finance

7.5 What does it mean to say that portfolio weights sum to 1.0 or 100 percent?

7.8 Evaluate this statement: With regard to portfolio risk, the whole is not equal to the sum of the parts.

7.15 Should investors generally expect positive correlations between stocks and bonds? Bonds and bills? Stocks and real estate? Stocks and gold?

7.16 What are the inputs for a set of securities using the Markowitz model?

Excel exercise

7.3 Fill in the spreadsheet below to calculate the portfolio return and risk between Zenon and Dynamics, given the 10 years of annual returns for each stock and portfolio weights of 50/50.

How would your answer change if the weights were 40 percent for Zenon and 60 percent for Dynamics?

How would your answer change if the weights were 30 percent for Zenon and 70 percent for Dynamics?

Zenon

Dynamics

Expected return

Variance

Standard deviation

Covariance

Weight for Zenon

50%

Weight for Dynamics

50%

Expected portfolio return

Portfolio variance

Portfolio standard deviation

Zenon return

dynamics return

9.89

-47.67

2018

-12.34

30.79

2017

13.56

24.78

2016

34.56

7.89

2015

-15.23

24.42

2014

20.09

34.56

2013

7.56

67.56

2012

16.47

44.67

2011

18.34

78.56

2010

15.56

51

2009

8.1 Consider a diagram of the efficient frontier. The vertical axis is ________. The horizontal axis is ________, as measured by the ________.

8.3 Why do rational investors seek efficient portfolios?

8.6 What does it mean to say that combining the efficient frontier with indifference curves matches possibilities with preferences?

8.12 How well does diversification work in reducing the risk of a portfolio? Are there limits to diversification? Do the effects kick in immediately?

Excel Chart

8.1 Closing prices for SilTech and New Mines for the years 20032018 are shown below.

a) Calculate the return for each stock for each year to three decimal places.

b) Assume that similar returns will continue in the future (i.e., average returns = expected returns). Calculate the expected return, variance, and standard deviation for both stocks and insert these values in the spreadsheet. Use AVERAGE, VAR.S, and STDEV functions.

c) Calculate the covariance between the two stocks.

d) Using the 11 different proportions that SilTech could constitute of the portfolio ranging from 0 to 100 percent in 10 percent increments, calculate the portfolio variance, standard deviation, and expected return.

e) Plot the trade-off between return and risk for these two stocks based on the calculation in (d). Use the XY scatter diagram in Excel.

SilTech

NewMines

2018

198.08

21.634

2017

84.84

34.867

2016

71.89

44.67

2015

32.2

49.8

2014

10.69

49.55

2013

7.16

46.86

2012

10.95

53.11

2011

7.44

48.75

2010

25.7

63.12

2009

10.23

37.04

2008

3.28

31.67

2007

5.22

21.78

2006

7.97

14.45

2005

9.64

9.39

2004

7.13

14.99

2003

14.39

10.72

December 5, 2022

December 5, 2022