FinCorp Inc. wants to examine a “real” efficient frontier involving Research in Motion (RIM.TO) and the Royal Bank (RY.TO).
a. Using monthly data for these two companies from January 2011 to December 2011, graph the relationship between risk and return.
b. Explain the difference between the frontier you developed in (a) and the efficient frontier.
c. Where do you expect the S&P/TSX Composite Index to plot relative to the frontier?
Explain.
d. Download the S&P/TSX Composite Index data for the same period (ticker: ^GSPTSE) and plot the S&P/TSX on your graph.
e. Based on your graph, is the S&P/TSX an efficient portfolio? Explain.
f. What do you expect will happen to the frontier if you increase the number of stocks?
Explain your reasoning.