Question
Professors Portfolio Case Synopsis: Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to form a portfolio using these
Professors Portfolio Case
Synopsis: Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to form a portfolio using these stocks.
Assignment: Provide a quick rundown of the issues that the professor face while creating his portfolio. Discuss what your goals and objective would be if you were creating this portfolio, how can you add value. Think about issues such as efficiency, risk-return, and how to add value. Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks).
1. Estimate and compare the monthly returns and variability (standard deviation) of each stock with that of the DJIA Index.
a. Which stock appears to be riskiest? Less risky?
b. How might the expected return of each stock relate to its riskiness?
2. Suppose the professor decides to make the portfolio with equal weight of stock holding (each stock holds 25% weight in the portfolio). Estimate the resulting portfolio position.
a. How does each stock affect the variability of the equity investment? What is the risk and return of the portfolio?
b. What is the correlation between the stocks? How do you think the stocks effect the portfolios risk and return?
c. How does this relate to your answer in question 1 above?
3. Compute the beta for each stock (Use DJIA as the market return).
a. What does beta measure?
b. How does this relate to your previous answers?
4. What is the required rate of return for each stock (CAPM)? Explain the number and put it into context? (Use the RF rate given in the second page)
5. Make a recommendation of what you would do if you were professor. Would you try something different?
a. What would be your main objective?
b. How would you weigh each stock in the portfolio? Why? What would be the resulting risk and return?
Monthly Risk-Free rate (in percentages)
| 1997-06-01 | 0.93% |
| 1997-07-01 | 1.05% |
| 1997-08-01 | 1.14% |
| 1997-09-01 | 0.95% |
| 1997-10-01 | 0.97% |
| 1997-11-01 | 1.14% |
| 1997-12-01 | 1.16% |
| 1998-01-01 | 1.04% |
| 1998-02-01 | 1.09% |
| 1998-03-01 | 1.03% |
| 1998-04-01 | 0.95% |
| 1998-05-01 | 1% |
| 1998-06-01 | 0.98% |
| 1998-07-01 | 0.96% |
| 1998-08-01 | 0.90% |
| 1998-09-01 | 0.61% |
| 1998-10-01 | 0.96% |
| 1998-11-01 | 0.41% |
| 1998-12-01 | 0.39% |
| 1999-01-01 | 0.34% |
| 1999-02-01 | 0.44% |
| 1999-03-01 | 0.44% |
| 1999-04-01 | 0.29% |
| 1999-05-01 | 0.50% |
| 1999-06-01 | 0.57% |
| 1999-07-01 | 0.55% |
| 1999-08-01 | 0.72% |
| 1999-09-01 | 0.68% |
| 1999-10-01 | 0.86% |
| 1999-11-01 | 1.07% |
| 1999-12-01 | 1.20% |
| 2000-01-01 | 1.32% |
| 2000-02-01 | 1.55% |
| 2000-03-01 | 1.69% |
| 2000-04-01 | 1.66% |
| 2000-05-01 | 1.79% |
| 2000-06-01 | 1.69% |
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Open Market Operations And Financial Markets
Authors: David Mayes , Jan Toporowski
1st Edition
0415417759, 978-0415417754
