FIN 310: INVESTMENTS
Fall 2011
Pr. Oleg Bondarenko
Project Instructions
General instructions: The objective of the project is to enhance students’ understanding of
principles of the portfolio theory. You should do the project in groups of 4. One report should be
submitted for each group and everyone in a group will receive the same grade. For this project, you will
use Microsoft Excel.
I.
Capital allocation between two stocks.
Consider two stocks A and B with returns r
a
and r
b
such that E
(
r
a
29
=11%, E
(
r
b
29
=17%,
σ
a
=10%, and
σ
b
=18%.
1.
Construct portfolios of the two stocks by investing fraction y in stock A and (1y) in stock B, i.e.,
P=yA+(1y)B. For the following four cases, vary weight y and plot the resulting portfolio’s expected
return E(r
P
) vs. its standard deviation
σ
P
.
a) corr(r
a,
r
b
)=1.0;
b) corr(r
a,
r
b
)=0.5;
c) corr(r
a,
r
b
)=0.0;
d) corr(r
a,
r
b
)=1.0;
Put all these graphs on the same plot. Choose increment and range for weight y to make the plot
look pretty (for example, from –1 to 3 with increment 0.05).
Hint: when plotting graphs in Microsoft Excel, choose type of chart as
XY(Scatter)
and draw four
graphs (or series). For Yaxis, use the expected return E(r
P
) (same for all four graphs); for Xaxis,
use the standard deviation
σ
P
(corresponding to four different values of correlation coefficient).
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 Fall '09
 ARDAUGH
 Standard Deviation, SPX

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