Assignment
International Portfolio Allocation
Write a polished and persuasive letter to your client and show your work with detailed technical Appendix.
Suppose you are financial advisor working for a client with 90% of his wealth invested in the S&P 500 and 10% of his wealth invested in Microsoft stock. Prepare a brief letter to your client advising why a portfolio reallocation into international stocks might be favorable.
The _rst step is to obtain data on the returns of relevant assets. A common way is to prepare the daily holding period return (HPR) of the following exchange traded funds (ETFs) and Microsoft stock:
1. MSFT - Microsoft stock
2. SPY - The SPDR ETF which tracks the S&P 500 index.
3. MDY - An ETF that tracks the midcap S&P index.
4. EWA - An ETF that tracks the MSCI Australia index.
5. EWC - An ETF that tracks the MSCI Canada index.
6. EWQ - An ETF that tracks the MSCI France index.
7. EWG - An ETF that tracks the MSCI Germany index.
8. EWJ - An ETF that tracks the MSCI Japan index.
9. EWU - An ETF that tracks the MSCI United Kingdom index.
10. EWS - An ETF that tracks the MSCI Singapore index.
11. EWW - An ETF that tracks the MSCI Mexico index.
12. EWH - An ETF that tracks the MSCI Hong Kong index.
13. EWM - An ETF that tracks the MSCI Malaysia index.
For Microsoft Stock (MSFT), you can _nd the historical return from Yahoo Finance. For the ETFs, let us take SPY as an example. ETFs are traded on NYSE, so we go to the NYSE website, https://www.nyse.com/quote/ARCX:SPY To simplify this assignment, I have prepared you the daily return series in several Excel _les uploaded on blackboard.
To write the letter, include the following analysis into your technical appendix:
1. Calculate the mean and standard deviation of each daily return series.
2. Calculate the correlation between each of the return series. Hints: You can create a 13 by 13 matrix and calculate the correlation coe_cient by Excel. Or if you have learned Matlab or other softwares, it's also _ne to use those.
3. Calculate and plot the minimum standard deviation portfolios both with and without short-selling allowed using the following securities (plot as many points as you feel appropriate): Hints: For this question, you need to build mean-variance frontiers by changing
the number of risky stocks in the portfolio. You need to build the plots of the frontiers just as what we plotted on the board. Basically for each of the following case, you are solving a variance minimization problem, with the sum of weights constrained by 1. We will demonstrate this optimization problem in class.
(a) Large U.S. Stocks - S&P 500 and Microsoft.
(b) Large U.S. Stocks and Midcaps - S&P 500, Microsoft, and S&P Midcaps.
(c) North American Stocks - MS&P 500, Microsoft, S&P Midcaps, Canada, and Mexico.
(d) North American Stocks and European Stocks - MS&P 500, Microsoft, S&P Midcaps, Canada, Mexico, France, Germany, and the U.K.
(e) All 12 ETFs and Microsoft stock.
Use given 3 files to complete the project.
Attachment:- Data.rar
Attachment:- Tutorial.rar
Attachment:- GA-tutorial.rar