Financial Insights and Business Intelligence Assignment Three

In the New York Stock Exchange (NYSE), the common stocks of General Motors (GM) and

Ford (F) are recorded historically below.

Year

GM Common

Stock Return

Ford Common

Stock Return

2003 -10.00% -3.00%

2004 +18.50% +21.29%

2005 +36.87% +44.25%

2006 +14.33% +3.67%

2007 +33.00% +28.30%

Required tasks:

As a capital-budgeting manager at NYSE, you are required to calculate the following task for

advising your client:

1) Estimate the average rate of return of each stock individually. (10%)

2) If your client invested in a stock portfolio comprising 40% of GM common stocks and

60% of Ford common stocks, what would have been the rate of return on the asset

portfolio each year? (10%)

3) What would have been the average return on the portfolio during the period from

2003 to 2007. (10%)

4) Estimate the (individual) risk of each stock. (10%)

5) Calculate the risk for the asset portfolio (both common stocks taken together). (10%)

6) What is the coefficient correlation between the returns of the two common stocks?

(10%)

7) Critically discuss the modern portfolio theory, which was pioneered by Harry

Markowitz, in relation to your findings and advise your client accordingly in laymans

terms on the profitability of your clients asset portfolio.