Question
We are faced with the possibility of forming an equity portfolio, by combining an investment in two American stocks included in the S&P 500 index:
We are faced with the possibility of forming an equity portfolio, by combining an investment in two American stocks included in the S&P 500 index: Walt Disney (DIS US Equity) and Colgate Palmolive (CL US Equity).
We know the current prices of their quotes (DIS $ 33.84; CL $ 91.62) and the volatilities of both shares (DIS 17.89%; CL 15.0%). Likewise, we know that the correlation between the price of both stocks is 0.65 and that the Betas of both stocks with respect to the S&P 500 are 1.12 and 0.85, respectively. The 12-month analyst consensus target prices are DIS $ 38 and CL $ 100.6.
- Calculate the expected returns, volatilities and betas of the different combinations of both securities (assuming successive variations of 5% in the exposure levels).
- Graph the efficient frontier.
- What could we say about a portfolio made up of both titles with a volatility of 16.11% and that offered us an expected return of 10.80%?
- Knowing that we do not want to form a portfolio with a Beta greater than 1 and that, assuming that the expected returns follow a normal distribution, we do not want to bear a loss greater than -18.57% with a 95% probability, what combination of assets would we select?
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