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Econ 393 Assignment 2




Question;Portfolio construction and analysisI.I50 ptConstruct a portfolio (Oct 1, 2012 ? Sep 14,2014)1. Give a short summary about the following stocks6 pta.BHP,NKE,RIO,PFE,PEG,SP5002. Download the last year daily close prices for SP500 index from yahoo financea. Download the last 2 year daily close prices for the stocks named in #1 5 pt4. Import daily close values and betas into excel and compute18 pta. Log returnb. Expected returnc. Variance ? VAR functiond. Standard Deviatione. Covariance matrixf. Correlation matrix5. Create a portfolio composed of RIO with each of the other stocks12pta. stock 1 weight =.65, find stock 2 weightb. find the return on the portfolio with stock weights found in a.c. find the portfolio variance using the correlation coefficientd. find the portfolio standard deviation6. Portfolio Analysis9 pta. State the portfolio with the lowest risk and highest returnb. Look at the correlation coefficient for each pair of RIO,stock 2 and find the lowestc. Is the lowest risk portfolio (found in 6.a) also the portfolio with the lowest correlationcoefficient?IIEfficient Frontier and the Minimum Variance PortfolioII.IPortfolio: RIO, NKE1. Efficient Frontiera.b.c.d.e.f.II.II24 pt12 ptInput the ER,Variance, sd and CORREL(RIO,NKE) into tableFind the portfolio return for the varying stock weights (see excel template)Find the portfolio varianceFind the portfolio sdplot the Efficient Frontier (x axis is the sd, y axis is the return)Highlight the lowest risk (?P) combination2. Find the MVP12 ptUsing the equations for XA, XB, rP and?2P on Lecture 4 slide 19a. Find XA and XBb. Find rP,?2P and?Pc. Compare the lowest risk,return combo in II.I f to the?P, rP in the MVP, which is lowerrisk?IIICAPM26 ptII.I1. Estimate Beta8 ptUsing return data calculated in Part Ia. Estimate Beta with formulaand compare with the Beta given from yahoofinance.(To estimate beta, our market portfolio is the SP500)2. CAPM9 pta. find the 3 month US T bill rate as of 10/1/14, input the value into the rf cell the values on this page are in percentage alreadyi.e if the value stated is 0.05 it is 0.05% or 0.0005b. input the expected return for the SP500 in the ERM cell (calculated in Part 1 4b)c. input the Estimated betas you found in III #1 into the Beta rowd. Find the CAPM for each stock using the equation:3. SML9 ptIf we vary RIO stock beta from 0 to 2.5 by increments of.5a. Find the CAPM for each given betab. plot the SML (x axis is risk(beta), y axis is CAPM)c. Compare the CAPM value of RIO with beta 1.28 to the expected return calculated inPart 1 4b. Is RIO expected return above (undervalued) or below (overvalued) the CAPMrequired rate of return according to our beta calculations? Explain.Extra - Arbitrage Pricing Theory5 ptExplain how APT differs from CAPM (2 pt)Suppose that two factors have been identified for the U.S. economy: the growth rate of GNP,GNP, and the inflation rate, IR. GNP is expected to be 5% and IR is expected to be 7%. A stockwith a beta of 0.3 on GNP and with a beta of 0.9 on IR currently is expected to return 22%. IfGNP actually grows by 7% and IR by 10%, what is the revised estimate of the return on thestock? (3 pt)


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