "Investment Products" link at the bottom and follow the "Stock funds" and "Sector & specialty funds" links there will be lists of funds in which you'll find the fund you're looking for.
(The Total Stock Market fund is listed under stock funds and the Real Estate Index fund is listed under "Sector & specialty funds."
At the home page for each fund, go to the "Prices and Performance" tab and then follow the "See cumulative, yearly and quarterly historical returns" link. There you'll find year-by-year returns from 2003 through 2017; use the returns in the "Total Return" column.
After inputting returns for the Vanguard funds, create a column showing the returns on a portfolio weighted 80% stocks and 20% real estate. Then use Excel functions to find the correlation between the two funds and the average return and standard deviation for each of the funds and for the portfolio.
Add a row showing the Sharpe ratios for each of the funds and for the portfolio, using a risk-free interest rate of 1.2% (the approximate average return on T-bills from 2003 to 2017).
2. On a second page, answer these questions:
a. The Real Estate Index fund invests in REITs. What is a REIT? Why would investing in a mutual fund like the Vanguard Real Estate Index fund be a good way to invest in real estate?
b. Assume your initial portfolio is all stocks (100% in the Vanguard Total Stock Market Index Fund).
How does adding real estate (i.e., changing your portfolio mix to 80% Total Stock Market, 20% Real Estate Index) change your (i) return, (ii) risk, (iii) Sharpe ratio?
c. Would adding the REIT index fund to your all-stock portfolio be a good idea? Briefly explain why/why not. There may be considerations beyond the numbers you cite in part (b).
Your submission should be a maximum of two pages; the second page should be typed. It is to be turned in at the beginning of class on March 8. (It should not be emailed unless you are absent from class on that day.)
Total Real Portfolio
Stock Estate (80% stock,
Market Index 20% Real)
Fund Fund Estate )
Weights 0.8 0.2
2017 21.17% 4.94% ?
2016 ? ? ?
2015 ? ? ?
2014 ? ? ?
2013 ? ? ?
2012 ? ? ?
2011 ? ? ?
2010 ? ? ?
2009 ? ? ?
2008 ? ? ?
2007 ? ? ?
2006 ? ? ?
2005 ? ? ?
2004 ? ? ?
2003 ? ? ?
AVERAGE ? ? ?
STD DEV ? ? ?
CORRELATION ?
(STOCKS AND REAL ESTATE)
SHARPE RATIO ? ? ?
Assume an average risk-free rate (2013 - 2017) of 1.2%.