Question
Complete the following integrative practical exercises. The purpose of this exercise is to examine the diversification potential for an investor developing an investment strategy based
Complete the following integrative practical exercises. The purpose of this exercise is to examine the diversification potential for an investor developing an investment strategy based on two very different mutual funds. The Black Rock Latin America fund (MDLTX) invests in Latin American securities. The Wells Fargo Advantage Precious Metals fund (EKWAX) invests in precious metals. Is there a significant opportunity to enhance return and/or reduce risk by holding a combination of these funds versus holding just one of them? Monthly price data for MDLTX and EKWAX from Yahoo Finance is contained in the Excel spreadsheet for this exercise. There are 37 months of price data for the period from September 2009 to September 2012. (Note: These prices already incorporate dividend payments.) The 36 monthly returns for each fund are also provided. Calculate average (arithmetic) monthly return and standard deviation for each fund. You can use the Excel functions AVERAGE, STDEV to derive these stats. Annualize these statistics. Use the CORREL function in Excel to derive the correlation coefficient between the two sets of returns. (Annual correlation is the same as monthly correlation. Hence, no need to annualize this stat.) Using the annualized statistics derived in step 1, compute the expected return and standard deviation for portfolios containing from 0% to 100% MDLTX (and 100% to 0% EKWAX) by 10% increments. Graph the resulting portfolios. Based on your analysis, is there any potential benefit to diversification across these two funds? Explain. Of the 11 portfolios you graphed, which are efficient?
ClosingMonthly Closing Monthly HPR for MDLTX MDLTX EKWAXEKWAX HPR forPrice- 55.23 Oct-09 55.75 0.009415.30.04279 Nov-09 61.54 0.1038576.53 0.189523 62.45 0.06133 Ja-10 56.23 -0.1051955.680.10841 Feb-10 58.95 0.04837359.9 0.076688 Mar-1062.81 0.0654791.52 0.026188 69.04 0.122237 May-1056.09 0.10571 67.34 0.02462 Jun-10 55.82 0.004819.30.032522 Jul-1063.36 0.13507767.39 0.03078 Aug-1062.120.01957 74.55 0.106247 79.9 0.071764 Oct-10 72.56 0.0446381.16 0.01577 Nov-10 71.06 0.0206782.69 0.018852 Dec-09 62.84 0.021124 ec-09 62.720.00143 0 Sep-09.46 0.118158 6 8 0 Mar-11 71.06 -0.02067 74.57 0.049395 70.08 0.06021 70.54 0.006564 72.91 0.033598 73.93 0.01399 2 May-11 71.67 -0.03057 Dec-10 7457 0.04939586.04 0040513 006021 83.37 76.27 -0.11355 83.37 0.09309 83.65 0.003359 Apr-11 3.3 0.0139987.74 0.048894 82.74-0.05699 Jun-11 71.23 0.0061479.050.0446 Jul-11 68.15 0.0432483.440.05S534 Jan-11 Feb-11 Aug11 642969 0083293 64.290.05664 Sep-152.45 0.18417 77.52 0.14238 Oct-1161.32 0.16911382.89 0.069272 58.1 0.0525183.78 0.010737 72.21-0.1381 63.2 0.114638 0.03 0.108295 78.73 0.01624 70.3 -0.10707 Apr-12 61.210.04953 67.21 0.04395 61 -0.0924 Nov-11 Dec-11 Jan-12 Feb-12 56.7 0.024 72.21 01381 0 66.85 0.057753 64.4 0.03665 0.1163262.23 Sep-1256.81011845 62230924 Aug-12 56.81 0.007627 67.94 4 May-12 54.09-0.11632 55.720.030135 un-12 55.72 0030135 62.23 02014 6 Jul-1256.38 0.01184561.48 0.01205 67.94 0.105075 Sep-12 59.31 0.044006 77.56 0.141596Step by Step Solution
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