Question
Follow the two companies you chose in Homework 3-2 and use their annual return rates (changes in stock price from the previous year) from 2011
Follow the two companies you chose in Homework 3-2 and use their annual return rates (changes in stock price from the previous year) from 2011 to 2020 to find the average, standard deviation and correlation of their returns (you should have them from Homework 3-2). 1. Assume you have an investment portfolio and plan to put 65% of your fund into the first company (weight = 0.65) and 35% into the second company, what is the expected return of your portfolio? 2. Similarly, assume you plan to invest 65% of your portfolio into the first company and 35% into the second company, what is the variance and standard deviation of your portfolio? 3. Calculate the expected return and standard deviation of your portfolio if you put 0%, 10%, 20%, 30%, 40%, 50%, 60%, 70%, 80%, 90%, and 100% into the first company (remaining goes to the second company). 4. Do you observe a U-shape relationship between the portfolios standard deviation and the weight of the first company? Why? 5. Use the Sharpe ratio with 3.5% risk free return rate to determine the optimal weight of your first company that you should invest in (that is, the percentage of the first company that achieves the highest Sharpe ratio). Mark your answers clearly on the Excel spreadsheet and submit your file.
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