If you invested the same amount of money in each of three stocks at the beginning...

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If you invested the same amount of money in each of three stocks at the beginning of the time period from Part One (and you rebalance at the end of each month so that you have the same amount of investment in each stock), what would be the average monthly return of the portfolio and the volatility (standard deviation) of the portfolio's monthly returns? Now consider an alterative portfolio that consists a risk free asset and the S&P 500 stock index. The risk-free rate during this period is about 1% annually, which translates to a monthly risk-free rate of about 0.083 %. Assume that every month you can invest in the risk free asset to earn 0.083% for sure and that you can also borrow money at this risk free rate if you want to use leverage. If you choose your allocation between the risk-free asset and S&P 500 index so that the overall portfolio's risk (standard deviation of monthly returns) is the same as the above equally weighted 3-stock portfolio during the same period, what would have been the average monthly return of the portfolio consisting of the risk-free asset and the S&P 500 index? Is this average return higher or lower than the average return of the 3-stock portfolio? (You can multiply the difference in monthly returns by 12 to get roughly the difference in annualized returns.) Would you expect to see this difference based on our discussion of MPT? Please explain. Stocks GE TYL AXP Weights Monthly Averages 0.333333333 -0.005940659 0.333333333 0.018954474 0.333333333 0.018894412 Varience Covarience matrix Monthly return GE Monthly return TYL Monthly return AXP Monthly return GE 0.013781607 0.002021629 0.004290003 Monthly return TYL 0.004054738 0.001344295 Monthly return AXP 0.001344295 0.00559258 Portfolio mean Portfolio varience Portfolio standard deviation 0.002021629 0.004290003 0.010636076 0.004304531 0.065608924 If you invested the same amount of money in each of three stocks at the beginning of the time period from Part One (and you rebalance at the end of each month so that you have the same amount of investment in each stock), what would be the average monthly return of the portfolio and the volatility (standard deviation) of the portfolio's monthly returns? Now consider an alterative portfolio that consists a risk free asset and the S&P 500 stock index. The risk-free rate during this period is about 1% annually, which translates to a monthly risk-free rate of about 0.083 %. Assume that every month you can invest in the risk free asset to earn 0.083% for sure and that you can also borrow money at this risk free rate if you want to use leverage. If you choose your allocation between the risk-free asset and S&P 500 index so that the overall portfolio's risk (standard deviation of monthly returns) is the same as the above equally weighted 3-stock portfolio during the same period, what would have been the average monthly return of the portfolio consisting of the risk-free asset and the S&P 500 index? Is this average return higher or lower than the average return of the 3-stock portfolio? (You can multiply the difference in monthly returns by 12 to get roughly the difference in annualized returns.) Would you expect to see this difference based on our discussion of MPT? Please explain. Stocks GE TYL AXP Weights Monthly Averages 0.333333333 -0.005940659 0.333333333 0.018954474 0.333333333 0.018894412 Varience Covarience matrix Monthly return GE Monthly return TYL Monthly return AXP Monthly return GE 0.013781607 0.002021629 0.004290003 Monthly return TYL 0.004054738 0.001344295 Monthly return AXP 0.001344295 0.00559258 Portfolio mean Portfolio varience Portfolio standard deviation 0.002021629 0.004290003 0.010636076 0.004304531 0.065608924

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To calculate the average monthly return and volatility of the equally weighted 3stock portfolio youd first need historical data on the three stocks mo... View the full answer