Question: Problem 1. Now let's consider a portfolio with two stocks: AMZN and MSFT. Use the same historical data from the previous problem. You will use

Problem 1.

Now let's consider a portfolio with two stocks: AMZN and MSFT. Use the same historical data from the previous problem. You will use the adjusted close prices. The initial value of the portfolio should again be $50,000, but it should be a 50/50 portfolio: 50% in AMZN and 50% in MSFT at the start. When creating the simulation, make sure to account for the correlation between these stocks (they aren't independent!). Note also that the portfolio will not remain a 50/50 portfolio over time as the values of the stocks change. That is, the portfolio will not be rebalanced over time, by taking proceeds from selling one stock and buying the other.

a) Present a histogram for just the value of the portfolio V21 using 5,000 simulations. (For this problem, it may be easiest to use a Data Table in Excel)

b) Often investors invest in multiple stocks in order to reduce the volatility of returns. Since AMZN and MSFT are not perfectly correlated, some days when one stock is down, the other is up, and vice versa. Compare the histogram for this portfolio to that of the previous problem with 100% invested in AMZN. Is the \spread" of the distribution for the 2-stock portfolio less than the spread of the 1-stock portfolio?

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