Finance and Accounting Dow Jones Industrial Average:
Using between three and seven shares which are part of the Dow Jones Industrial Average, create an investment portfolio for two individual investors; one is highly risk averse, the other is more tolerant to risk.
Project description:
Using the six of the shares ( BA, AXP, GE, INTC, T, VZ) picking from Dow Jones Industrial Average between 02/01/13 to 31/12/13 create an investment portfolio for two individual investors one is highly risk averse, the other is more tolerant to risk.Outline in a report the choices you made in creating these portfolios and any assumptions you have made in addition.
The Variance, Co-Variance, Mean, Expected Return Standard deviation and Sharpe Ratio of portfolio of BA AXP GE INTC T VZ is already calculate in excel ( in
attrachment) two of the six shares is high return high standard deviation, one is high return low standard deviation, one is high standard deviation low return and the
other two is low return low standard deviation.
Please also mention that before I decide those six share that have been chosen, have different category such as high return high risk, low return low risk or high return low risk etc. I have calculated all 30 of Dow Jones Industrial Average shares of Variance, std Dev, E[R] expected return and (AR)annual return
[Explain clearly how the statistics you calculate from excel such as share’s Variance, Co-Variance, Mean, Expected Return (individual shares &portfolio) , Standard deviation (individual shares &portfolio) and Sharpe Ratio of portfolio are useful when create an investment portfolio for investors.]
The assignment should mention the following:
A) Explain the theory that using in the assignment e.g. Portfolio theory
B) What assumption have made?
*assume that risk-free rate using the USA 10 Years treasury 3/1/2013 1.92%
(1.92% would be use in calculate the Sharpe Ratio in portfolios.)
You may assume that all investors and investments are based in the USA assumes that the investors are risk averse the risker the investment, the higher the expected return that is required to give an incentive to purchase it.
No transaction costs or taxation
For any given level of expected return, they prefer less risk to more and so on.
C) How efficient frontier relate to the portfolio and what does it illustrate about?
D) Explain clearly how the statistics you calculate from excel such as share’s Variance, Co-Variance, Mean, Expected Return (individual shares &portfolio) , Standard deviation (individual shares &portfolio) and Sharpe Ratio of portfolio are useful when create an investment portfolio for investors. Explanation of the criteria used to make such a set of choices should be clearly discussed and their limitations considered. explain the benefit of diversification portfolio.
Step include : using adjust close from each shares data calculate individual, Variance, Mean, Expected Return, std deviation then choose 6 of shares using to create portfolios for risk averse and higher risk tolerant investors, calculate
portfolio expected return, standard deviation and sharpe ratio. Maximise return in the constrain of less or equal than the lowest standard deviation individual shares.
Minimise Standard deviation of portfolio given the constrain of higher or equal to the lowest expected return of individual shares in those 6 shares we chose.
you may also suggest a very risk averse investor can minimise variance for a given expected, less risk averse investor accept a little more risk may maximse their expected for a given variance…
E) Explain other risks each as non-systemic risk, liquidity risk and so on
indicate that which risk can be reduce and which can not
F) The limitations of the portfolio that investors have to considered.
The marking criteria are indicative to the elements that one might wish to address in your report.
1. Selection of assets & portfolio allocation must be clearly stated and justified
2. Explanation of the criteria used to make such a set of choices should be clearly discussed and their limitations considered.
3. Any limitations of the approach you have used to create your portfolio should be considered