You are considering an investment in the stock market and have identified two potential stocks (XYZ and

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You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below.
You are considering an investment in the stock market and

a. Calculate the average return and standard deviation of returns for each stock over the past five years. Which stock would you prefer to own? Would everyone make the same choice?
b. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of XYZ and ABC would provide good diversification?
c. Calculate the annual returns that would have been achieved had you owned a portfolio consisting of 50% in XYZ and 50% in ABC over the past five years.
d. Calculate the average return and standard deviation of returns for the portfolio. How does the portfolio compare with the individual stocks? Would you prefer the portfolio to owning either of the stocks alone?
e. Create a chart that shows how the standard deviation of the portfolio's returns changes as the weight of XYZ changes.
f. Using the Solver, what is the minimum standard deviation that could be achieved by combining these stocks into a portfolio? What are the exact weights of the stocks that result in this minimum standard deviation?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Financial Analysis with Microsoft Excel

ISBN: 978-1285432274

7th edition

Authors: Timothy R. Mayes, Todd M. Shank

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