- What is the expected return for the following portfolio?
Asset Return Weight
A 20% 10%
B 5% 40%
C 7% 30%
D 12% 20%
a. The expected return given the weights above is not enough for
your investor. Which weights you would assign to each of the
assets described above to achieve the highest possible return?
b. If you are a risk-averse investor, and considering the higher the
return the higher the risk applies, which one of the 2 proposed
portfolios would be more attractive for you. Explain why. - Suppose you have invested in three stocks: A, B and C. You expect that
returns on the stocks depend on the following two states of the economy,
with the probabilities to happen given below
Scenario Probability Return Stock A Return Stock B Return Stock C
Boom 60% 6% 14% 30%
Recession 40% 2% 2% -4%
a. What is the expected return of an equally weighted portfolio of
these 3 assets?
b. What is the expected return of a portfolio invested 20% each in A
and B and 60% in C? - What´s the difference between covariance and correlation?
- Assume the following 2 stocks:
Stock A Stock B
25 10
24 10
21 9
18 9
a. Calculate variance and volatility for each asset
b. Calculate covariance and correlation
(Do not use the formulas in excel. Describe each column as we did
in class) - Describe the steps involved in the investment process. Describe each step.
- What is the correlation coefficient that brings the maximum reduction of
risk? Justify why and give an example. - Go to yahoo finance (https://finance.yahoo.com):
a. Choose 2 different stocks
b. Go to historical prices in each stock and download these:
i. Monthly frequency for the last 15 years
ii. Disregard any dividend paid. Use only the dates and close
columns.
c. Calculate variance and volatility for each
d. Calculate covariance and correlation
e. Calculate monthly returns for each stock
(Do this exercise only through the steps followed in class to find
out variance, volatility, covariance and correlation. Use the
formulas in excel to double check your results).
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