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Risk and Return Analysis of Stock Portfolios

The document outlines a group assignment focused on risk and return analysis of stocks and assets, including calculations for expected returns and portfolio risks. It discusses the benefits of diversification and requires the creation of risk-return plots under different correlation scenarios. Additionally, it involves creating an efficient set using Markowitz's algorithm and mentions the need for optimization software.

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hanafi
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8 views2 pages

Risk and Return Analysis of Stock Portfolios

The document outlines a group assignment focused on risk and return analysis of stocks and assets, including calculations for expected returns and portfolio risks. It discusses the benefits of diversification and requires the creation of risk-return plots under different correlation scenarios. Additionally, it involves creating an efficient set using Markowitz's algorithm and mentions the need for optimization software.

Uploaded by

hanafi
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Group Assignment

I. Risk and Return

1. Suppose the correlation matrix of four stocks is as follows.

A B C D
A 1 -0.2 0.1 0.4
B 1 0.3 0.25
C 1 0.15
D 1

The standard deviation of returns for stocks A, B, C, and D are 15%, 20%, 25%, and 30%,
respectively. Meanwhile, the expected returns for A, B, C, and D are 10%, 15%, 20%,
and 25%.

a. Suppose we form a portfolio consisting of stocks A and B, with equal weights of 50%
each, calculate the expected return and the risk of the portfolio.

b. Is there a benefit to diversification? Explain.

c. Suppose we form a portfolio consisting of stocks A, B, C, and D, with equal weights of


25% each, calculate the expected return and the risk of the portfolio.

d. Is there a benefit to diversification? How can it be observed?

II. Efficient sey

Suppose we have two assets as follows

A B
E(R) 8,1% 4,3%
 9,6% 1,8%

Plot risk-return images for three scenarios. Calculate the risk and return for each scenario.

a. Correlation of A with B = -1, weights change from A=100%, 80%, 60%, 40%, 20%,
and 0.
b. Correlation of A with B = 0, weights change from A=100%, 80%, 60%, 40%, 20%,
and 0.
c. Correlation of A with B = 0.5, weights change from A=100%, 80%, 60%, 40%, 20%,
and 0.
d. Correlation of A with B = +1, weights change from A=100%, 80%, 60%, 40%, 20%,
and 0.
Evaluate the plots, discuss. Evaluate which set or scenario is the most optimal, a, b, c, or
d.

III. Suppose we have three assets as follows


Correlation matrix

E(R)  A B C
A 10% 13% 1 -0.2 0.3
B 12% 15% 1 0.7
C 15% 20% 1

Create an efficient set using the algorithm from Markowitz. You will need to find an
optimization software. Then, write down that software in the report.

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