Investment Portfolio

The following are the estimated volatilities and correlations of seven U.S. publicly traded stocks:

Microsoft

Dell

Delta Air

AA

GM

Ford

Anheuser

Std.Dev

42%

54%

50%

72%

33%

37%

18%

Correlations:

Microsoft

42%

1

65%

27%

19%

22%

6%

-7%

Dell

54%

65%

1

19%

18%

32%

32%

10%

Delta Air

50%

27%

19%

1

69%

31%

38%

19%

AA

72%

19%

18%

69%

1

35%

58%

11%

GM

33%

22%

32%

31%

35%

1

64%

11%

Ford

37%

6%

32%

38%

58%

64%

1

10%

Anheuser

18%

-7%

10%

19%

11%

11%

10%

1

Using Excel spreadsheets to:

1. Using the above information to construct the covariance table for these seven stocks as in the example of the research method section of this module.

2. Following the three stock example in Section D to calculate the variances and volatilities of the following portfolios with equal weights:

a. 2-stock portfolio consisted of Microsoft and Dell.

b. 3-stock portfolio consisted of AA, GM and Ford.

c. 4-stock portfolio consisted of Dell, Delta Air, AA and GM.

d. 5-stock portfolio consisted of Delta Air, AA, GM, Ford and Anheuser.

e. 6-stock portfolio consisted of Dell, Delta Air, AA, GM, Ford and Anheuser.

f. All 7-stock portfolio.

3. Using this numerical example to briefly explain why diversifying your portfolio helps reducing portfolio risk and improve your risk-return profile.