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ExerciseforExcel

# ExerciseforExcel - ‐ 0.5 ‐ 0.4 ‐ 0.3… 1.4 1.5...

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Exercise for Excel Expected Return Stock 1 = 7% Expected Return Stock 2 = 5% Volatility Stock 1 = 30% Volatility Stock 2 = 20% Correlation = 0 How is the expected return and standard deviation of the portfolio affected if we vary the portfolio weight of stock 1 from 0.5 to 1.5? Recipe: 1) Start with weight of stock 1 labeled as w = 0.5 (weight on stock 2 = 1.5)! 2) Compute Expected return and standard deviation of this portfolio (see formula below) 3) Now slightly increase the weight of stock 1 (say to w = 0.4. Compute Expected return and standard deviation of this portfolio! 4) Keep increasing the weight on stock 1 by a small increment (say by 0.1) until stock 1 has a weight of 1.5 (and stock 2 a weight of 0.5). For each portfolio calculate the expected return and standard deviation Setting up the spreadsheet: Column1: Portfolio weights on stock 1 (
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Unformatted text preview: ‐ 0.5, ‐ 0.4, ‐ 0.3…., 1.4, 1.5) Column2: Calculate Standard Deviation for each portfolio Column3: Calculate Expected return Plot the Expected return of the portfolios (Y ‐ Axis) that you just created against the standard deviation (X ‐ Axis), i.e. Column 3 against Column 2. ܧሺܴ ௉ ሻ ൌ ݓܧሺܴ ଵ ሻ ൅ ሺ1 െ ݓሻܧሺܴ ଶ ሻ ܵܦሺܴ ௉ ሻ ൌ ඥ ݓ ଶ ܸܽݎሺܴ ଵ ሻ ൅ ሺ1 െ ݓሻ ଶ ܸܽݎሺܴ ଶ ሻ ൅ 2 כ ݓ כ ሺ1 െ ݓሻܥ݋ݒሺܴ ଵ , ܴ ଶ ሻ Hint: Remember that the Covariance is just the product of the correlation coefficient and the volatilities of stock 1 and stock 2. Repeat the exercise for Correlation coefficients of ‐ 1, ‐ 0.5, 0.5 and 1. Everything else should stay the same and plot the graphs in one diagram!...
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