Diversification and Portfolio Risk (Security Analysis and Portfolio Management)
Instructions:
1. Download 5-years (2 January 2009 – 2 January 2014) of monthly stock price history for two large market capitalisation stocks from Yahoo Finance (click the Investing tab followed by the Historical Prices tab). Create a time series of monthly returns from this time series of monthly stock prices.
Calculate the annualised mean return, standard deviation and correlation of the stocks.
2. Use investment proportions for the two stocks ranging from zero to 100% using intervals of 10%. Tabulate and draw the investment opportunity set of the two stocks
3. Calculate the weights on the minimum variance portfolio consisting of the two stocks, wh ich we denote by stock X and stock Y, using the following formulae
4. Calculate the expected return and standard deviation of this minimum variance portfolio. Plot the two assets and the minimum variance portfolio on a diagram and plot the efficient fron tier consisting of portfolios made up of these two assets.
5. Obtain the 5-year risk free rate. Draw a tangent from the risk – free rate to the opportunity set. Identify the expected return and standard deviation of the optimal portfolio?
6. Calculate t he performance measures such as Sharpe ratio, Treynor ratio etc. for each of the portfolios. Identify the portfolio with the high est reward -to -volatility ratio.
7. Include in your report an in troduction, a method section, a results section and conclusions.
8. Discuss in your report diversification referring to the expected return and standard deviation of the minimum-variance portfolio in your answer.