Assignment Task: Creating an efficient asset allocation
You will calculate a correlation matrix, build efficient portfolios, and graph the efficient frontier.
Use the Project Part - Template to assist in these calculations.
Question: Calculate a correlation matrix of returns for your securities.
Create a correlation matrix of the eleven securities you have chosen and call it "Table 4". Essentially, you will be looking at an 11x11 matrix where each stock is listed on the vertical and horizontal axis in the same order. This ensures that the main diagonal is all "ones" and that the matrix is symmetric, a useful characteristic for calculation. The value at the intersection of the associated rows and columns are the correlations between the data points on the axis. Also, when many reporters display a correlation matrix, they oftentimes omit the "upper triangle". You may display yours either, with or without these values (they essentially duplicate the lower triangle because the matrix is symmetric).
Question: Create a table that displays portfolio weights for your securities for different scenarios.
There are a few points on the efficient frontier we care about, two of which are the minimum variance portfolio and the optimal risky portfolio. Create a table called "Table 5" that displays the weights of your 11 stocks in these two portfolios as well as calculates the average return and standard deviation of each portfolio. Also include your selected weights from part 2, an equal weighted portfolio, and a market cap weighted portfolio. Use the remaining space to make up some portfolio weights of your own (and label the headders).
P0 - weights from Project Part 2 P* - optimal risky portfolio
P_mv - minimum variance (mv) portfolio P_eq - equally weighted (eq) portfolio
P_mc - market cap (mc) weighted portfolio (use your market caps from Project Part 1) Make up some more interesting combinations if you want to look at some other portfolio alternatives.
Build the minimum variance frontier and display it on a graph with your securities.
Create a figure called "Figure 1" with standard deviation on the "x-axis" and return on the "y-axis". On this figure, plot/draw the following:
- Points for your 11 stocks
- the minimum variance frontier
- P0
- P*
- P_mv
- And any other portfolios you find interesting (P_mc is usually particularly interesting).
Be sure everything is clearly labeled and that the figure looks professional.
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Attachment:- Asset allocation.rar