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Project2_Instructions

# Project2_Instructions - FIN 310 INVESTMENTS Fall 2011 Pr...

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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 (1-y) in stock B, i.e., P=yA+(1-y)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 Y-axis, use the expected return E(r P ) (same for all four graphs); for X-axis, use the standard deviation σ P (corresponding to four different values of correlation coefficient).

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Project2_Instructions - FIN 310 INVESTMENTS Fall 2011 Pr...

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