Example Lec2

Example Lec2 - Example on Forming an Optimal Portfolio The...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Example on Forming an Optimal Portfolio The Case of Two Assets • Let’s consider investing in two risky assets and one risk-free asset. The two risky assets are two stocks: IBM and Whole Foods (WF). The risk free asset is the 1-month Treasury bill ( T-bill ). • Suppose that it is now the end of December 2006. We want to find the optimal portfolio consisting of IBM and WF to invest in. To do that, we first need some data about the returns on the assets we are interested in. We have data that goes back to January of 2002. Based on that, we compute the following statistics: Sample Period: 2002-2006 IBM WF T-bill Average Return 0.0004 0.0173 0.0019 Standard Deviation of Return 0.0825 0.0840 0.0012 Correlation between IBM and WF 0.2659 Using notation from the lecture notes: 0004 . ) R ( E IBM = 0825 . IBM = σ 0173 . ) R ( E WF = 0840 . WF = σ 2659 . WF , IBM = ρ Over the period from 2002 to 2006, WF performed better than IBM . This statement is based on a Sharpe ratio analysis: • Sharpe Ratio of...
View Full Document

This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue.

Page1 / 5

Example Lec2 - Example on Forming an Optimal Portfolio The...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online