Coursework 1. Download stock prices for any three different companies – daily closing prices for each company for the most recent 3 months period. You can use any database to obtain the prices e.g. datastream, yahoo finance, etc. Present in a table the name of the companies, the dates, the prices, and the returns (in …
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Coursework
1. Download stock prices for any three different companies – daily closing prices for each company for the most recent 3 months period. You can use any database to obtain the prices e.g. datastream, yahoo finance, etc.
Present in a table the name of the companies, the dates, the prices, and the returns (in %). It does not count towards the word limit. Example:
| Company A | Company B | Company C | ||||
| Date | Price | Return (%) | Price | Return (%) | Price | Return (%) |
2. Calculate the average return and variance of returns for each company. Briefly discuss the results. Compare them with the theory discussed in class e.g. are there any companies that dominate other companies?
3. Calculate the variance-covariance matrix and correlations for each company.
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4. Select two companies from (c) with the highest correlation coefficient. Use investment proportions for the two stocks with intervals of 10% to create N combinations of the portfolio, with N > 10. Calculate the expected returns and standard deviations for each combination. Tabulate the investment opportunity set of the two stocks. Plot the investment opportunity set of the two stocks.
| Combination | Weight
Company A |
Weight
Company B |
Expected Return (%) | Standard Deviation (%) |
Repeat the steps above using the two companies from (c) with the lowest correlation coefficient.
Draw the Markowitz Efficient Frontier (MEF) using the two tables created above. Identify in the graphs the Minimum Variance Portfolio.
5. Discuss the results obtained in (d) for each one of the two MEF e.g. explain why some portfolios are preferred to others, the shape/curvature of the MEF, the relevance of investors’ risk preference, and the selection of an optimum portfolio, etc.
Based on the results obtained in (d) would you choose an individual stock or a portfolio? Which stock/portfolio would you choose? Explain your choice based on the modern portfolio theory
6. Explain the relationship between the possibility of lending and borrowing at a risk-free rate and the MEF.
Would the existence of a risk-free asset change your answer in (e)? Discuss?
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