Question
1. Calculate the weekly return for each of the 5 stocks and each of the 2 portfolios 2. Calculate the standard deviation of returns for
1. Calculate the weekly return for each of the 5 stocks and each of the 2 portfolios
2. Calculate the standard deviation of returns for the 5 stocks and the 2 portfolios.
3. Calculate the weighted average standard deviations of the 2 portfolios, using the portfolio weights established at the start of the project.
4. Compare the calculated numbers above to the realized standard deviation of the 2 portfolios. Calculate the ratio of the realized standard deviation of the portfolios to the weighted average standard deviations calculated in # 3 above. [Note that the weighted average standard deviation calculated in #3 would only be equal to the realized standard deviation if all 5 stocks were perfectly positively correlated, i.e. have a +1 correlation coefficient. In that case, no diversification benefit would be possible. As long as that is not the case, diversification benefits should be realized reflected in reduced risk (standard deviation).]
5. Take the value of each portfolio as of the ending date. Using the percent allocation as of the starting date, how much would you need to have invested in each stock to maintain that distribution. Which stocks have the greatest disparity in values in each portfolio and why?
6. In evaluating the performance of your portfolio, use CAPM to estimate the return you could reasonably expect. You have the beta of your portfolio. You may use the change in the S&P 500 index over the period as your market return and 1% as the risk free rate. How does that compare with the observed return?
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