Data Case:
Today is April 30, 2012, and you have just started your new job with a financial planning firm. In addition to studying for all your license exams, you have been asked to review a portion of a client’s stock portfolio to find out the risk/return profiles of 12 stocks in the portfolio. Unfortunately, your small firm could not afford the expensive databases that will provide all this information with a few simple keystrokes, but that’s why they hired you. Specially, you have been asked to find the monthly average returns and standard deviations for the 12 stocks for the past five years. The stocks (with their symbols in parentheses) are:
Archer Daniels Midland (ADM) International Business Machines Corporation (IBM)
Boeing (BA) JP Morgan Chase & Co. (JPM)
Caterpillar (CAT) Microsoft (MSFT)
Deere & Co. (DE) Procter and Gamble (PG)
Google Inc. (GOOG) Hershey (HSY)
Wal-Mart (WMT)
1. Collect price information for each stock from Yahoo! Finance (finance.yahoo.com).
2. Convert these prices to monthly returns as the percentage change in the monthly prices (Hint: Create a separate worksheet within the Excel file.) Note that to compute a return for each month, you need a beginning and an ending price, so you will not be able to compute the return for the first month.
3. Calculate the mean monthly returns and standard deviations for the monthly returns of each of the stocks. Convert the monthly statistics to annual statistics for easier interpretation (multiply the mean monthly return by 12, and multiply the monthly standard deviation by √12).
4. Add the column in your Excel worksheet with average return across stocks for each monthly. This is the monthly return to an equally weighted portfolio of these 12 stocks. Calculate the mean and standard deviation of monthly returns for the equally weighted portfolio. Double check that the average return on this equally weighted portfolio is equal to the average return of all of the individual stocks. Convert these monthly statistics to annual statistics (as described in Step 3) for interpretation.
5. Using annual statistics, create an Excel plot with standard deviation (volatility) on the x-axis and average return on the y-axis as follows:
a. Create three columns on your spreadsheet with the statistics you created in Question 3 and 4 for each of the individual stocks and the equally weighted portfolio. First column would have the ticket, the second would have annual standard deviation, and the third will have annual mean return.
b. Highlight the data in last two columns (standard deviation and mean), select Insert>Chart>XY Scatter Plot. Complete chart wizard to finish the plot.
6. What do you notice about average of the volatilities of the individual stocks, compared to the volatility of the equally weighted portfolio?