Question
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%
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.
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