1) Find out which 30 stocks comprise the Dow Jones Industrial Average. (DJIA)

For each stock calculate expected return and standard deviation using monthly adjusted close data from January 2016 to December 2018.

2) Construct a covariance matrix for the stocks.

3) Use the data calculated in 1) and 2) to derive the optimal investment weights in each DJIA stock so that a portfolio which considers only these 30 stocks has the maximum expected Sharpe ratio (assume short selling is permitted).

4) Imagine you are constructing a portfolio at the beginning of 2019 with $10,000,000 of capital. Use the first opening price from 2019 and your weightings calculated in 3) to determine how many shares of each stock you should buy on the first business day of 2019.

5) Use the closing adjusted close prices for the stocks on March 29th 2019 to calculate the return on your portfolio for the first quarter of 2019.

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6) After analyzing historical data you determine that in the past the returns on two different assets had a correlation of 0.2. You decide to buy both assets, investing 50% of your savings in each. However, over the following year that you are holding the assets the correlation between them is much higher than it has been in the past, with correlation equal to 0.8. Explain how the performance of your account would differ from what you were expecting when you bought the assets and believed their correlation would be 0.2.

7) According to standard portfolio theory, explain how an investor would determine the following:

a) how to allocate his/her savings amongst the risky assets available in the economy

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FIN 402 – Investments Spring 2019 – Assignment 4 Please answer all questions in a single Excel file Please answer questions 1 to 3 on the same worksheet, questions 4 and 5 together on another worksheet, and the remaining questions all on different worksheets within that one file For written answers, please use Insert – Text – Textbox and type your answer into a text box on the worksheet. Do not type answers directly into cells on the spreadsheet. Please save your file as “[your_last_name]_assignment4” Upload your file to the course website before the following deadline: Sunday, April 14th, 11:59 PM 1) Find out which 30 stocks comprise the Dow Jones Industrial Average. (DJIA) For each stock calculate expected return and standard deviation using monthly adjusted close data from January 2016 to December 2018. 2) Construct a covariance matrix for the stocks. 3) Use the data calculated in 1) and 2) to derive the optimal investment weights in each DJIA stock so that a portfolio which considers only these 30 stocks has the maximum expected Sharpe ratio (assume short selling is permitted). 4) Imagine you are constructing a portfolio at the beginning of 2019 with $10,000,000 of capital. Use the first opening price from 2019 and your weightings calculated in 3) to determine how many shares of each stock you should buy on the first business day of 2019. 5) Use the closing adjusted close prices for the stocks on March 29th 2019 to calculate the return on your portfolio for the first quarter of 2019. ——————————————————————————————————————– 6) After analyzing historical data you determine that in the past the returns on two different assets had a correlation of 0.2. You decide to buy both assets, investing 50% of your savings in each. However, over the following year that you are holding the assets the correlation between them is much higher than it has been in the past, with correlation…

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