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Finance Portfolio Construction and Performance Analysis
Individual Security Analysis First, compute the measures of risk and return for each of the four securities noted above. Sample of issues to think about for your writeup: Describe and interpret your findings. What do the numbers mean for a naive investor (i.e. someone with no knowledge of financial markets or valuation)? Are they as you expected? Why or why not? Any unusual findings? (You may wish to chart the returns of each stock vs. the index over time.) What proportion of the total risk is contributed by systematic risk? Which of your stocks has the most systematic risk? Does this stock also have the highest firm-specific risk? What do the betas indicate? Are the betas as you would expect (in sign and magnitude) for each security? (beta and stdev)
II. Portfolio Formation and Analysis Constructing the Markowitz optimal portfolio a) form 10 random portfolios (short sales allowed) using the chosen stocks. Generate random numbers (using the uniform distribution) to determine portfolio weights for one of the stocks. b) using the expected return for each of the random portfolios (as constraints), form a minimum variance set (using Solver function in Excel), assuming short sales are allowed. c) using the standard deviation for each of the random portfolios (as constraints), form a minimum variance set (using Solver function in Excel), assuming short sales are allowed. d) After comparing the results in the steps above, identify the optimal risky portfolio. Sample of issues to think about for your writeup: What percentage of your random portfolios are efficient? Are you surprised by this finding? Are the weights for the optimal portfolio intuitive? Draw the Capital Allocation Line (CAL) for your complete portfolio. This is your new efficient frontier. What is its slope? Where on this CAL would you prefer to invest? Specifically, describe how you would allocate $1000 between your three stocks and the T-bill.
