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PORTFOLIO MANAGEMENT AND THEORY

PORTFOLIO MANAGEMENT AND THEORY

 

Purpose:

Modern Portfolio Theory is based on Harry Markowitz’s (1952) work on mean-variance portfolios. In the theory, a rational investor should either maximize his expected return for a given level of risk, or minimize his risk for a given expected return. This leads to an efficient frontier of portfolios, among which the investor is free to choose.

In this individual assignment, you are asked to use Excel to plot an efficient frontier with three stocks. You then need to identify the global minimum variance portfolio and tangent point on the efficient frontier. A maximum of 10 marks is awarded for this individual task.

 

 

Task

  1. You have monthly share price data for BHP, Commonwealth Bank and CSL from December 2012 to February 2018. Calculate the holding period yield each month for these stocks. Based on the monthly holding period yield, calculate monthly mean returns (geometric and arithmetic) and standard deviation for each stock, and covariance and correlations amongst these stocks. You must show your working (in Excel). The only Excel functions you are allowed to use in answering the above are average(), count(), sum () and product ().
  2. Using Excel Solver, plot an efficient frontier with these three stocks (no short sales). Assuming the monthly risk free rate is 1% (with zero standard deviation), identify the global minimum variance and tangent point on the efficient frontier. Draw the Capital Market Line.

 

 



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