Question
Please answer the questions using excel . Please use Apple and Southwest Airlines as the stocks. Thank you. 1. Pick two different stocks for your
Please answer the questions using excel. Please use Apple and Southwest Airlines as the stocks. Thank you.
1. Pick two different stocks for your portfolios, and calculate monthly expected returns, standard deviations, and correlation coefficients for them based on historical monthly stock database from 2000/01 to 2017/09. (Firms should be from different industries.)
2. Find opportunity set, MVP, and efficient frontier of your portfolios. (You can try various combination of two stocks.)
3. Pick the optimal portfolio composed of the two stocks you choose on efficient frontier based on two-stock version Capital Market Line. (This portfolio is a tangent point on Capital Market Line. You can find the point by maximizing Sharp Ratio = risk premium / standard deviation.)
4. Draw Security Characteristics Line for two stocks based on historical monthly stock database, and obtain their betas.
5. Calculate beta of your optimal portfolio, and set up CAPM for the portfolio.
6. Draw SML (Security Market Line) and obtain expected returns for individual stocks and your optimal portfolio based on their betas. Compare the historical averages of holding period returns with these estimates from CAPM.
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