Suppose you have $150,000 to invest in a two-stock portfolio. Complete the following eight steps to gather
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Suppose you have $150,000 to invest in a two-stock portfolio. Complete the following eight steps to gather information about your portfolio:
- Pick two publicly traded companies listed on a U.S. stock exchange (excluding Tesla and Proctor & Gamble).
- View a list of the companies that trade on the NYSE.
- View a list of the companies that trade on the NASDAQ.
- View a list of the companies that trade on the AMEX.
- Download the Monthly historical price data from September 2018 - September 2023 for each company
- Calculate the monthly returns for each company over the time period using the adjusted close (Adj Close) price
- Use the average() function in excel to find the average monthly return for each company over the time horizon. This will reflect the expected return for each stock.
- Use the stdev.s() function in excel to find the standard deviation of the monthly returns for each company.
- Use the correl() function in excel to find the correlation coefficient between the returns of each stock
- Find the Beta from the summary information page on Yahoo!Finance(Links to an external site.)
- A table that contains the average return, standard deviation, correlation, and beta information for the two stocks.
Use the information above to answer the following questions:
- You can split your $150,000 anyway you want into your two-stock portfolio (i.e., except 100% in one-stock or 50%/50% split between the two). Decide how much of the $150,000 you want to invest in Stock 1 and put the remainder of the $150,000 in Stock 2. Calculate the weights for each stock in your portfolio
- What is the expected return of your portfolio?
- What is the standard deviation of your portfolio?
- What is the beta of your portfolio?
- Forget that you have calculated the expected return above. Assume all you know is each company's beta, and that the market risk premium is 5.50% and the risk-free rate is 4.89% (using the 3-month T-bill yield as the risk-free proxy). Using the Capital Asset Pricing Model (CAPM), what is the expected return for each company?
- How does the correlation coefficient of the two stocks impact the standard deviation of your portfolio? Would a positive or negative correlation drive the risk of your portfolio up, and why?
Related Book For
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118644942
6th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
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