Construct five portfolios by averaging the monthly return observations for each security included.
Calculate the standard deviation of the portfolios.
Graph the portfolio standard deviations versus the number of stocks or funds in each portfolio. You will have two lines: one for the five stock portfolios and one for the five fund portfolios.
2) Using a regression (as in HW#4), calculate the betas for the portfolio of 5 stocks (AMGN, OXY, FMC, NKE, NSC) and the portfolio of 5 funds (FBIOX, FSENX, FSDPX, FSRPX, FSRFX).
3) If the risk-free rate is 2% and the market risk premium is 8%, what are the required rates of return on the portfolios of 5 stocks and 5 funds?
4) Compare the risk of the portfolio of five stocks and the portfolio of five funds. Consider both the standard deviation and the beta as measurements of risk.
5) Compare the risk of both portfolios to the S&P 500. How diversified is a portfolio of five stocks?