Returns, Risk and Correlations

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Part 1  (30 points: 20 excel + 10 report)

Returns, Risk and Correlations 

Go and obtain the daily prices for MSFT, AAPL, TGT, and WMT over the year MM/DD/2018 to MM/DD/2019, where MM/DD corresponds to your birthday. Compute daily return for each stocks for the entire sle period. Merge the returns for these firms into a single excel workbook with the returns for each company properly aligned. 

  1. Using the Excel functions for Average and Standard Deviation, calculate the average return and standard deviation for each of the firms.  (10 points)
  2. Using the Correlation function construct the correlation matrix for the firms using the daily returns for the entire period. (5 points)
  3. Which pair of firms has the highest correlation coefficient? The lowest? (2 points) 
  4. If you have to choose two stocks for your portfolio, which pair would give you the greatest benefit with regard to diversification? Explain. (3 points)

Part 2  (50 points: 40 excel + 10 report)

 

Minimum Variance Portfolios 

Monthly price data can be obtained for securities at a number of online sources. A good source is (Look for the “Historical Prices” tab once you enter ticker symbol of the firm you choose.) 

  1. Download 10 year’s worth of monthly price data for two different stocks.            (2 points) 
  2. Calculate the annualized mean return and annualized standard deviation of the monthly returns and the correlation coefficient of the returns on the two stocks. (15 points) 
  3. Use a spreadsheet to calculate the investment opportunity set composed of these two stocks. Plot the investment opportunity set. (15 points)
  4. What are the weights of each of these stocks in the minimum-variance portfolio? (4 points)
  5. Compute the expected return and standard deviation of the minimum-variance portfolio. (4 points)

Hints:

Standard Deviation of Annual Return = Standard Deviation of Monthly Return

 

Part 3    (20 points: 15 excel + 5 report)

  Choose any stock that you want to analyze.  Use data from Yahoo Finance to calculate the beta of the stock. Start by downloading the monthly adjusted closing prices of the stock and the S#038;P 500 (^GSPC) in the Historical Prices section. Copy the data into Excel and calculate the monthly rates of return (based on closing prices) for each series. Using the entire period for which data are available for both the stock and S#038;P 500, estimate a regression with stock’s excess return as the dependent (Y) variable and the S#038;P 500 excess return as the independent (X) variable. To compute excess return assume risk free rate to be 3%. Verify the  and  from the regression with and  computed using the analytical formula given in Exle 6.3 in BKM. Finally, compare your results to the beta listed in Yahoo Finance Stock Report. Do any of your results match the Yahoo Finance Report beta? What might explain the differences?

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